Cracking the 2013 tax code
A guide to the changes wrought by the fiscal-cliff deal
Early in the morning of January 1, Congress finally got around to dealing
with the tax part of the fiscal cliff drama by passing what is inaccurately
named the American Taxpayer Relief Act of 2012. Thanks to the demise of the
so-called payroll tax holiday, all workers will pay higher taxes this year, but
the new law cancels federal income tax increases that would have resulted in
added misery for just about everyone. The bad news is that higher-income folks
will face higher rates.
Here’s a detailed summary of the most-important changes for individual taxpayers.
Payroll Tax Holiday Is Dead For 2010-2012, the Social Security tax withholding rate on your salary was temporarily reduced from the normal 6.2% to 4.2%. If you’re self-employed, the Social Security tax component of the self-employment tax was reduced from the normal 12.4% to 10.4%. Last year, this so-called payroll tax holiday could have saved one person up to $2,202 or a working couple up to $4,404. Somewhat surprisingly, the new law does not extend the holiday through 2013. (For this year, the Social Security tax can hit up to $113,700 of salary or self-employment income.)
Rates on Ordinary Income: For most individuals, the federal income tax rates for 2013 will be the same as last year: 10%, 15%, 25%, 28%, 33%, and 35%. However, the maximum rate for higher-income folks increases to 39.6% (up from 35%). This change only affects singles with taxable income above $400,000, married joint-filing couples with income above $450,000, heads of households with income above $425,000, and married individuals who file separate returns with income above $225,000.
Here’s a detailed summary of the most-important changes for individual taxpayers.
Payroll Tax Holiday Is Dead For 2010-2012, the Social Security tax withholding rate on your salary was temporarily reduced from the normal 6.2% to 4.2%. If you’re self-employed, the Social Security tax component of the self-employment tax was reduced from the normal 12.4% to 10.4%. Last year, this so-called payroll tax holiday could have saved one person up to $2,202 or a working couple up to $4,404. Somewhat surprisingly, the new law does not extend the holiday through 2013. (For this year, the Social Security tax can hit up to $113,700 of salary or self-employment income.)
Rates on Ordinary Income: For most individuals, the federal income tax rates for 2013 will be the same as last year: 10%, 15%, 25%, 28%, 33%, and 35%. However, the maximum rate for higher-income folks increases to 39.6% (up from 35%). This change only affects singles with taxable income above $400,000, married joint-filing couples with income above $450,000, heads of households with income above $425,000, and married individuals who file separate returns with income above $225,000.
Rates on Long-Term Gains and Dividends: The tax rates on
long-term capital gains and dividends will also remain the same as last year for
most individuals. However, the maximum rate for higher-income folks increases to
20% (up from 15%). This change only affects singles with taxable income above
$400,000, married joint-filing couples with income above $450,000, heads of
households with income above $425,000, and married individuals who file separate
returns with income above $225,000. Remember: these higher-income folks can also
get socked with the new 3.8% Medicare surtax on investment income, which can
result in a maximum 23.8% federal tax rate on long-term gains and dividends.
Personal and Dependent Exemption Deduction Phase-Out: The last time we saw a phase-out rule for personal and dependent exemption deductions was 2009. Sadly, the phase-out deal is back. As a result, your personal and dependent exemption write-offs can be reduced or even completely eliminated. Phase-out starts at the following adjusted gross income (AGI) thresholds: $250,000 for single filers, $300,000 for married joint-filing couples, $275,000 for heads of households, and $150,000 for married individuals who file separate returns.
Personal and Dependent Exemption Deduction Phase-Out: The last time we saw a phase-out rule for personal and dependent exemption deductions was 2009. Sadly, the phase-out deal is back. As a result, your personal and dependent exemption write-offs can be reduced or even completely eliminated. Phase-out starts at the following adjusted gross income (AGI) thresholds: $250,000 for single filers, $300,000 for married joint-filing couples, $275,000 for heads of households, and $150,000 for married individuals who file separate returns.
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