Taxes to rise for everybody in 2013
As you’ve probably heard by now, our leaders in Washington have reached an agreement on tax hikes for 2013. While higher rates for the wealthy have dominated the news coverage, the deal reached actually raises tax on all workers.
While most of the tax hikes hit those making more than $1 million a year, the deal reached is more nuanced than a simple increase to tax rates. So here is a quick guide with everything you need to know about the 2013 increase in federal taxes.
Top Federal Tax Rate
The top tax rate is set to rise to 39.6% for couples with taxable income of $450,000 or more and for singles with taxable income of $400,000 or more. This was an increase to President Obama’s proposal of $250,000/$200,000 and a decrease from the Republican’s initial proposal of no tax hikes. The tax brackets remain unchanged for everybody else.
Increase in Capital Gains Tax
Cap gains tax rises from 15 to 20 percent for couples making more than $450,000 ($400,000 if you’re single). This increase makes tax planning all the more important. I tend never to sell investments, so my portfolio generates few capital gains every year. But you’ll want to make sure that any mutual funds you own in a taxable account are tax efficient.
Loss of Personal Exemption and Itemized Deductions
With this change, the new tax laws will affect those making a bit less. For married couples with taxable income of $300,000 ($250,000 for singles) or more, you’ll start to lose the benefit of your personal exemption and itemized deductions. The formula is a bit complicated. I always let my tax accountant handle the calculations. But if you do your own taxes, tax software such as TurboTax rips through the calculations in a matter of seconds.
As a general rule of thumb, the limitation on itemized deductions (known as the Pease provision after Rep. Donald Pease (D., Ohio)) adds one percent to the top tax bracket and top capital gains tax rate.
Increase in Social Security Tax
This is where taxes go up for all workers. Over the past few years we’ve been enjoying a 4.2% payroll tax rate for social security. This was a decrease from the standard rate of 6.2%. Beginning in 2013, the rate is going back to its 6.2% historical level.
Remember that the social security tax is levied on the first $113,700 in wages for 2013 (the number is adjusted for inflation each year). So this tax hits everybody with earned income.
Increase in Estate Tax
The estate tax rate will rise from 35 to 40 percent for estates over $5 million. While this doesn’t affect most of us, it makes estate planning for the wealthy all the more important. There are plenty of ways to avoid this tax for all but the largest estates, so its impact on revenue is minimal.
So exactly how much revenue do these tax hikes raise? Good question.
The 2013 tax increases will raise an estimated $610 billion in revenue. Now you’re probably thinking that’s not too bad considering our projected annual deficit before the tax hikes is $1.1 trillion. So we’ll cut the deficit in half, right? Wrong.
The $610 billion in new revenue is over the next 10 years. In other words, the increased revenue is a drop in the proverbial bucket. And even if the Obama plan had been enacted (increasing taxes for joint filers with taxable income of $250,000 or more), the revenue raised would have been paltry.
So at this point you’re no doubt asking why in the world our politicians have been arguing over increasing taxes for the wealthy if such increases have such a miniscule affect on our fiscal crises. Good question.
Reality Check: I’ve been a member of the middle class all of my life. I was in the lower middle class as a child, the middle class as a young adult, and in the upper middle class today. And if there’s one thing I know it’s this–whether by increased taxes, decreased spending, or both, folks in the middle class will be the ones that pay for our profligate spending.
I don’t care if you worship the current administration or loathe it. Republican or Democrat. In favor of tax increases or not. The wealthy, however defined, cannot save us from $16 trillion in debt, $1 trillion in annual deficits, and entitlement programs heading for a real fiscal cliff.
Middle class, gird yourself. As surely as night follows day, we will sacrifice more than anybody to pull us out of our fiscal mess.