The most radical changes occur in the following areas:
The regular income tax rates
The capital gains tax rates
The tax rate on qualified dividend income
The redeployment of cut-backs in exemptions and itemized deductions
The Regular Income Tax Rates
Five of the six income tax rate categories are scheduled to increase in 2013. The lowest rate, currently at 10 percent will increase to 15 percent. While the current 15 percent rate is scheduled to remain the same, the 25, 28 and 33 percent rates are scheduled to increase to 28, 31 and 36 percent respectively, and the current 35 percent rates will rise to 39.6 percent. To be more precise--the 10 percent rate will increase by 50 percent, and the 35 percent rate will increase by over 13 percent--so the tax changes are dramatic.
Capital Gains Rate
Capital gains have been taxed at 15 percent for Federal purposes, and are scheduled to increase to 20 percent effective January, 2013. This will have a significant impact on those who sell stocks at a profit, or who are selling business interests and real estate.
Qualified Dividend Income
An even more dramatic increase is scheduled to come from the changes in the qualified dividend income tax rates. This income has been taxed at the favorable rate of 15 percent. However, effective January, 2013 the rate of tax could be as high as the 39.6 percent rate--an increase of as much at 2.64 times the current income tax rate.
Additional Hospital Insurance Tax for High Income Wages Earners
If you file a joint income tax return with your spouse and have a combined income of $250,000 or more; file your return as married filing separately with an income of $125,000 or more; or file any other return with an income of $200,000 or more, you will be expected to pay an additional 0.9 percent hospital insurance (Medicare) tax on top of the 1.45 percent amount you have been paying.
New Medicare Tax on Unearned Income.
Another significant change in the tax code that is scheduled to take place at the first of the year is the new Medicare Tax on unearned income. In addition to the income tax changes outlined above, if you file a joint income tax return with your spouse and have a combined income of $250,000 or more; file your return as married filing separately with an income of $125,000 or more; or file any other return with an income of $200,000 or more, you will be expected to pay a 3.8 percent tax on investment income. Calculations are too complicated to present in this article.
Net investment income includes:
¨ Interest
¨ Dividends
¨ Annuities
¨ Royalties
¨ Rents
Other than income received in the ordinary course of or a trade or business, less deductions;
¨ Income from a passive activity or trading of financial instruments or commodities;
¨ Net gain of property other than property held in a trade or business
¨ Disposition of real estate
¨ Disposition of a primary residence if there is a taxable gain that exceed the exclusion amount
In addition, loss of deductions for personal exemptions and itemized deductions are scheduled to re-appear in 2013. The effect of these changes also mean increase in income tax paid.
I reviewed a recent calculation of a taxpayer with the following fact pattern:
Wages $250,000
Outside business income $50,000
Capital gains $120,000
Rental Income $90,000
The anticipated total tax burden will be $24,000 higher in 2013 than the same income in 2012.
Do not let these new rates and taxes surprise you. There are tax planning opportunities that could mitigate some of the effects, but you must act in 2012.
© 2012 L. Paul Kassouf & Co., P. C.
Gerard J. Kassouf, CPA is a director of the Birmingham, Alabama firm of L. Paul Kassouf & Co., P. C., Certified Public Accountants and Business Advisors. He can be reached at gkassouf@kassouf.com.
¨ Net gain attributable to the disposition of property other than property held in an active trade or business
ú Includes disposition of rental property
ú Includes disposition of other real property to extent it is not in an active trade or business
Can include personal residence to the extent the gain exceeds the exclusion amount ($500,000 for married taxpayers and $250,000 for single taxpayers)
¡ Net gain attributable to the disposition of property other than property held in an active trade or business
ú Includes disposition of rental property
ú Includes disposition of other real property to extent it is not in an active trade or business
Can include personal residence to the extent the gain exceeds the exclusion amount ($500,000 for married taxpayers and $250,000 for single taxpayers)
¨
¨ Net investment income includes:
¨ Int Net investment income includes:
¡ Interest
¡ Dividends
¡ Annuities
¡ Royalties
¡ Rents
¡ Other than income that is derived in the ordinary course of a trade or business, less allocable deductions
¡ Includes income from a passive activity or business of trading in financial instruments or commodities
¡ erest
¡ Dividends
¡ Annuities
¡ Royalties
¡ Rents
¡ Other than income that is derived in the ordinary course of a trade or business, less allocable deductions
¡ Includes income from a passive activity or business of trading in financial instruments or commodities
¨ Gains Rates will increase Capital Gains Rates will increase from 15.0% to 20.0%
¨ Qualified Dividends will revert from 15% rate back to ordinary income rate (maximum of 39.6%)
¨ from 15.0% to 20.0%
¨ Qualified Dividends will revert from 15% rate back to ordinary income rate (maximum of 39.6%)
