Well, as of the date of this Insight anyway, these taxpayer-friendly provisions are set to expire December 31, 2012. What this means, for most individual taxpayers, is that income taxes will be increasing in 2013, barring further legislation from Congress. These tax breaks were originally scheduled to “sunset” December 31, 2010; however, legislation was passed in December 2010 to extend them an additional two years.
Individual income tax rates will revert back to 15%, 28%, 31%, 36% and 39.6%. The highest bracket represents a 13% increase over the current maximum rate of 35%. Additionally, the 10% bracket will no longer apply, and joint filers will see an additional tax increase as the “marriage penalty” relief provisions are also set to expire.
Individuals with investment income (dividends and capital gains) will see diminishing net returns as the maximum capital gains rate will increase to 20% (from 15%), and dividend income will be taxed at ordinary tax rates as high as 39.6% (from 15%).
The PEP and Pease provisions are set to be reinstated in 2013. The PEP (personal exemption phase-out) will result in higher-income taxpayers seeing some or all of their deductions for personal exemptions eliminated. The Pease provisions reduce the amount of allowable itemized deductions for higher-income taxpayers, by generally about 3% of the taxpayer’s adjusted gross income in excess of an inflation-adjusted threshold.
If this weren’t enough, the tax impact of the Patient Protection and Affordable Care Act (healthcare reform) will be borne beginning in 2013. These tax provisions include an additional 0.9% Medicare surtax on earned income for individual taxpayers making over $200,000 annually ($250,000 married filing joint), and a 3.8% tax on unearned income, including interest, dividends, gains, rents, royalties and passive activity income, applied against the lesser of a taxpayer’s net investment income or modified adjusted gross income in excess of $200,000 ($250,000 married filing joint).
As a result of these tax changes noted above, Schneider Downs is projecting maximum marginal rates on earned income, capital gains and dividend income to be 41.7%, 25.0% and 44.6%, respectively.
Please contact your Schneider Downs tax advisor if you have questions or need additional information.
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