On December 31, 2012, the following tax cuts (that were created during the Bush administration) will end unless the Obama administration acts.
10% Tax Rate will rise to 15%
Currently the first $8,500 ($17,000 if married) of taxable income is taxed at a 10 percent rate. In 2013, the first dollar of taxable income will be taxed at a 15 percent rate.
All other tax brackets will increase as well
Currently the highest tax rate is 35 percent. That tax bracket will increase to 39.6 percent in 2013.
Payroll taxes will increase
Today, there is a 2 percent rollback on the employee portion of FICA taxes. That rollback could end in 2013 unless renewed by the Obama administration.
Child tax credit will be reduced
The Child Tax Credit for those with dependent children under age seventeen will be reduced from $1000 to $500.
College Education Credit will be eliminated.
The current American Opportunity Credit offers up to $2,500 to help defray the cost of higher education expenses. That credit will no longer exist in 2013.
Long-term capital gain taxes will increase.
The long-term capital gains will be taxed at 10% (instead of 0) if you are in the 15% ordinary income tax bracket or below, and will be taxed at 20% (instead of 15%) if you are in a higher ordinary income tax bracket.
Qualified Dividends will be eliminated.
The current tax rate on qualified dividends is 0% (if you are in the 15% tax bracket or lower) and taxed at 15% if you are in the higher ordinary tax brackets.
In 2013, dividends will be taxed as ordinary income. This means they will be taxed as high as 39.6%. There will be a new 3.8% surtax on investment income for those with taxable incomes over $200,000 ($250,000 if married). Thus, if you are in the higher tax brackets, your dividend income could be taxed at 43.4% (39.6 % + 3.8%) versus the 15% tax rate in 2012.
These are just a few of the potential increases that could go into effect in 2013. Other increases include the return of limitations on itemized deductions and personal exemptions, return of the marriage penalty, reduced student loan interest deductions, and more.
For more information, contact Leiza Dolghih.