After much wrangling and posturing and hand-wringing, a tax deal has been agreed to in the “fiscal cliff” saga. While the issue of what spending cuts should be made to the budget has been put off for a couple of months, the tax situation is a little bit clearer — just in time for you to start making plans for your 2013 taxes. Here are a few things you should be aware of for the new year:
Goodbye to the Payroll Tax Cut
As many expected, the payroll tax cut is being allowed to (finally) expire. It had been extended, but now it is gone. Employees have been receiving a 2% break on payroll taxes because of this cut. Unfortunately for many, the money has been something they are used to, since it was part of the paycheck.
Now, with the payroll tax cut gone, you will be paying 2% more in payroll taxes starting almost immediately. This means a smaller paycheck for you. Remember, though, that your payroll taxes are different from income tax. Don’t adjust your withholding to compensate, or you might not have enough to cover what you owe in income taxes next year.
Double-Check Your AMT Possibility
The AMT could be an issue for you. The fiscal cliff deal included a more permanent solution to the AMT by indexing it to inflation, but you might still be subject to it for tax year 2012, even if you managed to escape it in 2010 and 2011. Figuring out whether or not you are subject to the AMT requires that you do your taxes twice, to see whether you owe. Run the numbers, and double-check.
39.6% Tax Bracket for Highest Earners
If you make more than $450,000 filing jointly, or $400,000 filing singly, you will now be in the 39.6% bracket instead of the 35% tax bracket. Also, you will see a higher tax on your long-term capital gains if you are above these income levels. The new long-term capital gains rate is 20% for those above the threshold, instead of 15%. Also, don’t forget that those making more than $250,000 (joint) or $200,000 (single) are also going to be subject to a surtax of 3.8% on gains. The surtax is designed to help fund the Patient Protection and Affordable Care Act (otherwise known as Obamacare).
Exemption and Deduction Phaseouts
During the time the so-called Bust tax cuts were in effect, phase outs on certain personal exemptions and itemized deductions were suspended. Now, though, those phase outs are back. The phase outs will kick in for those who make more than $300,000 filing jointly, or $250,000 filing singly. If you are unsure about what is being phased out, it’s a good idea to speak with a tax professional or an accountant about the situation.
Your 2012 tax return shouldn’t be affected by these changes. However, your return for 2013 will be affected, and now is the time to consider what you can do to offset some of the costs, and to do your best to mitigate the effects. If your tax liability is going up, now is the time to do what you can to legally reduce what you owe.