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A “Perfect Storm” Brewing | Tax Tip of the Week | No. 158 August 8, 2012

Posted by bradstreetblogger in : Tax Tip, Taxes, Taxes , trackback

Pending Tax Increases in 2013

Last week we looked at some pending tax increases in 2013 as a result of the Supreme Court upholding the major provisions of the Patient Protection and Affordable Care Act (Obamacare). 

This week we will look at some additional tax increases if Congress allows the Bush tax cuts to expire on December 31, 2012. 

Next week we will examine some tax savings opportunities to consider before the end of this year and the Perfect Storm of all tax increases hits us in 2013.

These are some of  the tax cuts scheduled to end on December 31, 2012: 

Elimination of the 10% tax rate.  Currently the first $8,500 ($17,000 if married) of taxable income is taxed at a 10% rate.  In 2013, the first dollar of taxable income will be taxed at a 15% rate.

All other tax brackets will increase.  Currently the highest tax rate is 35%.  That tax bracket will increase to 39.6% in 2013.

Long-term capital gain increases.  In 2012, long-term capital gains are taxed at 0% if you are in the 15% tax bracket or below, and taxed at 15% for those in the higher tax brackets.  In 2013, long-term capital gains will be taxed at 10% or 20% depending on your tax bracket.

Elimination of qualified dividends.  The current tax rate on qualified dividends is 0% (if you are in the 15% tax bracket or lower) and taxed at 15% if you are in the higher tax brackets.  In 2013, dividends will be taxed as ordinary income.  This means they will be taxed as high as 39.6%.  Remember from last week, there will be a new 3.8% surtax on investment income for those with taxable incomes over $200,000 ($250,000 if married).  In 2013, if you are in the higher tax brackets your dividend income could be taxed at 43.4% (39.6% + 3.8%) vs. the 15% tax rate in 2012.  (Editor’s note:  this can’t be good for the stock market!)

Payroll taxes will increase.  Today we still have the 2% rollback on the employee portion of FICA taxes.  That rollback could end in 2013.

Child tax credit reduction.  For those with dependent children under age 17 the current child tax credit is $1,000.  The credit could be reduced to $500 next year.

Elimination of college education credits.  The current American Opportunity Credit offers a very generous credit of up to $2,500 to help defray the cost of higher education expenses.  That credit is eliminated in 2013.

These are just a few of the potential increases.  Other increases include the return of limitations on itemized deductions and personal exemptions, return of the marriage penalty, reduced student loan interest deductions, and more. 

In addition to these pending tax increases we are also left with a lot of uncertainty about estate taxes and any possible relief from the Alternative Minimum Taxes (AMT).  The current estate tax exclusion is $5 million ($10 million if married) with a 35% estate tax rate.  In 2013, the estate tax exclusion will return to $1 million ($2 million if married) and assets above the exclusion will be taxed at a 55% tax rate. 

We’ll keep you posted.

As always, give us a call with any questions you may have.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

Tax Tip of the Week Video Series:

http://youtu.be/BlhqUiVEsJo

…until next week.

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