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6 Tax Changes You Should Know About In 2013 (USA)
Post-fiscal cliff fiasco, it’s no wonder Congress’ approval rating fell to an all new low of just 9%. Few people like spending cuts and few people like tax increases, but to avert another major financial crisis (possibly even a double dip recession), the House and Senate were forced to put together a last minute deal (technically after the deadline of December 31) that involved both significant federal budget cuts and tax increases.
Taxes didn’t increase as much as they would have if we had gone over the fiscal cliff without Congressional intervention, but in order to raise more government revenue and preserve the financial longevity of entitlement programs (such as Social Security and Medicare), taxes are still on the rise in 2013.
As expected, one of the few areas of common ground politicians have is the need to protect the lower and middle classes from income tax hikes. The Bush-era tax cuts were set to expire for everyone, but allowing this to happen would have created economic chaos for individuals and households that are already struggling to get by. As such, Congress added a new tax bracket in the fiscal cliff compromise: 39.6% on single filers making over $400,000 and joint filers making over $450,000 per year. For those who fall into the new income tax brackets will also see an increase in their capital gains taxes from 15% to 20%—while opponents of the increase say this will hurt investment in American enterprises, this is preferable to the 39.6% rate that was originally considered as a part of the fiscal cliff deal.
To aid the ailing system, burdened by the influx of qualified recipients due to the Baby Boomer generation, Medicare will see a boost in revenue in 2013. Why? Because single filers making over $200,000 or joint filers making over $250,000 per year are now subject to 0.9% Medicare surcharges on top of what they already pay for the entitlement program. This is problematic policy in that employers cannot discern whether their joint-filing employee makes over $250,000, but the increase is relatively clear-cut for single filers.
Investment Income Taxes
For single filers making over $200,000 and joint filers making over $250,000 per year, expect to see a 3.8% increase on your investment income (capital gains, interest, dividends, etc.).
The estate tax is now set at 40% for those at or above the $400,000 income level, with a $5 million exemption.
Two years ago, to combat the harmful economic effects of the recession, Congress passed legislation to temporarily reduce payroll taxes. These reductions were not renewed in the fiscal cliff compromise, which means that employees will see the Social Security tax on their paychecks raise from 4.2% to 6.2% (starting January 1, 2013). With economists predicting the potential insolvency of the Social Security Administration by the year 2037, Congress members acknowledged that we cannot afford to continually underfund the system, even if it means higher taxes for the average employee (approximately $1,000 increase for families with an average income of $50,000 per year). This is the one tax that affects everyone across the board; we have yet to see how this affects the overall economy, but anyone who has received a paycheck so far in 2013 definitely noticed the hike.
New taxes, yes, but there are other tax policy decisions that will ultimately affect how much you have to pay to the government in 2013. Take the elimination of certain deductions, for example. Specifically: the ‘Pease limitation’ and Personal Exemption Phaseout (PEP). These apply primarily to those making $250,000-300,000 and limit the amount they may claim as personal exemptions and itemized deductions.
Tax breaks for low-income Americans were extended for an additional five years: the Earned Income Credit, the American Opportunity Tax Credit, and Child Tax Credit. This will help these families pay for their children’s college education, amongst other child-related expenses. Congress is also looking to significantly “patch up” the Alternative Minimum Tax in order to avoid hurting the middle class in the future.
And what about businesses? Luckily, temporary tax breaks on research & development industries and especially green technology industries were extended for another year.
So, taxes are going up in 2013. Not just for the wealthy, but for nearly everyone who makes a regular income. The implementation of an entirely new tax bracket for those making over $400,000 and expiration of the payroll tax holiday are just more signs of these desperate times. However, even with all its procrastination and stagnation in trying to reach a fiscal cliff compromise, Congress managed to shield most of the lower and middle class individuals and families from the most devastating economic impacts we would’ve seen if we had gone over the fiscal cliff.
Photo Credit: Alan Cleaver