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.