Part 1: New Tax Rules, Hikes and Strategies for 2013

Tax hikes in 2013 mean it’s time to revisit available tax breaks.

Effective 1/1/13, taxes increased for many well-paid Americans. Here are three separate tax hikes that might affect you:

  • Top federal income tax rate now 39.6%
  • Top Medicare tax on earned income now 3.8%
  • New 3.8% Medicare tax on unearned income

Beginning on January 1, 2013, The American Taxpayer Relief Act raised the top federal marginal income tax rates from the 35% max in place since the Bush 2003 tax cuts to 39.6% for taxable income exceeding the following thresholds:

Threshold for 39.6% Bracket:

Filing Status

Tax Bracket Starts
(at taxable income)

Married Filing Joint

$450k

Head of Household

$425k

Single

$400k

Married Filing Separate

$225k

So how much more federal income taxes could you expect to pay this year due to the 39.6% bracket? Single individuals with taxable income of $600k will pay the federal government an additional $9,200. Earn $400k more to bring your taxable income to $1 million, and the additional taxes you’ll owe jumps to $27,600. Let’s look at the increases based on the four filing statuses:

Additional Taxes Starting in 2013

Taxable income

Single

Head of Household

Married Filing Joint

Married Filing Separate

$600,000

$9,200

$8,050

$6,900

$17,250

$800,000

$18,400

$17,250

$16,100

$26,450

$1,000,000

$27,600

$26,450

$25,300

$35,650

Increased Tax Rate on Long-Term Capital Gains and Corporate Dividends

The top tax bracket was not the only increase to federal income taxes. For long-term capital gains and qualified corporate dividends, the tax rate increases by one-third – from 15% to 20% – based on the same taxable income thresholds as apply the 39.6% bracket, effective 1/1/13.

Higher Medicare Taxes:

There are two new increases to the Medicare tax. One upped the Medicare tax that you’ll pay on your earned income from 1.45% to 2.25% for single individuals earning more than $200k or married couples whose combined earned income exceeds $250k. Keep in mind that your employer will match Medicare taxes withheld from your pay at a rate of 1.45%, so the federal government now gets 3.8% on your earned income that exceeds the applicable threshold.

Increased Medicare Tax

Filing Status

3.8% Tax Starts
(Earned income)

Married Filing Joint

$250k

Single

$200k

New 3.8% Medicare Tax On Unearned Income:

The new 3.8% Medicare tax on unearned income kicks in at the $200k of Adjusted Gross Income (AGI) for single individuals and $250k of AGI for married couples. Unearned income includes interest, dividends, capital gains, annuities, royalties, and rents. This is the first time that unearned income has ever been subject to Medicare taxes.

Tax Rates for Capital Gains and Qualified Dividends – 2012 vs 2013

Single

Married Filing Jointly

Capital Gains and Qualified Dividends -2012 rates

Capital Gains and Qualified Dividends -2013 rates

Increase in Tax Rates on Investments 2012 vs 2013

$0 – $36,250

$0 – $72,500

0%

0%

0%

$36,250 – AGI of $200,000

$72,500 – AGI of $250,000

15%

15%

0%

$200,000 – taxable income of $400,000

$250,000 – taxable income of $450,000

15%

18.8%

3.8%

$400,000+

$450,000+

15%

23.8%

8.8%

About Andrew Schwartz, CPA

Andrew D. Schwartz, CPA, is a partner with Schwartz & Schwartz, PC, and the founder of The MDTAXES Network.
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1 Response to Part 1: New Tax Rules, Hikes and Strategies for 2013

  1. Pingback: Part 2: New Tax Rules – Strategies to Minimize your Tax Bill | Schwartz and Schwartz, CPAs News

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