Unless Congress and the President enact legislation, the so-called Bush tax cuts will expire at the end of this year, and other taxes will take effect such that individual income taxes may skyrocket beginning January 1, 2013.

End of Bush Tax Cuts
Taxes may go up for almost everyone and not just “high-income taxpayers.” Specifically:

  • Individual income tax rates will rise from the current top rate of 35% to 39.6%;
  • Long-term capital gains taxes will go from 15% to a maximum rate of 20%;
  • Qualified dividends will be taxed as ordinary income at rates up to 39.6%, up from their current 15% tax rate;
  • The limitation on personal exemptions will be restored for higher-income taxpayers,and the total amount of exemptions that can be claimed will be reduced by 2% for each $2,500 by which the taxpayer’s adjusted gross income exceeds about $265,000 (for married filing joint taxpayers).
  • The limit on itemized deductions will also be restored so that for higher-income taxpayers, the total amount of itemized deductions will be reduced by 3% of the amount by which the taxpayer’s adjusted gross income exceeds about $175,000.
  • Also, beginning in 2013, the estate tax exemption is scheduled to fall from $5 million to $1 million, and the top estate tax rate will revert to 55% from its current 35%.

Unearned Income Medicare Contributions Tax
For 2013 an unearned income Medicare contribution tax will be imposed on certain individuals, estates, and trusts. For an individual, the tax is 3.8% of the lesser of (1) net investment income or (2) the excess of modified adjusted gross income over $250,000 (for a joint return). The tax is imposed on investment income, which is generally defined as income from interest, dividends, annuities, royalties, rents, and capital gains. Investment income does not include distributions from qualified retirement plans. This tax is not imposed on persons who are nonresidents for U.S. tax purposes.

In addition, there is scheduled to be an additional Medicare tax of 0.9% (on the Hospital Insuranceportion of Medicare) on employee’s wages and on self-employment income in excess of certain threshold amounts.

The Payroll tax
Social Security imposes two taxes on employers, employees, and self-employed workers—OASDI, the so-called Social Security tax, and HI; commonly referred to as the Medicare tax.

To help stimulate the economy by increasing workers’ take-home pay, in 2010 legislation reduced by two percentage points the employee OASDI tax rate (from 6.2% to 4.2%). This 2-point reduction is due to expire in 2013.Thus, for the first $110,100 of remuneration received during 2012, the 4.2% rate applies, but absent Congressional action, the OASDI rates will revert to normal levels beginning in 2013.

Uncertainty
Commentators are suggesting that it is highly unlikely that Congress will take any action on these scheduled tax increases until after the November 6th election. This means that Congress may have less than two months during a “lame-duck session” to conclude any changes to tax legislation.

Stay tuned to Tax Alerts from The Wolf Group as we will keep you informed of any important changes in individual income taxation.

This newsletter is for informational purposes only. It should not be construed as tax, legal, or investment advice. Information has been gathered from sources believed to be reliable, but individual situations can vary and you should consult with your investment, accounting and/or tax professional.

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE WOLF GROUP TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.