 |
by : William O.
“Trey” Whitt, III, CPA
Partner _ Dent, Baker & Company, LLP
Search the term “fiscal cliff averted” and you’ll get about
57 million hits in a quarter of a second.
Is that proof enough that we did, in fact, avoid a cataclysmic spill
over a scary economic precipice? As a
nation, perhaps so. But if you now find
yourself approaching the highest income tax bracket, you may not feel as if you
averted anything at all!
The newly enacted American Taxpayer Relief Act of 2012
preserved lower tax rates and other benefits for nearly all households. But as household income increases, taxpayers
may now be climbing a personal tax mountain that feels as daunting as the
fiscal cliff the nation just dodged.
Here’s what you need to know.
Payroll Tax Holiday
Sunset
The consequence of the new tax law that affects the most
people is actually not in the law at all.
For the past two years employees and self-employed workers have enjoyed
the benefit of a two percent reduction in the Social Security tax rate.
The result was an average boost of about $2,200 for the
typical taxpayer. Because this reduction
was not renewed for 2013, the Social Security rate returns to 6.2%, and, as a
consequence, take home pay will go down.
$250,000 Income
Threshold
Additional wage and investment surtaxes enacted with the 2010
healthcare reform legislation took effect at the beginning of this year. This means that every dollar in wages over
$250,000 is now subject to a Medicare tax of 0.9%.
Once total income surpasses the $250,000 threshold any
investment income – dividends, interest, rents, most capital gains and other
types of unearned income – is now subject to a 3.8% Medicare tax.
These taxes are assessed on top of the taxes that ordinarily
apply to wage and investment income.
$300,000 Income
Threshold
At the $300,000 income level, you begin to give back certain
tax benefits available to taxpayers at lower levels. For example, itemized deductions such as
charitable contributions, real estate taxes and mortgage interest are reduced
up to 80% of the otherwise deductible amount.
Additionally, the value of personal exemptions for you, your
spouse and your children will gradually be phased out.
$450,000 Income
Threshold
If your income exceeds $450,000, you will likely be subject
to the new higher tax rates governing ordinary and capital gains income. The top rate applying to ordinary income is
now 39.6% (up from 35% last year), and the new capital gains rate is 20%. A capital gains rate of 15% still applies if
income is below $450,000.
Business Provisions
Since most businesses are organized as passthrough entities,
(business income passes through the entity and is reported by its owners), the
new individual tax provisions will have a major impact on business planning.
One encouraging development is the extension and expansion of
tax rules that make it easier for businesses and owners to write off capital
equipment purchases. Retroactive to the
beginning of 2012, businesses can deduct up to $500,000 in qualifying purchases
during the year.
With top income tax rates approaching 40%, this provision
represents a significant inducement for businesses to make infrastructure
investments. The half-million dollar annual threshold remains in effect through
the end of this year.
It’s impossible that any
financial policy decision – let alone one with the potential impact of that
scary fiscal cliff – results in consequences that are “all good” or “all
bad.” No matter howneatly the politicians try to wrap the package, there are
always surprises, some welcome and others less so, that straggle out.
My advice for taxpayers is to do your own investigation, or
enlist a trusted tax advisor, into what these changes will mean for you. Only then will you know if you’re falling
over a cliff, climbing a mountain or resting easy…at least until the next
crisis erupts.
No comments:
Post a Comment