The countdown is on with just five weeks to go to April 15! Tax season is upon us, and if you are wealthy or simply well-to-do, steel yourself, you are about to get soaked. Tax changes for the 2013 tax year are huge and the nation's top earners are likely to see their tax rates rise above a whopping 50 percent.
At risk for the biggest changes, are Americans earning over $200,000, says Melissa Labant, director of tax advocacy for the American Institute of Certified Public Accountants. To be sure, though, earners above $400,000 for single filers and $450,000 for married filers filing jointly will get the biggest bite. And, it’s not just wages that will get more heavily taxed; investment income taxes are rising, and tax benefits that you might have taken for granted like personal exemptions and itemized deductions are under assault too. These changes come thanks to Obamacare and the American Taxpayer Relief Act of 2012.
“I think high earners may be surprised that multiple increases are hitting them,” says Rich Coppa, of Wealth Health LLC. “If they didn't pay attention to these changes from last year they are going to find a bigger bill to Uncle Sam.”
Here’s what you can expect: You likely already know about the increase in the Medicare payroll tax. In 2012, the tax was 2.9 percent and employee’s share of the tax, 1.45 percent, was automatically deducted from your paycheck. Effective this calendar year, however, high-wage earners owed an additional 0.9 percent tax on earned income above $200,000 for single filers and $250,000 for those married and filing jointly. This year also starts a new income tax bracket for people earning $400,000 for single filers and $450,000 for joint filers – a top tax rate of 39.6 percent up from 35 percent last year. That’s the easy stuff to understand. Some of the other changes are more complicated.
Your personal exemption of $3,900 last year is phased out. The amount of the reduction is 2 percent for each $2,500 in excess of adjusted gross income amounts of $250,000 for single filers and $250,000 for those married, filing jointly. The result is a complete elimination of the exemption for single filers with an adjusted gross income above $372,501, and for couples filing jointly over $422,501. What’s more, itemized deductions, such as mortgage interest, state income and sales tax and home office deductions will be on phase-out schedules as well. (These are sometimes Pease deductions). This change will reduce the value of itemized deductions by 3 percent of adjusted gross income above $300,000 for couples and $250,000 for single filers to a maximum reduction of 80 percent of its value.
Even more pernicious are higher taxes on investment income. If your income is greater than $200,000 as a single filer or $250,000 married and filing jointly, a 3.8 percent Medicare surtax on investment income will be due. (The tax applies to the lesser of your net investment income for the year or the amount by which your modified adjusted gross income exceeds the income thresholds). Note that a taxpayer could be subject to both the additional 0.9 percent tax on earned income and the 3.8 percent tax.
In addition, Obamacare makes it more difficult to deduct unreimbursed medical expenses. Before the Affordable Care Act was passed, unreimbursed medical expenses could be deducted after they exceed 7.5 percent of adjusted gross income. The threshold is now 10 percent.
All this week, we will be discussing what you need to know about this year's tax bite and what you can do to reduce it.
Join us on The Willis Report at 5pm ET.
Gerri Willis is the host of "The Willis Report" (5PM/ET), a primetime program that covers the leading financial and political stories of the day and their impact on consumers. Click here to see more from Gerri Willis.