There are a slew of 2013 tax law changes ready to go into effect if Congress fails to reach an agreement on the fiscal cliff.
According to the Tax Policy Center, almost 90% of taxpayers, both rich and poor, will see their household tax bill increase by about $2,000 next year with the top 1% seeing a tax increase on average at $121,000.
In other words, take-home pay will decrease, which has been referred to as "Taxmageddon,"with the middle class especially hard hit from the changes.
But that's just a small piece of the large puzzle of 2013 tax law changes. Here's a more detailed look at what could hit your income, investments and savings.
2013 Tax Law Changes
Capital Gains Rate
Thinking about selling that vacation home or selling some stock? You may want to do it before year's end to avoid a higher tax rate.
Unless there's a congressional truce, the capital gains rate will increase to 20% in January, up from 15% now.
This will not affect qualified retirement plans such as IRAs or 401(k) plans.
For those with higher income levels, they'll also incur a 3.8% surtax on capital gains, dividends, royalties and real estate sales thanks to the Affordable Care Act.
Add in a limit on itemized deductions that will kick in for 2013 and there is an additional 1.2% rise.
Do the math and this means the effective capital gains rate will hit 25% on Jan. 1.
The higher income has been defined as $200,000 for a single filer and $250,000 for a married couple.
Payroll Tax Deduction Change
Taxpayers will say goodbye to the 2% payroll tax reduction.
This means a $50,000 salary could incur $1,000 more in taxes with a higher income filer making more than $108,000 would pay $1,950 more on average, reported the Tax Policy Center, or a 0.9% tax on earnings.
Higher is defined as more than $250,000 for married filers and more than $200,000 for singles.
The current 10% individual income tax bracket will be cut while the 33% and 35% tax brackets will rise to 36% and 39%, respectively.
In addition, the "marriage penalty" will go away and the 15% tax bracket for singles will be greater than the 15% tax bracket for married persons jointly filing.
Higher earners will see increased Medicare taxes to 2.35%, up from the current 1.45%. Self-employed workers will be hit harder with a rate of 3.8%, up from 2.9%.
Beginning in 2013, there will not be a cap on the limit.
Itemized deductions will also change with the greatest one coming in medical expenses.
Now medical expenses greater than 7.5% of your adjusted gross income can be deducted but beginning in January, this rises up to 10%.
For those looking to transfer their estate to heirs, the cost will increase in 2013.
Currently, the first $5 million of an estate is untaxed but anything greater has a 35% tax rate. Change from the current law, will have the effective exemption dropping to $1 million while the top tax rate would increase to 55%.
President Obama has proposed placing estate tax exemption at $3.5 million, indexed to inflation, while the Republicans want to get rid of the tax.
With six weeks to go until the New Year, there's still time to seek tax advice and make sales that will incur fewer taxes than in 2013. Careful planning can help.
Related Articles and News:
- Money Morning:
The Alternative Minimum Tax Change That Could Cost You $3,700 in 2013
- Money Morning:
Taxmageddon 2013: How to Prepare for Looming Tax Law Changes
- The New York Times:
At year's end, a slew of tax changes hit
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Napa Valley Register:
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- Washington Post:
Tax Laws Could Require Change in Strategy