How Will Tax Rate Changes Affect You?
By: J. Gregory Hamm, J.D., CPA
The 2010 Tax Relief Act extended the “Bush” tax rate cuts through 2012. Without further legislation, the tax rates revert to previous levels in 2013. President Obama recently proposed additional tax changes for 2013.
2011 and 2012
The 2010 Tax Relief Act extends through December 31, 2012, the individual marginal income tax rates of 10, 15, 28, 33, and 35 percent. The 2010 Tax Relief Act also maintained the reduced maximum capital gains rate of 15 percent on adjusted net capital gain of noncorporate taxpayers (for regular tax and AMT purposes), and the zero percent capital gains rate on adjusted net capital gain of noncorporate taxpayers in the 10-percent or 15-percent income tax bracket. The favorable taxation of “qualified” dividends received by individuals, trusts or estates at capital gain rates was also extended through 2012.
2013 + (Without Any Further Legislation)
The individual income tax rates will revert to 15, 25, 28, 36 and 39.6 percent. The capital gains rate will increase to 20% and dividends will be taxed at ordinary income rates.
Beginning in 2013, the 3.8% Medicare contribution tax on net investment income in excess of $200,000 ($250,000 for joint filers and $125,000 for married filing separately) will apply. Also 0.9% additional Medicare tax on earned income in excess of $200,000 ($250,000 for joint filers and $125,000 for married filing separately) will apply.
2013 + (With President Obama’s PROPOSED Deficit Reduction Plan)
President Obama PROPOSED a $3 trillion federal budget deficit reduction plan which is to be considered by Congress. This proposal has not been favorably received by Congress but we wanted to update you on the initial proposal. The proposed plan includes $1.57 trillion in new tax revenue in the form of:
1. Allowing the “Bush” tax cuts to expire for higher income taxpayers, eliminating the capital gain preference, and restoring the estate tax to 2009 levels
2. Limiting itemized deductions on higher income taxpayers
3. Eliminating special depreciation deductions for corporate aircraft, eliminating oil, coal and gas tax incentives, repealing LIFO, and various other tax incentives.
Under the proposal, the individual income tax rates will revert to 15, 25, 28, 36 and 39.6 percent. Capital gains and qualified dividends will be taxed at 20% for singles taxpayers with income over $200,000 ($250,000 for married filing jointly). The 3.8% and 0.9% additional Medicare taxes would apply as set forth above.
The proposal reduces the tax benefit of itemized deductions and other tax preferences to 28%. The provision would apply to single taxpayers with income over $200,000 ($250,000 for married filing jointly).
Absent further extension of the “Bush” tax rate cuts, 2013 could bring a significant increase in the rates for single individuals with income in excess of $200,000 ($250,000 for married filing jointly). Although Congress will weigh in and could minimize the tax increase, Individuals at these income levels should start planning for proposed changes. More details to follow as they become available.