Friday, February 15, 2013

New Taxes in 2013 - What You'll Pay

The New Years Day compromise on the fiscal cliff was designed to prevent massive tax increases from taking effect that many feared would devastate the economy. Yet even with the compromise, several new taxes in 2013 will raise tax bills for millions of Americans, and the groups that are the most affected by the changing of the calendar may surprise you.
Here's a list of new taxes that took effect as of Jan. 1:   
Income tax
Income tax (Photo credit: Alan Cleaver)
Payroll Taxes: Returning to Old Levels
For the past two years, just about everyone who has a job got a tax break of 2 percentage points on the Social Security taxes withheld from their paychecks. But on Jan. 1, the rate of tax withheld from employee paychecks rose from 4.2% to 6.2%, representing about a $1,000 tax increase for typical families earning $50,000. Already, anyone who's received a paycheck in 2013 has likely seen the impact of this tax, with those who get paid twice a month having about $40 extra taken out under the FICA on their paychecks.
Few analysts expected the fiscal cliff negotiations to extend this tax break further. But given that it hits at just about everyone, it could have the biggest impact of any of the new taxes in 2013.
Medicare Surcharge
High-income earners will see a brand-new tax this year. Single filers earning more than $200,000 and joint filers with income over $250,000 could be subject to two new taxes.
With one tax, if your earned income goes above the threshold, then you'll owe an extra 0.9% of your earnings in Medicare withholding. In some cases, this additional money may be taken directly out of your paycheck, although for joint filers, your employer may not be able to do so accurately because it doesn't know what your spouse earns in order to get the calculation correct.
The second tax applies to investment income, including interest, dividends, and capital gains. For this income, you'll owe an extra tax of 3.8% for any amount that exceeds the threshold. The idea behind this part of the new tax is to treat investment income for high-income earners the same way as earned income, making both types of income subject to the same higher Medicare tax rate.
New Tax Brackets and Rates for High-Income Earners
The biggest news from the fiscal cliff compromise was the return of the 39.6% tax rate for singles earning more than $400,000 and joint filers with income above $450,000. This rate is a carryover from the old rate structure that existed before the tax cuts of the early 2000s and represents a 4.6 percentage point rise from the old 35% rate.
In addition, taxpayers whose earnings are above these thresholds will see their taxes on dividends and capital gain income rise from 15% to 20%. Given that dividend rates could have risen as high as the 39.6% ordinary income tax rate, investors were fairly pleased with the eventual outcome.
Disappearing Deductions and Other Hidden Taxes
In addition to the explicit increases in taxes, some old provisions are back that will have the same tax-increasing impact. In particular, two separate rules that phase out certain deductions for high-income taxpayers came back this year after having been absent from tax law since 2009.
The phase-outs target two areas: personal exemptions and itemized deductions. One rule, known as the PEP, reduces the value of your personal exemptions by 2% for every $2,500 in additional income you earn over thresholds of $250,000 for singles and $300,000 for joint filers. The other rule, called the Pease phaseout, cuts the amount you can claim in itemized deductions by 3% of the amount of additional income you earn over those same thresholds, subject to a maximum reduction of 80% of your itemized deductions.
Those calculations are a bit complicated, but the net result is that you can end up paying thousands of extra dollars in taxes by losing the value of those deductions.
Finally, the estate tax rate rose from 35% to 40% this year. With the $5 million exemption made permanent, however, the impact of the tax will be limited to far fewer families than would have paid tax without the fiscal cliff compromise.
Start Planning
These new taxes for 2013 won't make anyone happy, but by knowing about them early on, you can start planning for them right away. Doing so may not let you reduce your tax bill too much, but it'll at least get you prepared for the hit to your paycheck and your tax refund next year.

The article New Taxes in 2013: What You'll Pay originally appeared on Fool.com.
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