As seen in the Minneapolis Star Tribune, January 3, 2013
Larson Financial Group, the nation’s largest financial planning firm exclusively for doctors, provides a Fiscal Cliff recap to clearly illustrate how each income level will be taxed in 2013.
Nearly all American wage earners will see their total tax rate increase by at least 1% in 2013. The American Taxpayer Relief Act of 2012 (Fiscal Cliff bill) combined with various other laws, now in effect, has caused a tax rate increase for almost every American taxpayer. The amount of tax each individual will owe depends on a number of factors: income, number of dependents, tax deductions, marital status, alternative minimum tax, and others.
Summary of 2013 Tax Changes
- Income up to $113,700 (per person whether single or married): Tax payers will pay an additional 2% in social security taxes on their income. This is $1,000 in additional tax for $50,000 of income with a maximum increase of $2,274 per person for income of $113,700.
Income over $200,000 (single) or $250,000 (married): Taxpayers will pay an additional .9% in Medicare taxes on any income over the $200,000 (single) or $250,000 (married) threshold. This is $900 more in taxes for every $100,000 earned in excess of the $200,000‐$250,000 limit.
Taxpayers will also owe 3.8% in Medicare taxes on investment income (includes income from interest, dividends, capital gains, annuities, and more). This is an additional $380 in taxes for every $10,000 earned through investment income.
Income over $250,000 (single) or $300,000 (married): The new tax laws state that personal exemption deductions will begin to get phased out. Presumably, a deduction is completely lost for earners making more than $375,000. Increased taxes could be as much as $1,544 per eligible dependent.
Some itemized deductions are reduced by up to 3% of taxpayer income. Worst case this well‐hidden tax could effectively increase the income tax rate by an additional 1% ‐ 1.19% on income over $250,000 (single) or $300,000 (married). In other words, taxpayers could pay $1,190 more in taxes for every $100,000 earned over the $250,000/$300,000 threshold.
Income over $400,000 (single) or $450,000 (married): The income tax rate will increase on any income over this amount by 4.6%. This means taxpayers could owe an additional $4,600 for every $100,000 earned in excess of the $400,000 (single) or $450,000 (married) threshold.
The long‐term capital gains and dividend tax rate will increase from 15% to 20%. Also note the 3.8% Medicare increase already discussed for these types of income.
What about the Alternative Minimum Tax?
Those that fall under the Alternative Minimum Tax (AMT) will not likely see a major change. Although the new legislation puts a permanent inflation adjustment provision in place for AMT, it is only standardizing what was already being done on an annual basis. This means that taxpayers may experience less of a tax increase than those shown above if they were already falling under AMT as the rate increase may not be enough to bump them out of AMT. If a taxpayer remains in AMT, then the only real impact they would feel is the additional social security taxes owed on the first $113,700 of income as well as the Medicare tax increases.
The article above is for informational purposes only. It is not intended to be specific tax advice and is not a recommendation, as every taxpayers financial situation is unique. Please contact a tax advisor before taking any action.