Possible Tax Law Changes — January 1, 2013

If Congress allows the so-called “Bush tax cuts” to expire at the end of this year—a not unreasonable assumption–the personal tax rates on ordinary income will increase as follows:

      Unmarried Filers     Married Joint Filers   Marginal Rate
    Over But Not Over       Over But Not Over 2012 2013
       0   $8,700       0  $17,400 10%  15%
   $8,700  $35,350  $17,400  $70,700 15%  15%
 $35,350  $85,650  $70,700 $142,700 25%  28%
 $85,650 $178,650 $142,700 $217,450 28%  31%
$178,650 $388,350 $217,450 $388,450 33%  36%
$388,350   ___ $388,350    ___ 35% 39.6%

The end of the Bush tax cuts will also impact itemized deductions and personal exemptions.  Individual taxpayers will lose some current personal exemptions and deductions, including mortgage interest, charitable contributions and more.

In terms of payroll deductions, the 2% Social Security reduction that has been in effect for a few years will be reinstated.  Also, the new 3.8% health care tax that is part of Obamacare will apply to all wages. This will increase the current Medicare withholding on individuals from 2.9% to 3.8%. The “employee portion” of the Medicare tax will increase from 1.45% to 2.35% while the employer’s portion will remain the same at 1.45%.

Taxes on passive, ordinary income, such as interest and dividends, will increase from 35% to 43.4%, including the health care tax. The long-term capital gain rate will increase from 15% to 23.8%. This includes a basic capital gain increase from 15% to 20%, as well as a new 3.8% “health care tax” on interest, dividends and other passive income realized by “high earners” — individuals earning more than $200,000 per year, or $250,000 for married taxpayers.

In addition, the estate and gift tax will also increase in 2013. Currently, the estate and gift tax exclusion amount is $5 million per person. For a surviving spouse, the exclusion amount in 2012 is as high as $10 million. Above that level, any excess is subject to a federal estate tax of 35%. Unless the tax laws change, the maximum estate and gift tax rate will increase from 35% to 55% on Jan. 1, 2013. The lifetime exclusion (i.e., including gifts during lifetime) amount will revert to $1 million.

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