Wage earners have already seen a reduction in their take home pay, due to the expiration of the ‘payroll tax holiday’, which was with us for 2011 and 2012.
Social Security withholdings have gone back up to their former level of 6.2% of the first $110,000, previously 4.2%. This applies to all ‘Earned Income’.
Next, due to the ‘Fiscal Cliff’ negotiations, several new taxes are coming on line. Perhaps the most talked about are the increases as a result of ‘Obamacare’. High-income earners will pay an extra 3.8% on their net investment income, if their adjusted gross income exceeds $250,000. This calculation can be tricky. First, your adjusted gross income must exceed $250,000, then the 3.8% is applied to the amount your AGI exceeds over $250,000 or the net investment income, depending on which is lower.
Additionally, high wage earners will pay an extra .9% in Medicare taxes for 2013, when their gross earnings exceed $250,000 for a couple filing jointly or an individual earning over $200,000. This applies to self-employed individuals as well – another issue that is continuing to hurt small business owners.
For 2013, a new tax bracket has been added for high incomes. If you happen to be filing a joint return and your taxable income exceeds $450,000 or filing individually earning at $400,000, you are now in the 39.6% bracket. Formally, these progressive brackets topped out at 35%. Federal estates under $5,250,000 are transferred tax-free and you have the ability to gift $14,000 per person starting this year.
Frankly, it appears that there will be additional tax legislation coming that will affect most of us later this year. At this point, we have to wait for further clarification from the government. The administration and Congress will at some point agree on something. In the meantime, focus on closing out your 2012 return and remember these could be the good old days of tax rates!