Advice, Preparation . . . Results™

Escape from the Fiscal Cliff

(Part One of a Two-Part Series)

Now that we escaped the first fiscal cliff, we hear two more may be looming before our next tax returns are due. Between cliffs we generally find a valley or water, so let’s hope our stay will be short- lived and more pleasant when we reach the other side. At least the last few weeks of our Congressional drama were somewhat entertaining.

As you know, our new year brought a new tax law.  When The American Taxpayer Relief Act of 2012 was passed on January 2, 2013, it wasn’t clear whether our relief was from the uncertainty of our tax obligations or simply that Capitol Hill quit bickering. Some changes are designed to clean up loose ends from last year, a few will take a bigger bite from the top income brackets, but the majority of the legislation is intended to keep the status quo most of us enjoyed last year.

The headline of the new rules is that the core tax rates will remain the same as they’ve been for a decade. The 10% through 33% tax rate brackets are extended permanently (whatever that means inWashington) with only the usual cost of living adjustments. The special rates for qualified dividends and long-term capital gains also have an extended life. All marriage penalty relief provisions have been extended through 2013.

Here’s the bad news:

  • The recession incentive we enjoyed for the last two years (a 4.2% vs. 6.2% employee FICA rate) has passed on. So, if your paycheck seems a little lighter, it is.
  • At the upper end of the income scale the 35% tax bracket has been squeezed to a top limit of $400,000 for singles, $425,000 for heads of household, and $450,000 for married filing jointly. Above that these folks will be taxed at 39.6%.
  • Additionally, people in that top bracket will be taxed at 20% for qualified dividends and long-term capital gains.
  • Another new provision reprises the phase-out of itemized deductions and personal exemptions for married folks with adjusted gross income of $300,000 or more (half of that if filing separately) $275,000 if a head of household, and $250,000 for the single filers. This phase-out is computed “simply” by reducing Schedule A by 3% of that income above these levels and exemptions are reduced by 2% times each $2,500 that Adjusted Gross Income (AGI) exceeds those amounts. (Of course, we can help with these tricky calculations.)
  • Don’t forget the gift from the Affordable Care Act:  a Medicare Surtax for those with an AGI of $250,000, if married ($125,000 if filing separately or $200,000, if filing single). The rate is .9% on earned income (W-2’s and self-employment income) or 3.8% on investment income (interest, dividends, capital gains, and passive income).

So, with layers of a higher tax bracket, Medicare surtax, and a potential phase-out of your deductions and exemptions, you may find your marginal tax rate well into the 40%+ range.

If these changes weren’t taxing enough, we’ll look at several specific changes for your 2013 taxes next week. Of course if you have questions before then, contact us at 904-396-5400 or office@CPAsite.com.

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