Posts Tagged ‘Tax increase’

Fiscal Cliff Deal

Just as I predicted, taxes are going up.  While we were bringing in the New Year with our loved ones (or sleeping if you have little kids like me), the Senate agreed on a deal and the House passed it as well.  You may or may not know the details of the “fiscal cliff” deal by now.  Since it’s the New Year and I’d like to start it out on a positive note. I’ll try to approach the deal with the most optimistic tone as possible (though there is quite a bit to be pessimistic about in this deal). 

One thing I was glad to see was the permanent AMT patch.  Past legislation has only applied temporary patches to the AMT mess and made tax planning very difficult (2012 was no exception).  They finally made the “patch” permanent and indexed for inflation each year.  AMT still needs a serious overhaul, but this will help us in the mean time and saved over 60 million Americans from being subject to AMT (myself included!).  While I’m happy this patch is permanent, I’m concerned it means Congress won’t be as eager to redo or eliminate the AMT issue since it’s no longer urgent. 

Part of my prediction was correct on the income tax rates; rates for lower and middle income taxpayers were extended, however they were set permanently which I wasn’t expecting.  While I’m happy with the permanent nature because it helps with tax planning, it doesn’t mean Congress won’t change it again. The debt ceiling issue is again quickly approaching and tax rates may be thrown into the negotiations once again.  The other “positive” in the tax rates was the apparent compromise on the top tax rate level.  The President was proposing the 39.6% tax rate to be effective for income (based on adjusted gross income (AGI)) over $200,000/$250,000 (single/married).  The compromise ended up setting the 39.6% rate on taxable income (after deductions) of $400,000/$450,000 (single/married).  I see two positives in there.  While I disagree whole-heartedly with increasing taxes on the wealthy (a.k.a. usually the job creators), it’s a compromise that seemed inevitable and ended up better than I expected. 

While the income tax rates for the lower and middle income taxpayers are not going up, the payroll taxes did increase.  The 2% payroll tax holiday we’ve been enjoying was allowed to expire.  If you make $50,000 a year, you will bring home $1,000 less this year. 

The “wealthy” Americans will also be subject to the following tax increases (not inclusive):

  • Capital gains/ Dividend tax rates: from 15% to 23.8 %
  • Personal exemption phase out (previously eliminated), starts at $300,000 for married couples   ($250,000 single)
  • Limitation on itemized deductions (previously eliminated), starts at $300,000 for married couples ($250,000 single)
  • Estate taxes permanently increased from 35% to 40%, although they did set the exclusion at $5million (adjusted for inflation) which was set to expire back to $1million at 55% 1/1/13. 

The following items were set to expire, but have been extended (not inclusive):

  • Child tax credit of $1,000 was made permanent
  • Earned income credit was extended through 2017
  • Adoption credit/assistance was made permanent at $10,000
  • Child and dependent care credit was made permanent
  • Employer-provided child care credit was made permanent
  • American opportunity tax credit (higher education) was extended through 2017
  • Above-the-line deduction for qualifying tuition and expenses extended through 2013
  • Teachers’ classroom expense deduction extended through 2013
  • Exclusion of cancellation of indebtedness on principal residence extended through 2013 

Business related items in the deal include (not inclusive):

  • Section 179 deduction of $500,000 with a $2million investment limit for 2012 and 2013
  • Extended 50% bonus depreciation through 2013
  • Research tax credit was extended through 2013
  • Work Opportunity Tax Credit was extended through 2013
  • 100% exclusion for gain on sale of qualified small business (Sec. 1202) stock (see Paul Polito’s website article here)
  • A number of green energy tax incentives 

Not the perfect deal, but at least one was made.  We were saved from the “fiscal cliff” and now maybe we don’t have hear that term again… for the time being. 

Happy New Year everyone!

 

My prediction: Taxes are going up

President Barack Obama was reelected president and Democrats maintain control of the Senate.  Republicans still have majority in the House.  While this may mean that nothing as significant as the Affordable Care Act will pass again (at least within the next two years), it also means a complete repeal is unlikely.  All those tax increases start next year in 2013.  In addition, Californians just passed a new tax primarily aimed at the “wealthy”.  The President wants to tap the wealthy too!  Here’s a run down of what’s in store, just to name a few new taxes: 

         California Prop 30 increases CA taxes on earnings over $250,000 for single taxpayers ($500,000 joint filers) retroactively beginning January 1, 2012, and increases sales tax by 0.25% beginning 2013

         “Bush-era” tax cuts expire end of 2012 bringing tax rates up across the board, restoring the “Marriage Penalty”, and increasing tax rates on capital gains and dividends

         The “Affordable Care Act”  imposes a new Medicare tax on investment income and the “wealthy” commencing 2013

         Estate taxes increase and the gift exclusion decreases by over $4 million!

         Payroll tax holiday (we’ve been paying 2% less in social security taxes) expires after 2012 

If I had to guess at what the future holds, I think Congress will pass the President’s proposal which extends the Bush tax cuts for lower to middle income families but increases taxes on the upper income levels. 

Here is a table that may help show the federal increases visually:

 

2012 rates

Affordable Care Act increases

Expired cuts increased rates by

2013 rates

President’s Proposal

Individual tax rates (income ranges for MFJ as of 2012)

 (2)

      $0 – $17,400

10%

 5%

15%

10%

      $17,400 – $70,700

15%

15%

15%

   $70,701 – $142,700

25%

 3%

28%

25%

  $142,701 – $217,450

28%

 3%

31%

28%

  $217,451 – $388,350

33%

 3%

36%

33%

      $388,350 +

35%

 4.6%

39.6%

36%

 

39.6%

 
Capital gains

15%

3.80% (1)

5%

23.80%

23.8%

Dividends

15%

3.80% (1)

25%

43.40%

43.4%

Medicare tax – high wage earners

1.45%

0.90% (1)

2.35%

2.35%

Estate tax

35%

20%

55%

Lifetime gift exclusion

           5,120,000

         1,000,000

 (1)   Individuals will pay an additional 0.9% Medicare Hospital Insurance (HI) tax on wages and self-employment income on amounts earned above certain threshold amounts: 1. $250,000 for joint returns; 2. $125,000 for married filing separate; and $200,000 for all others. To the extent that the amount of the income exceed the threshold, the tax on investment income is 3.8% of the lesser of:

1.      Net investment income, or

2.      The excess of modified adjusted gross income (MAGI) over a threshold amount. 

(2)   Income ranges differ from 2012 income ranges 

Here is a table that shows the CA Prop 30 increases (taxable income ranges): 

Prop 30 (effective January 1, 2012)

$250,001 -$300,000 for single/MFS

10.3% (1% increase)

$340,001 – $408,000 for HOH
$500,001 – $600,000 for MFJ
$300,001 -$500,000 for single/MFS

11.3% (2% increase)

$408,001 – $680,000 for HOH
$600,001 – $1,000,000 for MFJ
More than $500,000 for single/MFS

12.3% (3% increase)

More than $680,000 for HOH
More than $1,000,000 for MFJ

 

 

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