Now
that we’ve put away the eggnog, shiny party hats, and stopped hearing the
phrase “fiscal cliff” every 15 seconds, ’tis the season to be thinking about how
the changes in tax code may affect you.
Unless
you slept through the last three months, you are probably aware that courtesy
of Congress, tax code has changed. Here
are some of the results, for 2013 and the foreseeable future.
The
threshold for who can claim an exemption for the Alternative Minimum Tax was
raised to account for inflation, meaning that 60 million Americans will not be
affected by Congress’s new changes. The Alternative Minimum Tax, or AMT, is a
parallel tax system which began as a way to ensure that taxpayers pay at least
a minimum amount of tax. AMT has a completely different set of calculations
than regular tax. For the regular tax, you add up your total income, subtract
out various deductions and personal exemptions, and then the tax is calculated.
AMT, however, does not allow for the
standard deduction, personal exemptions, or certain itemized deductions. Also
some income which is typically not subject to regular tax is added back in for
AMT purposes. Your tax under AMT rules may be higher than your tax under
regular tax rules.
Obama’s
payroll tax reduction, which we have been enjoying for the past two years, was set
back to its original amount. This means that Social Security tax on each
paycheck will once again be the full 6.2%. The wage ceiling, on which Social
Security is taxed, was raised to $113,700, which means that the first $113,700
you make is subject to the 6.2%. And for those earning $200,000 or more, the
tax for Medicare will be taking 0.9% more than last year out of each paycheck.
High-income
households, that is, singles making $400,000, or married filing jointly and earning $450,000, will see rates rise from a
previous 35% to 39.6%. This begins as of 2013, however, and will not affect
2012 tax returns. Capital gain rates for this tax bracket will rise to 20%
(previously 15%), and will see a 3.8% surcharge for the Affordable Care Act.
Affectionately nicknamed “Obamacare,” the ACA includes all of the new
healthcare reforms we’ve debated so much about. Some of the highlights of the
ACA include coverage for people who have not been covered, lower costs to
consumers, and the end of the pre-existing condition clause.
If
you are single and earning $250,000, a head of household earning $275,000, or a
married couple filing jointly and earning $300,000, the new regulations mean
that the old itemized deduction and the personal exemption phase-outs, which
were part of tax code for years, will be reinstated. In layman’s terms, this
means that you won’t be able to take all of your itemized deductions anymore
and your personal exemptions will also be reduced. Don’t despair, though—if you
build a racecar track for NASCAR, you can get a tax benefit that way. No,
seriously.
Many
tax deductions that were applicable last year still stand, however, including being
able to get credits or adjustments for
tuition costs, a deductions for those pesky mortgage insurance premiums, and deductions
for substantiated charitable donations.
Of
course there is a lot more, but no room here for all 157 pages of the new law. So
now that you’re all up to speed, “walk into the light.” And no matter how
nervous you feel, avoid the Puerto Rican rum, since there’s been a tax on it
since 1917 that is now whistling to the tune of $13.50/gallon.
I’ve found feelings of trepidation can be just
as easily conquered by a few aromatherapy candles and a hot bubble bath. But
please don’t bring your 1040 with you. Soggy documents will not be accepted, no
matter how nice they smell.
