The
New Year's Day compromise on the fiscal cliff
was designed to prevent massive tax increases from taking effect
that many feared would devastate the economy. Yet even with the
compromise, several new taxes in 2013 will raise tax bills for
millions of Americans, and the groups that are the most affected
by the changing of the calendar may surprise you.
Here's a list of new taxes that took effect as of Jan. 1:
Payroll taxes: Returning to old levels
For the past two years, just about everyone who has a job got a
tax break of 2 percentage points on the Social Security taxes
withheld from their paychecks. But on Jan. 1, the rate of tax
withheld from employee paychecks rose from 4.2% to 6.2%,
representing about a $1,000 tax increase for typical families
earning $50,000. Already, anyone who's received a paycheck in
2013 has likely seen the impact of this tax, with those who get
paid twice a month having about $40 extra taken out under the
FICA on their paychecks.
Few analysts expected the fiscal cliff negotiations to extend
this tax break further. But given that it hits at just about
everyone, it could have the biggest impact of any of the new
taxes in 2013.
Medicare surcharge
High-income earners will see a brand-new tax this year. Single
filers earning more than $200,000 and joint filers with income
over $250,000 could be subject to two new taxes.
With one tax, if your earned income goes above the threshold,
then you'll owe an extra 0.9% of your earnings in Medicare
withholding. In some cases, this additional money may be taken
directly out of your paycheck, although for joint filers, your
employer may not be able to do so accurately because it doesn't
know what your spouse earns in order to get the calculation
correct.
The second tax applies to investment income, including
interest, dividends, and capital gains. For this income, you'll
owe an extra tax of 3.8% for any amount that exceeds the
threshold. The idea behind this part of the new tax is to treat
investment income for high-income earners the same way as earned
income, making both types of income subject to the same higher
Medicare tax rate.
New tax brackets and rates for high-income earners
The biggest news from the fiscal cliff compromise was the return
of the 39.6% tax rate for singles earning more than $400,000 and
joint filers with income above $450,000. This rate is a carryover
from the old rate structure that existed before the tax cuts of
the early 2000s and represents a 4.6 percentage point rise from
the old 35% rate.
In addition, taxpayers whose earnings are above these
thresholds will see their taxes on dividends and capital gain
income rise from 15% to 20%. Given that dividend rates could have
risen as high as the 39.6% ordinary income tax rate, investors
were fairly pleased with the eventual outcome.
Disappearing deductions and other hidden taxes
In addition to the explicit increases in taxes, some old
provisions are back that will have the same tax-increasing
impact. In particular, two separate rules that phase out certain
deductions for high-income taxpayers came back this year after
having been absent from tax law since 2009.
The phase-outs target two areas: personal exemptions and
itemized deductions. One rule, known as the PEP, reduces the
value of your personal exemptions by 2% for every $2,500 in
additional income you earn over thresholds of $250,000 for
singles and $300,000 for joint filers. The other rule, called the
Pease phaseout, cuts the amount you can claim in itemized
deductions by 3% of the amount of additional income you earn over
those same thresholds, subject to a maximum reduction of 80% of
your itemized deductions.
Those calculations are a bit complicated, but the net result
is that you can end up paying thousands of extra dollars in taxes
by losing the value of those deductions.
Finally, the estate tax rate rose from 35% to 40% this year.
With the $5 million exemption made permanent, however, the impact
of the tax will be limited to far fewer families than would have
paid tax without the fiscal cliff compromise.
Start planning
These new taxes for 2013 won't make anyone happy, but by knowing
about them early on, you can start planning for them right away.
Doing so may not let you reduce your tax bill too much, but it'll
at least get you prepared for the hit to your paycheck and your
tax refund next year.
Fool contributor
Dan Caplinger
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