KJ: With all the talk of the “Fiscal Cliff” lately and what that might mean for taxes, I felt compelled to get this post out to our readers after the decisions have now been signed off by President Obama. Regardless of your political persuasion, these are some highlights of the decisions that have been approved. While the promises (and current attestations) have been that taxes will not be raised on middle income America, it has already happened (albeit significantly less than that on high income households as noted below).
Expiration of the Social Security payroll tax
If you recall a couple years back, there was a “payroll tax holiday” whereby the employee’s portion of payroll Social Security taxes had been reduced from 6.2% to 4.2%. This started in 2011 as a temporary stimulus, and it was extended last minute to include 2012. However, the recent tax changes have allowed this “payroll tax holiday” to expire. It doesn’t sound like much, does it? Well let’s look at some numbers on the real impact it may have on your increasing taxes.
- For a married couple making $50,000 per year, this tax increase (mind you, it is merely back to the levels it was prior to the cut in 2011 – already long forgotten by most) equates to an instant $83 hit to your 2013 monthly budget or the equivalent of $1,000 for the year. If you are a married couple making $100,000 per year, then this is $167 chopped from your monthly income. The Social Security payroll tax is based on each person’s wages up to $113,700 for 2013 and is NOT a combined limit for married couples (read, each person has their own $113,700 limit).
Increase in the top tax bracket
The tax brackets will remain the same other than the top tax bracket. For married couples earning more than $450,000, they will see their taxes rise from 35% to 39.6% – thousands more in taxes.
Phaseout of itemized deductions and personal exemption
For married couples with incomes greater than $300,000, they will begin to see their itemized deductions and personal exemptions reduced. As such, the benefit you may have been getting for itemizing such items like your real estate taxes, state income or sales tax, and certain medical expenses may dry up.
Additional medical taxes
With joint incomes greater than $250,000, couples will face a 0.9% increase in their hospital insurance tax that is part of their FICA payroll taxes – otherwise the rate stays at 1.45%. Additionally, there will be a new 3.8% Medicare surtax on net investment income provided your income was above $250,000 for married couples.
More details were beyond the scope of this post since there are a LOT of changes under the new tax laws (the above as well as energy credits, business credits, how you calculate the new 3.8% Medicare tax if it applies, etc.). For additional resources with a comprehensive look at the changes, please check out: Journal of Accountancy Fiscal Cliff Summary.
Check your budgets, and check them twice! You’re gonna find out Uncle Sam is naughty, not nice!
Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.