Each year, the tax laws change. New taxes are levied, and some taxes are cut.
For 2013, you are likely to see some new taxes as old tax cuts expire and as new taxes are imposed. The new year is likely to bring with it new impacts on your budget.
While there is no saying, for sure, what will happen (what with budget talks underway, and negotiations attempting to avoid the fiscal cliff), here’s what’s possible so far:
New Taxes You Can and Will See Next Year
Payroll Taxes Going Up
Chances are that you don’t realize that you have been enjoying a payroll tax cut.
As part of the effort to get the middle class spending, the Making Work Pay bill cut the employee side of payroll taxes by 2%. That tax cut was then extended. Now, though, the most recent extension is about to expire.
There is a good chance that it will be allowed to expire, and that means your side of the payroll tax will go up in January, meaning less money in your paycheck.
New Medicare Taxes
As part of the Patient Protection and Affordable Care Act (PPACA — also called Obamacare), a Medicare surtax of 3.8% is being added to the investment income received by those who make more than a certain amount of money.
There is a formula, involving your Modified AGI, to help you figure out how much you owe.
Also, be aware that there is also a wage surtax for Medicare taxes. This is an additional 0.9% withheld from the paycheck of high wage earners, in addition to the Medicare taxes already collected. The income amounts, for 2013, are $200,000 for individuals, $250,000 married filing jointly, and $125,000 for married filing separately.
Medical Device Excise Tax
Another consideration is the medical device excise tax that comes with the PPACA.
When you buy certain medical devices, including wheel chairs and prosthetic limbs, there is an additional 2.3% excise tax starting in 2013. You don’t have to pay the tax on certain retail type medical devices like eyewear and hearing aids.
Taxing Dividends and Capital Gains Taxes
Dividend investors have been enjoying some special treatment, with qualified dividends being treated to the same rate as the top rate for long-term capital gains, which is currently at 15%.
Starting next year, though, dividend income will be taxed at your regular marginal rate for income. For those in higher tax brackets, this could make a big difference.
The long-term capital gains rate is also likely to rise. Right now, the long-term capital gains rate tops out at 15%. In 2013, though, if nothing is done, the new top rate will be 20%. The change could mean higher taxes for those who are selling for gains. As a result of these changes, some are preparing to sell their investments now, before the end of the year, in order to avoid paying higher taxes later.
New Marginal Tax Brackets
Once again, the so-called Bush tax cuts are threatening to expire, and that means higher tax brackets.
The top rate would be 39.6%, up from the current top tax rate of 35%. There would also be fewer tax brackets if all the Bush-era tax cuts were allowed to expire across the board.
Of course, that might not happen.
It might only happen for the higher earners, resulting in a top tax rate of 39.60%, and keeping the lowest rate at its current level of 10%, rather than moving it higher.
How Will You Be Affected?
Those most likely to be affected will be those considered high earners, and those who have a reasonable amount of investment income. Some high earners, particularly those with a significant amount of investment income, will feel the pinch from being in a higher tax bracket, as well as feeling the effects of higher taxes on dividends, and the Medicare surtaxes.
There are some different possibilities for the coming year, and it will be interesting to see what happens between now and the end of the year, since nothing is quite set in stone. And even if something isn’t decided by the end of the year, it’s possible that something could be decided on retroactively. After all, 2013 taxes don’t have to be paid until 2014. Some sort of retroactive solution would mostly make things difficult for employers, who aren’t sure how much to withhold.
Your best option right now is to run the numbers, and figure out where you stand with regard to the possibilities.
Chances are, though, that one way or another you could be paying higher taxes.
Thanks for the update, albeit only potential update. Living in the Northeast the way I do, the tax rates are always tough, since making six figures in the NYC area definitely does not qualify you as being “rich”.
Glen Craig says
I’m in the Northeast too, Long Island, and local taxes on top of everything else are killer. It sounds spoiled but you can really be six-figure poor out here since housing is so expensive.
It will be interesting to see how the next few weeks play out regarding taxes.
David Leonhardt says
Death and taxes – you just can’t avoid them. One reason why being frugal might be a better way to balancing one’s budget than increasing one’s income.
Glen Craig says
I think you have to look both ways – cut out unnecessary costs AND increasing income. As much as I’d rather not pay more taxes I think being in the highest tax bracket is a nice problem to have.
There is so much uncertainty until we figure out what will be extended and what wont but I agree that I think everyone will be paying higher taxes next year at least from the payroll tax cut expiration.
Glen Craig says
The payroll tax is pretty much a done deal from what I’ve seen. That was only temporary. We’ll see what else happens. No one wants to pay more taxes but we need to cut into our deficit somehow (and cutting out expenses will only do so much).
Wayne @ Young Family Finance says
I, too, am from The Taxing State…I mean, the Empire State. I don’t think we make enough to be overly affected, but taxes always have a way of creeping higher than you think they will. Now that the Boomers are getting older we are going to feel more and more of a pinch financially in this country.
Glen Craig says
There are a bunch of “fiscal cliff” taxes, like the child tax credit, that will affect us. Will it break us? I don’t think so but it will make our dollars tighter.
Chris @ Stumble Forward says
This is not good news. A lot of my employees are already under the gun with their finances and adding another 2% to the payroll tax is not going to be good for them.
As for the 15% on long term capital gains going up to ordinary income tax rates I fear it could mean some tough years are ahead for our country. I just don’t think right now is the time to raising this tax until the US gets back on it’s feet a little better.
Finally, the medical devise tax scares me a bit too. My brother works for a medical device company and he was telling me that they have one group of people working on how they are going to cover for this tax whether it be laying off employees, cheapening out the product, or even scaling back the pay. Whatever it is it’s not going to be good.
Great article Glen.