This time next year, you’ll probably be thinking about your 2012 taxes. Of course, laws could be passed and things could change, but as of now several changes will be coming your way at the end of 2012.
Federal Income Tax Rates
Your marginal tax rate is going up. After December 31, 2012, we’re scheduled to go from six federal tax brackets (10%, 15%, 25%, 28%, 33%, and 35%) to five (15%, 28%, 31%, 36%, and 39.6%).
Long-Term Capital Gains & Dividends
Currently, long-term capital gains are generally taxed at a maximum rate of 15%. (But if you’re in the 10% or 15% marginal income tax bracket, a 0% rate generally applies). Starting in 2013, however, the maximum rate on long-term capital gains will generally increase to 20%, with a 10% rate applying to those in the lowest (15%) tax bracket (though slightly lower rates might apply to qualifying property held for five or more years).
Long-term capital gain rates also apply to qualifying dividends. Starting in 2013, dividends will be taxed at ordinary income tax rates. These are changes which may influence investor behavior.
Payroll Tax Returns to Normal
The payroll tax reduction which was recently extended will expire at the end of 2012. This is a 2% reduction in the Social Security portion of your Federal Insurance Contributions Act (FICA) payroll tax. When it expires, you’ll see a corresponding drop in your after-tax pay.
Marriage Penalty Returns
If you’re married and file a joint return with your spouse, you’ll see the effect in the form of a reduced 2013 standard deduction amount, as well as in lower 2013 tax bracket thresholds in the tax rate tables (i.e., couples move into higher rate brackets at lower levels of income).
Itemized Deductions and Personal Exemptions
Beginning in 2013, itemized deductions and personal and dependency exemptions will once again be phased out for individuals with high adjusted gross incomes (AGIs).
Miscellaneous Tax Credits and Deductions
The earned income tax credit, the child tax credit, and the American Opportunity (Hope) tax credit revert to old, lower limits and rules of application. Also gone in 2013 is the ability to deduct interest on student loans after the first 60 months of repayment.
In addition to these changes, two entirely new Medicare-related taxes become effective in 2013.
Medicare Payroll Tax
The Medicare (hospital insurance) portion of the payroll tax will increase by 0.9% (from 1.45% to 2.35%) for those with wages exceeding $200,000 ($250,000 for married couples filing jointly, and $125,000 for married individuals filing separately). The rate for self-employed individuals increases from 2.9% to 3.8% on any self-employment income that exceeds the same dollar thresholds.
Medicare Tax on Unearned Income
A new 3.8% Medicare contribution tax is imposed on the unearned income of high-income individuals. The tax generally applies to the net investment income of individuals with modified adjusted gross income that exceeds $200,000 ($250,000 for married couples filing jointly, and $125,000 for married individuals filing separately).
I do not provide tax advice or tax preparation. Please consult your tax advisor for more information.
Examples are hypothetical and for illustrative purposes only. The information contained in this report does not purport to be a complete description of the developments referred to in this material and don’t constitute a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Sara Stanich and not necessarily those of RJFS or Raymond James. Tax laws are subject to future revisons. Raymond James does not offer tax advice. Please consult your tax advisor for any tax issues.