At the last second of the so-called eleventh hour, the Fiscal Cliff deal known as the American Taxpayer Relief Act of 2012 was forged. Because it is still relatively fresh you, no doubt, have questions and are wondering just how the provisions might impact your bottom line. Here’s a basic breakdown of the changes for taxpayers:
- Did taxes go up or down? Well, it depends upon your measuring stick and perhaps political persuasion. Bear with me – here is the timeline. At midnight on 12/31/12 the Bush era tax cuts expired, meaning in theory income taxes for most Americans increased. On 1/1/13 Congress enacted new law and reduced income taxes for most Americans. According to the Tax Policy Center, a nonpartisan research group in Washington, about 0.7 percent of households (those making over $500k) will be subject to an income tax increase in 2013.
- Payroll Tax Impact? However, if your measuring stick compares what you expect to pay in 2013 versus what you paid in 2012…..most will experience higher taxes (about 77% of households). This is due to the fact that payroll taxes are being restored. For example, a family earning $100,000 will pay roughly $2,000 (2%) more in payroll taxes in 2013 over 2012.
- What’s your number? There are different income (taxable income) thresholds for various income tax provisions that will be important in 2013. Here are some that you and your planner will want to review:
- $200,000 single/$250,000 married filing jointly:
- New Medicare surtax of 3.8% on net investment income
- New 0.9% additional tax on wages above the thresholds
- $250,000 single/$300,000 married filing jointly:
- Limitations on personal exemptions and Itemized deductions restored in 2013.
- The net effect is approximately a 2% increase in marginal rates for those above the thresholds.
- $400,000 single/$450,000 married filing jointly:
- New top marginal bracket of 39.6%
- Capital gains and qualifying dividends taxed at 20% up from 15%. Because of the Medicare surtax, this means that effectively capital gains and qualified dividends are taxed at 23.8%.
- $200,000 single/$250,000 married filing jointly:
- Estate & Gift Tax: The new law makes permanent the exemption equivalent at $5.12M and top rate up to 40% from 35%. Also, "portability" between spouses is now permanent.
- Annual gift exclusion: $14,000 up from $13,000
- Charitable IRA: Those over 70.5 may again choose to make tax free gifts up to $100,000 from their IRA to qualified charities.
- Remaining issues to be resolved: Based on what the new law doesn't change, we are sure to witness further confrontation over spending cuts and the debt ceiling.
For more information pertaining to your individual situation, feel free to contact me at timothy.wyman@CenterFinPlan.com.
Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a frequent contributor to national media including appearances on Good Morning America Weekend Edition and WDIV Channel 4 News and published articles including Forbes and The Wall Street Journal. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), trained and mentored hundreds of CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. You should discuss any tax or legal matters with the appropriate professional. Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.