How Your Taxes Might Increase Next Year

Unless Congress takes further action before the end of this year, many Americans will be facing a tax increase beginning in 2013. Some pundits, who have referred to this pending tax increase as “the 2013 fiscal cliff” and “Taxmageddon,” have voiced concerns that this tax increase could threaten the fragile economic recovery.

On January 1, 2013, the lower income, investment and estate tax rates that were passed as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) are scheduled to expire. These lower rates were originally scheduled to expire at the end of 2010, but they were temporarily extended by Tax Relief Act of 2010 until December 31, 2012.

What Taxes Are Affected?

Unless legislative action is taken again before December 31, 2012, the following taxes will be affected starting next year:

• Ordinary income taxes— The tax rates for the top four income brackets will all rise: from 25 to 28 percent, 28 to 31 percent, 33 to 36 percent, and 35 to 39.6 percent.

• Investment (or passive) income taxes— The top tax rate on capital gains will rise from 15 percent to 20 percent, and dividends will be taxed at ordinary income tax rates, which could be as high as 39.6 percent.

• Estate taxes— The top federal estate tax rate will rise from 35 percent to 55 percent. Also, the applicable exclusion amount for estate taxes will drop from the current $5.12 million per person (or $10.24 million for a married couple) to $1 million (or $2 million for a married couple).

In addition to the expiring lower EGTRRA tax rates, some upper-income taxpayers will also be faced next year with an additional 3.8 percent surtax on investment income as part of the Affordable Care Act. Starting in January, this surtax will apply to the unearned income of individuals with an adjusted gross income (AGI) of $200,000 or more and married couples with an AGI of $250,000 or more.

As a result, the top capital gains rate for these individuals and couples will rise to 23.8 percent (20% capital gains plus 3.8% surcharge) and the top tax rate will rise to 43.4 percent. An additional 0.9 percent payroll tax on wages will also apply to these individuals and couples at this time.

More Expiring Tax Provisions

Other tax provisions that were enacted as part of the Tax Relief Act of 2010 are also scheduled to expire beginning next year. These include:

·         Marriage penalty relief

·         Repeal of personal exemptions and a limitation on itemized deductions for higher-income taxpayers

·         An enhanced child and dependent care tax credit and enhanced adoption credit and assistance programs

·         Enhanced Coverdell Education Savings Accounts

·         Repeal of the 60-month restriction on deductions for student loan interest

·         Special rules for certain tax-exempt bonds

These pending tax increases have emphasized the importance of year-end tax planning this year. If you haven’t yet, it may be a good idea to schedule a meeting with your tax advisor to discuss how you might be affected and steps you can take that might help minimize your future tax liability.


Courtesy of David Lerner Associates.

Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considering in connection with the purchase or sale of securities.

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