Prepare for Tax Changes in 2013

By on August 24, 2012 in Current Events with 49 Comments

Co-Authored by Michael Canet

In 2001 Congress passed the “Bush Tax Cuts,” officially called the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).  These tax cuts are set to expire at the end of 2012, which would result in significant tax law changes. We have been here before, in 2010, when the original act was due to sunset.  At that time, Congress elected to extend most of the original provisions until 2012.

Will Congress extend them again? Who knows? What we do know is that over the years, more and more people will be caught by the new taxes, because the adjusted gross income level that triggers them doesn’t rise with inflation.

That’s why you may want to consider taking steps between now and year-end that could dramatically improve your financial picture – regardless of what Congress does.

The primary effect taxpayers may see increased tax rates are in three areas:

Income Taxes:

Single Filer

Joint Filer

   2012 Rates  2013 Rates
   
$0 – $8,700 $0 – $17,400 10% 15% (bracket starts at $0)
$8,700 – $35,350 $17,400 – $70,700 15%
$35,350 – $85,000 $70,700 – $142,700 25% 28%
$85,000 – $178,650 $142,700 – $217,450 28% 31%
$178,650 – $388,350 $217,450 – $388,350 33% 36%
Over $388,350 35% 39.6%

The 10% bracket will disappear and the rates for the remaining brackets will increase.  Taxpayers may want to consider the tax implications of their financial decisions – make elections in 2012 or 2013, when rates may be higher.  

Medicare Surtax:

For those wealthy enough to owe it, an additional tax of 3.8% Medicare investment tax will be due beginning in 2013.  The tax is calculated by multiplying the 3.8% tax rate by the lower of the following two amounts:

  • Net investment income for the year; or
  • Modified adjusted gross income over a certain threshold amount.

Modified adjusted gross income thresholds for the additional Medicare tax are:

  • $250,000 for married filing joint filers and qualifying widows or widowers;
  • $200,000 for single and head of household filers; and
  • $125,000 for married filing separately filers.

Sample calculation: Tom and Amy are married and file a joint tax return. They have $280,000 of salary income combined and $50,000 of investment income from dividends and capital gains. Their adjusted gross income is $330,000.

  • Step 1: Calculate their net investment income, or $50,000.
  • Step 2: Calculate their modified adjusted gross income in excess of the threshold amount, or $330,000 minus $250,000 for joint filers = $80,000.
  • Step 3: Take the lower of net investment income or modified adjusted gross income over the threshold, which is $50,000 in this case.
  • Step 4: Multiply $50,000 by 3.8% = $1,900.

Additional Medicare Tax:

The 3.8% surtax is getting most of the attention but there is an additional .9% Medicare tax on wages and self-employment income over the MAGI thresholds.

Long-Term Capital Gains:

   2012 Rates  2013 Rates
10% 0% 10%
15% 0% 10%
25% 15% 20%
28% 15% 20%
33% 15% 20%
35% 15% 20%

 

In 2013 investors will no longer be able to pay 0% on their long-term capital gains because there will no longer be a 10% tax bracket.  With long-term capital gains set to increase to 20% in 2013, investors should consider whether to sell sooner rather than later. 

Qualified Dividend Taxes:

Currently qualified dividends are taxes at the more favorable long-term capital gains rates.  In 2013, both qualified and ordinary dividends will be taxed at ordinary tax rates which mean for some investors, this could result in tax rates as high as 39.6%.  Here again, investors should consider the role that dividend paying stocks play in their portfolio.

Other Tax Implications to Consider:

The almost 28 million artificial-sun worshippers who visit tanning booths and beds each year — most of them women under 30, according to the Journal of the American Academy of Dermatology, will see a 10% tax on the price of tanning.

Those workers and families with the ‘Cadillac’s’ of health care coverage will see a 40% excise tax.   These are plans with premiums of more than $10,200 per person or $27,500 per family, not including dental or vision coverage.   The good news is that a majority of health plans aren’t affected because they don’t cost enough: Workplace family coverage now averages about $15,000, including the portion paid by the employer, according to the Kaiser Family Foundation’s survey. But some middle-class workers, especially those with strong union contracts, have health plans that exceed the threshold. Also hit are corporate bigwigs whose employer-paid plans cover virtually all expenses and lots of perks, akin to tax-free income.  The tax will affect more workers as time goes by. It’s indexed for inflation, but rising health care prices will probably outpace that.

Last year, people with FSAs and similar accounts lost the ability to spend the money on over-the-counter medicines not prescribed by doctors.  The law limits annual contributions to medical Flexible Spending Accounts to $2,500; there was no government limit before. Many employers had allowed $5,000 in the accounts, and some even more. Also, the penalty increased from 10 percent to 20 percent for money withdrawn for non-medical reasons from Health Savings Accounts, which people use to help pay high insurance deductible.

People with big medical or dental bills who itemize deductions currently have to spend more than 7.5 percent of their adjusted gross income on medical care to qualify for a deduction. The threshold will rise to 10 percent. So a household with income of $50,000 would have to spend $5,000 on health care before deducting amounts above that.

Planning Ahead

Tax planning done between now and year end can make a significant difference.  Some options you may want to explore with a qualified tax professional are:

  • Move income-producing assets into tax-deferred plans
  • Consider tax-exempt bonds instead of taxable bonds
  • Develop a proactive capital gain strategy to take advantage of  this year’s capital gain

It is more important than ever to speak with a qualified professional to ensure that you are paying the lowest amount of taxes legally possible, after-all, it isn’t how much you make, it is how much you keep.

For a listing of the Ten Most Important things to discuss with your Tax and Financial Planning team, go to www.savvyinvestorradio.com to request your copy.

For a copy of our recent white paper: Navigating New Health Care Taxes in 5 Easy Steps, email: natalie@franklinplanning.com or visit www.franklinplanning.com.

Michael Canet and his team at Prostatis Financial Advisors Group LLC have been providing comprehensive financial planning to their clients for more than 20 years. With a legal background in estate planning, a Master’s Degree in taxation, and being a financial planner – Michael has the necessary skills to guide his clients into and through retirement by creating a simple-to-understand financial plan.

© 2016 Carol Schmidlin. All rights reserved. This article may not be reproduced without express written consent from Carol Schmidlin.

About the Author

Carol Schmidlin is the President of Franklin Planning and has been advising clients on how to grow and preserve their wealth for 20 years. In addition to her financial planning practice, she is the founder of FedSavvy® Educational Solutions, which provides Financial and Retirement Literacy Programs for Federal Employees. Follow FedSavvy® Educational Solutions on Facebook for the most up to date information. Contact Carol at (856) 401-1101 or visit FranklinPlanning.com.

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  1. Dwestmor says:

    The Panic– the panic– just to go back to Clinton’s rates. Nation of isiots

    • Dwestmor says:

       ok I cant spell idiots — but I know who you are. Retired after 33 years as AF civilian– I seen I smell em– I KNOW em. None of this amounts to nothing– pay your taxes.  Obama will destroy your savings– then cut your retirement, and ruin your health care. But you might get food stamps til that’s gone. China will offer us a nickle on an Obama dollar on our bonds. Then Hilary will step in and continue the process. People here will sneak on boats to India and Bangladesh to try to start a new life. Chicago will be the center piece of “democrocy” That being if I can vote to get your stuff– I damn sure will do it

  2. meadows123 says:

    Isn’t rape illegal?  At this rate all the regular everyday “Joe’s” are going to starve and freeze to death in the dark.

  3. ClazyBBar says:

    Please look at FAIR TAX. 

  4. notworking says:

    Yep its alswys to tax the OTHER guy

  5. notworking says:

    Romney will inherit a huge Mess when he takes over in Jan. But by year end we’ll be on the road to recovery

  6. $15300432 says:

    we need the money to insure illegals all have access to free medical care, food stamps, welfare, school lunches, sect 8 housing and social security

  7. Raceway says:

    Make it simple…..Flat tax….EVERYONE….pays 10% of their gross. No more deductions.  Sorry accountants, you’ll have to retrain just like 70% of the blue collar workforce has over the last 40 years.

    • Createland says:

       Sorry Raceway, 10% of gross will not be enough to balance the budget.  Try again

      • Retired LR says:

        You mean to satify the irresponsible spender we havve in the WH …keep working…keep paying while 50% of the country pays no federal tax and the incompetent wants more and more of your wealth…wise up.

        • Philadelphia says:

           I am amazed that people working don’t care if 50% don’t pay any taxes.  46,514 MILLION are on food stamps as of Aug 2012 – up from 26 million in Jan 2008.  How many young healthy people are on social security now?  Thenational  debt now – close of business Sept 28 is $16,066,241,407,385.89.  16 TRILLION!!!  People want everything for Free!!

          • Bulldognumba10 says:

            I just heard the $$ amount that the average family on welfare makes (not earns). It is $60,000 and they pay NO tax-Nada Zip-now that is something to get PO’d about!

          • PA says:

            Sad! It was on the news.

          • RandFan says:

            You got it, Philadelphia… read “Atlas Shrugged”. Pretty scary… what’s happening in Greece could be happening here before long.

        • Abigal528 says:

           Nothing will be resolved as long as 47% of the citizens continue to be unemployed, do not care to be employed because they are essentially being paid not to work, and they don’t care.  We are headed down a very slippery slope.  The pride in the American workforce is all but totally gone, and nothing is going to bring it back unless you stop paying people not to work.  There are jobs out there, but no one is enforcing the unemployed worker to look any more.

      • FedRight says:

        We will never balance the budget with taxes alone.  We could tax every millionaire at 100% over $100,000.00 and would only be able to run the country a few months at most.  We have to reduce the entitlements.  And that will hurt more.  Especially the lowest paid amoung us.  That is the irony.  The liberal, Obama plan will hurt the least able to pay but they keep trying to convence us otherwise. 

      • notworking says:

        But eliminate unnecessary fed agencies will more than make up. Starting with Education
        Commerce, Interior, NIH, 1/2 of State and Justice

      • Bretdelman says:

        Yes 10% is enough if EVERYONE paid it because alot of people pay no tax now and would pay 10%

        • Muckraker says:

          If you don’t make any money, you can’t pay any taxes.  Do you think someone on SS with no other income should pay 10% on that?  It’s already been taxed once.

          • PA says:

             Why do we have so many young HEALTHY  people – now out of unemployment on Social Security.  You know it’s happening.  I have a problem with the healthy 50 and 60 year old — but the healthy 20 & 30 & 40 year old is crazy!

          • Chiefuncas says:

            Young healthy people are not on soc sec. Disabled people are

          • PA says:

             I truly hope you are correct. 
              I do know disabled people are on Social Security – and it is important the safety net stays available to them.   I think we all agree on that.

          • RandFan says:

            If you believe that, I’ll sell you another… Ha!!

          • RandFan says:

            How about this for radical, ‘If you don’t pay taxes, then you shouldn’t have a right to vote’. Maybe then this country would start turning around.

    • Philadelphia says:

       The tax system needs to be revised.  It is broken!
      I like this — but ……
      Too many people hide their money and work under the table.   How can that be corrected?

      • Retired Fed says:

        Easy.  Go to a European-style Value-Added-Tax.  You pay whenever you buy something.  That’s kind of hard to hide your money from.  Of course, I would expect that the income tax would be replaced by the VAT.

        • PA says:

           Retired Fed — Good idea!  People that work under the table, hide their earnings, and people that hide their money overseas – would finally be paying taxes.  :0)
          I actually think we would collect more taxes. 
          Most of us are honest, hard working government employees paying their taxes – so this is a great idea.
          OK – someone tell me the negative side to this…? 

          • Thomas Stapleton says:

            neg side – pay tax on your earnings for your whole life…….then rules change and you pay taxes on spending.  that is double taxation on entire nestegg.  Is that negative enough for you?

          • SomethingHasToChange1 says:

            Nope, just for you.

          • Bulldognumba10 says:

            The VAT tax is  used in Asia and Europe and they still pay income tax. The same would be true here as our miserable government would just want more money.

  8. ripwxman says:

    There is an error in the first table.  The current 25% income tax rate will go to 28%. There is also at least one “other tax implication” not mentioned.  The “marriage tax penalty” will return.

  9. memememe says:

    i, for one, would love to pay $100k in taxes.

  10. slobooger says:

    I see a lot of negative effects of this at all levels, except of course thhe 40+ percent getting backroom deals in exchange for votes… (Wealth Redistribution, aka Socialist agendas)

    Do you libs not see, the working class is being crushed by your view of deserving a free life. You are expecting the ultra rich to tax themselves to provide to you? Look at the numbers, the middle class is paying for the loss of the bush tax cuts.

    If only more people would have gradiated from private schools, instead of the left wing liberal nazi teacher union run public schools, more people would be able to think for themselves.

    SHEEP

  11. Fed Peasant says:

    Dividends from stocks, & tax free interest from municipal bonds, are two areas that would plunge if the tax rules were changed.  These are favorites of some retirees.  Retirees & seniors vote in large numbers.  I expect no changes.

    • JanetPilot says:

      As a retired CSRS fed, besides the annuity ck each month, I need to invest saved assets in something to supplement my income.  The CDs are paying a fraction of one %, so I do dividend capture on stocks and also invest in closed-end CA muni funds.  I sure hope they don’t do away with the dividend and muni fund tax advantage.  I agree with a previous writer, institute a national sales tax of x% with no deductions for nobody  AND  do away with the republic form of government and go with a true absolute democracy where any proposed law / regulation / statute goes directly onto the ballot for the mass to vote on.  Congress can write-up the proposal, but “rule of the mob” votes it in or out !!!

  12. D Byte says:

    The Bush tax cuts directed stunning tax benefits to high-income households over the last nine years:

    If one adds up the average tax cuts that households with incomes between $200,000 and $500,000 received in each of the last nine years, the total exceeds $74,000.

    The sum of the average annual tax cuts delivered to households with incomes between $500,000 and $1 million exceeds $189,000 over the last nine years.

    Incomes between $40,000 – $50,000 received a total $9,268 tax break over 9 years.

    • A A says:

      Two thirds of the BUSH tax cuts went to the low and middle-income
      households. One third went to the high-income households. The
      high-income households earn 18 percent of the income and pay 28 percent
      of the income taxes.  48 percent of the earners
      pay no income tax worse yet they gat welfare in the form of the earned income
      tax credit (originally passed to refund their FICA tax, the credit now exceeds
      any FICA they could have possibly paid. In order to get a tax cut you have to
      pay taxes. Since the low and middle-income
      households individually pay so little in taxes to start with their share
      of the cut is small.      

    • little taxpayer says:

      That’s one side of the coin.  Flip it over and look at how much those households PAID.  Then tell me how envious you are of their tax rates.

    • guest3 says:

       so?  they paid a lot more taxes, too. 

    • Retiredandforgotten says:

      So are you a beneficiary or envious?  Along with your numbers, you need to note the number of people who are in the higher brackets out of the 100,000,000 or so that file.

      You don’t note that the lower end folks paid 1/3 less.  Ant that is a much larger number of people.

      • 2troubled says:

        A poll from the Pew Research Center reports that Americans believe eliminating
        the Bush tax cuts for the rich would be both beneficial to the economy and make
        the tax system more fair. By a two-to-one margin, the public says raising taxes
        on income over $250,000 would help the economy (44%) rather than hurt it (22%),
        with (a particularly wise) 24% saying it would make no difference. By a similar
        44%-to-21% margin, Americans say this tax increase on the rich would make the
        tax system more fair rather than less fair (25% say no difference would result).

    • Republicans2 says:

      If someone making $500,000 received just a 1% decrease in taxes, they would save $5,000. If someone making $40,000 got a 10% decrease they would save $4,000. You would complain that the high earner saved more. You have to be able to do two things: look at the entire picture and stop worrying about other people. Wait until those tax cuts expire and you will quickly see how much you benefitted and you will rue the day you got caught up in the class warfare distraction from the real issues.

    • guest says:

       It’s called a progressive tax system, which liberal democrat politicians fight to their death for.  Google it.  Learn about it.  Embrace it.

      I hope your job doesn’t involve math, because math appears to not be your friend.   Envy, however, does appear to be.

    • notworking says:

      Last I looked it was THEIR $$$ to start with

    • spectrm says:

      And? How many business ventures were funded by the investments from those making 40-50k? How many jobs were created from their income being put into new projects in the private sector? How many of those paying 40-50k are actually not liable for Federal Income Tax at all? If you make 45k a year, have a mortgage, group policy through work, a kid or two, a newer or greener car, newer or ‘EnergyStar’ appliances, and pay state income taxes…just as nearly every middle-class American does, it is very likely you do not owe ANY Federal Income tax (though you may have to fork over 250-400 bucks to an accountant to make it happen). But that’s underneath the Bush tax cuts. Let those expire and those middle class families owe once more.

      I’m guessing you don’t actually take the time to read the legislation…Is the other bookmark on your browser the Huffington Post?

      • Cat1689 says:

         Excuse me. But I am one of those people in the 40-50K and I do pay federal tax and state tax. I can’t afford a newer or greener car or ‘EnergyStar’ appliances much less pay someone to do my taxes just so I can pay them for finding a couple hundred dollar refund.  I have no children at home but I do have a daughter in college.  Unless you are in my tax bracket, you have no business saying anything about those of us in it that are struggling just to make ends meet.  And last time I checked, those jobs being creating by the wealthier population still need my pennies to keep their job.

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