2013 Tax Increase May Cost You $$$

I attended a tax update seminar this week and the speaker discussed the looming tax changes set to go into effect on December 31, 2012. With the expiration of the Bush tax cuts, we can all expect to pay more in tax, including those in the lowest tax brackets. Here is a shortened list of tax items that are set to expire/change on December 31:

• Increase in tax brackets from 10/15/25/28/33/35% to 15/28/31/36/39.6%. Note that the 10% bracket is eliminated.
• 2% FICA reduction in employee's wages.
• Child tax credit is set to reduce to $500 per child, down from $1,000 currently.
• Marriage penalty relief. The standard deduction for married couples will be 167% of a single person, down from 200%.
• Itemized deductions and personal exemptions are set to phase out for higher income individuals.
• Child care credit will be reduced.
• Capital gain taxes will generally be increased from 15% to 20%.
• Dividends will be taxed at regular income tax rates, not at the capital gains rate. 
• AMT exemption will be reduced, causing nearly 16 million more families to pay AMT.
• Student loan interest phaseouts will reduce. Only student loan interest paid in the first 60 months out of school will be deductible.
• American Opportunity Tax Credit (AOTC), formerly the Hope Credit, will expire. This is a credit of up to $2,500 per college student for the first four years of higher education.
• Add 0.9% Hospital Insurance surcharge on all wages in excess of $250,000 married filing joint/$200,000 single.
• Add 3.8% surcharge on all unearned income (interest, dividends, capital gains, rents, royalties, etc) for individuals with incomes over $250,000 married filing joint/$200,000 single. (Note that the tax on dividends, interest, rent, etc. will now be taxed at a maximum rate of 43.4%. When adding in state taxes of 5-8%, the highest income earners will now be paying tax at a rate at or above 50%.)

The items above are very common items that many taxpayers have. Some families taxes will be affected by all or most of the items. I would expect Congress to extend some or most of the items above. However, if Congress and President Obama cannot agree soon, be prepared for even more partisan bickering and even more of the blame game between Democrats and Republicans. 

You'll also need to be aware that your wallet may become a little (or a lot) lighter in 2013. 

Contact me if you would like answers or additional explanation to your specific tax situation.