The Wall Street Journal
Weekend Investor – Tax Report – January 5, 2013
How Much Will Your Taxes Jump?
By Laura Sanders
In the nick of time, and amid much political drama, Congress passed the American Taxpayer Relief Act on New Year’s Day—averting massive tax increases for nearly all earners that were slated to take effect Jan. 1.
Even so, millions of people soon will feel something less than relief from the new law.
The most immediate change affects nearly all workers: Congress allowed a two-percentage-point cut for the employee portion of the Social Security tax to expire. As a result, each will owe up to $2,425 more in payroll tax this year than in 2012.
Back-Door Tax Increases
In 2013 the exemption phases out for people starting at the $250,000/$300,000 income thresholds, and vanishes completely for couples at $422,500 of “adjusted gross income,” or income before itemized deductions, and at $372,500 for singles.
The other new provision is called Pease, named after former Rep. Donald Pease (D., Ohio). It is a complex limitation on all itemized deductions—including charitable donations and mortgage interest—that will eliminate up to 80% of deductions for taxpayers above the $250,000/$300,000 income thresholds.
Estate and gift tax. The estate- and gift-tax exemption will remain at $5 million per individual—not the $3.5 million sought by President Barack Obama. But the current 35% top tax rate on amounts above the exemption will increase to 40%. These changes are permanent.
Comments January 5, 2013
Does the thought of paying 13%, 48% and/or 59% higher tax rates in 2013 versus 2012 make you sick to your stomach? You had better start planning now or get a sickness bag because those higher rates apply in 2013. Furthermore, some of the higher rates are cumulative at higher income levels.
Income Taxes. The 2013 new 39.6% top marginal income tax rate is 13% higher than the 2012 old 35% rate, for those making $400,000 (single) or $450,000 (couples).
Payroll Taxes. The 2013 new 6.2% payroll tax rate is 48% higher than the 2012 old 4.2% rate. And, the new tax applies to 3.3% more of your income than the old tax; $113,700 in 2013 versus $110,100 in 2012.
Capital Gains, Dividends and Interest. The 2013 new 20% long-term capital gains and dividends tax rates are 33.3% higher than the 2012 old 15% rate, for those making $400,000 (single) or $450,000 (couples). The 2013 new investment surtax on capital gains, dividends and interest applies to those making $200,000 (single) or $250,000 (couples). The combined 2013 new 23.8% tax rate is 59% more than the 2012 old 15% rate (note: the surtax did not apply in 2012).
Fortunately, there are a host of actions you can take to avoid or mitigate these sickening new taxes. Internal Revenue Code Sections 401(k), 403(b), 457(b), 1031, 1035 and many others present powerful means to combat this tidal wave of taxes. Work closely with a Registered Investment Adviser (RIA) to determine your best course of action.
Aaron Skloff, AIF, CFA, MBA
CEO – Skloff Financial Group
Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA), is the Chief Executive Officer of Skloff Financial Group, a Registered Investment Advisory firm. The firm specializes in financial planning and investment management services for high net worth individuals and benefits for small to middle sized companies. He can be contacted at www.skloff.com or 908-464-3060.