Give unto Caesar
October 1, 2012
by Brian Wolf

This past weekend I, watched a documentary on the early Roman Empire. Now, before you tell me to get a life, let me explain; it was late at night and I wasn’t tired anyway. The program talked about Caesar, followed by a parade of other emperors, each one being more psychotic and tyrannical than the last one. Now, fast forward a few thousand years and we’re still dealing with crazy leaders at home and abroad. Although I’m glad we don’t have kings, queens, dictators, or emperors here in America today, that doesn’t mean we don’t have problems with our elected leaders.

Let’s take a look at what’s in store for everyone for the next tax season. Anyone who watches television, reads newspapers, or follows the Internet is aware that substantial tax changes are coming in 2013.

Among other changes:

• the Bush tax cuts are scheduled to expire Dec. 31,

• the payroll tax holiday is also scheduled to expire at the end of the year; and

• new taxes associated with the health care law are scheduled to go into effect in 2013.

Many commentators are calling this situation a “taxmageddon” – a tax nightmare.

Here are some important tax changes that could affect you. Obviously, this is not intended to be comprehensive, but is merely a listing of a few things that would be of interest to my readers and clients. Also, it is possible that Congress could act between now and the end of this year to eliminate or reduce some of these changes.

Income taxes

The Bush tax cuts are scheduled to expire, and there will be a substantial increase on tax rates for nearly all tax brackets for ordinary income, long-term capital gains, and dividends.

The table below shows the rates to be paid by a married couple filing jointly in 2012 and what the scheduled rate would be in 2013.

There is a new 3.8 percent surtax on the lesser of (1) net investment income, or (2) the excess of modified adjusted income over a threshold amount. The threshold amount is $250,000 for married couples filing jointly, $125,000 for married couples filing separately, $200,000 for single taxpayers, and about $12,000 for trusts and estates.

Net investment income includes interest received, dividends, capital gains, rents, royalties, and passive activity income. Net investment income does not include active trade or business income, deferred compensation, distributions from IRAs or retirement plans, municipal bond income, distributions from life insurance contracts or nonqualified deferred annuities, and income reported for self-employment tax, or gain on the sale of an active interest in a partnership or S corporation.

Under current law, in 2013 the top dividend rate raises from 15 to 39.6 percent. The new Obama-Care surtax takes the top capital gains rate to 23.8 percent, and top dividend rate to 43.4 percent. Some estimate that the tax will take a minimum of $123 billion out of taxpayer pockets over the next 10 years.

Here are a few of the other individual tax return provisions that come into effect in 2013:

• The Child Care Credit drops from $1,000 to $500.

• The so-called “marriage penalty” returns.

• The alternative Minimum Tax (ATM) “patch” expires.

• The threshold for itemized deduction for unreimbursed medical expenses increases from 7.5 percent to 10 percent.

Again, this listing is not exhaustive, but merely illustrative of some of the changes occurring.

The net effect of these changes will be increased taxes for almost all taxpayers and every income level. Some have estimated that the tax bill for a married couple filing jointly with two children and making a household income of $50,000 will increase $2,700 in 2013 over what was due in 2012. These tax increases are clearly not limited to the wealthy.

So take your pick, a king, a queen, an emperor, a dictator or a president. Any way you slice, it they’ll take your money from you. Looks like the best tax plan is to just go out and make a few million and not worry about taxes.

2012 2013
Income Bracket Income Tax Rate Long-Term Capital Gain Rate Dividend Rate Income Tax Rate Long-term Capital Gain Rate Dividend Rate
Up to $17,400 10% 0% 0% 15% 10% 15%
$17,401-$70,700 15% 0% 0% 15% 10% 15%
$70,701-$142,700 25% 15% 15% 28% 20%* 28%
$142,701-$217,450 28% 15% 15% 31% 20%* 36%
$217,451-$388,350 33% 15% 15% 36% 20%* 36%
$388,351 and up 35% 15% 15% 39.6% 20%* 39.6%

*The maximum capital gains rate for capital assets held for five years or more is 18 percent. Capital gains are also subject to the special 3.8 percent discussed below.

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