How the New Tax Laws will Affect You - Part I

 

January 10, 2013

 

Part I – Income Taxes

 

The American Taxpayer Relief Act (ATRA) allows the Bush-era tax rates to expire for certain high earning individuals and families.  What do these changes mean to you?  In this WEALTHWISE, we discuss changes to income, investment, and payroll taxes for 2013.

 

Where things stand for 2013

 

Income Tax Rates

If you earn more than $400,000 (Single) and $450,000 (Married), your marginal tax rate will increase from 35% to 39.6%. 

 

In other words, if your family earns $500,000 in 2013 and has one child in college, you may see your overall tax liability increase by approximately $7,600.

 

Deduction Phase-outs

In addition to the income tax rate increase, certain itemized deductions and personal exemptions will be phased out if your income is above $250,000 (single) and $300,000 (Married).

 

While itemized deductions are reduced for high-income earners, they cannot be reduced by more than 80% of the total deduction amount. 

 

The personal exemption is eliminated at incomes above $425,000 (Married).

 

For example, if your family has $500,000 in taxable income and $100,000 in itemized deductions, you will only be able to deduct $94,000.  Additionally, your entire personal exemption is eliminated.  The loss of these deductions and exemptions would result in a tax increase of about $3,900 for your family.

 

Capital Gains Tax Rates

You are subject to capital gains tax if you sell an asset that you have held for more than one year. Your new long-term capital gains tax will be 20% if you earn more than $400,000 (Single) and $450,000 (Married).  This is an increase from the 15% rate in prior years.

 

For example, if you sold stock in 2012 that had $100,000 in capital gains, you would have paid $15,000 in capital gains tax.  However, sell that same stock in 2013 and you will pay an extra $5,000 if you are above the $400,000/$450,000 threshold.

 

Dividend Tax Rates

If you earn dividends on an investment in 2013, you will be taxed at 20% provided you earn more than $400,000 (Single) or $450,000 (Married).

 

For example, you earned $10,000 in stock dividends.  The tax due in 2012 would have been $1,500 (15% tax rate).  Starting in 2013, the tax due is $500 more if your income is above the $400,000/$450,000 threshold. 

 

Social Security Payroll Rates

The Social Security payroll tax rate was temporarily reduced two years ago, but this reduction has expired. This affects all who work, and it has increased from 4.2% to 6.2% beginning January 1, 2013.  Also, the maximum earnings subject to Social Security tax was raised to $113,700.

 

So, if you earn $400,000, you will pay approximately $2,400 more in payroll taxes in 2013.

 

The next step

Even though the above changes take effect immediately, there are strategies to lower the impact on financially successful households. At PARTNERSINWEALTH , our PERSONALCFO's look at these tax changes and create customized plans to mitigate the impact of the tax increases. 

 

If you would like to learn more about how PARTNERSINWEALTH can help with tax strategies, please contact your PERSONALCFO or Jim Waters at 713.964.4028.
 
The next WEALTHWISE will discuss changes to estate and gift taxes starting in 2013.