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2013 Taxes and Beyond

2013 Taxes and Beyond

The income tax rules are complex and are constantly changing. Even the IRS admits that it is over 3 million words long. It seems there are tax law changes every year and sometimes even more often. Even worse, many expect there will be continuing changes, perhaps substantial changes, in the future.

Putting today's tax rates into a longer term perspective

For the past decade or so, many of the tax law changes included provisions that were effective for only a certain number of years. These "temporary" provisions included Alternative Minimum Tax exclusion amounts, rules on estate taxation, tax rates and the tax treatment of long term capital gains and dividends. In early 2013, the 2013 Tax Relief Act was enacted and it addresses some of the temporary provisions and makes other changes as well. Here are some of the provisions of that law as well as other information on the tax rules for 2013.

Years
Top Ordinary Tax Rate
Top Long-Term Capital Gain Tax Rate
Top Dividend Tax Rate
1970s
50%
39.9%
70%
1982 - 1986
50%
20%
50%
1987
38.5%
28%
38.5%
1988 - 1990
28%
28%
28%
1991 - 1992
31%
28%
31%
1993 - 1996
39.6%
28%
39.6%
1997 - 2001
39.6%
20%
39.6%
2002
38.6%
20%
38.6%
2003 - 2012
35%
15%
15%
2013
39.6%
20%
20%

Income Tax Rates

The 2013 Tax Relief Act raised the top income tax rate from 35% to 39.6%. Here are the tax rate tables for 2013.

2013 Single Return Rate Schedule

2013 Married Filing Jointly Rate Schedule

Taxable income levels

Tax rate

Taxable income levels

Tax rate

0 to $8,925

10%

0 to $17,850

10%

$8,926 to $36,250

15%

$17,851 to $72,500

15%

$36,251 to $87,850

25%

$72,501 to $146,400

25%

$87,851 to $183,250

28%

$146,401 to $2223,050

28%

$183,251 to $398,350

33%

$226,051 to $398,350

33%

$398,351 to $400,000

35%

$398,351 to $450,000

35%

Over $400,000 39.6% Over $450,000 39.6%

Treatment of Long Term Capital Gains and Qualified Dividends

In 2013, for taxpayers in the 10% and 15% brackets, qualifying dividends and long term capital gains (assets held for more than a year) will be taxed at 0%. For those in 25%, 28%, 33% and 35% tax brackets; the tax rate on dividends and long term capital gains is 15%. For those in the top 39.6% bracket, the tax rate is 20%.

Standard Deduction and Personal Exemption Amounts

For 2013, the standard deduction for single filers is $6,100 and for joint return filers the standard deduction is $12,200. The personal exemption amount for 2013 is $3,900. The exemption will start to phase out at $250,000 for single taxpayers and $300,000 for those filing a joint return.

Phase-Out of Itemized Deductions

The 2013 Tax Relief Act brought back a phase out of the benefit for itemized deductions (mortgage interest, state and local taxes, charitable contributions, etc.) for high income taxpayers. For 2013, the phase out begins at $250,000 for single taxpayers and $300,000 for joint return filers.

Alternative Minimum Tax

The 2013 Tax Relief Act raised the AMT exemption amount for 2013 to $51,900 for single taxpayers and $80,750 for those filing a joint return. In addition, the Act provides that the exemption amounts will be indexed for inflation in future years.

Estate Taxes

The 2013 Tax Relief Act made substantial changes to the estate tax rules and removes a great deal of the uncertainty that has surrounded this issue for the past several years.

The first $5,250,000 of an estate created when one dies in 2013 is excluded from estate taxation. The tax rate for amounts over that amount is 40%. For a married couple with a well-crafted estate plan, that amount is doubled. These large exclusions will enable most families to avoid paying any federal estate taxes. Another provision of the Act provides that the exclusion amount is adjusted for inflation in future years. Assets acquired through an estate receive a tax basis step-up to the value of the assets at the time of death.

Social Security Taxes

Beginning in 2011, the Social Security tax rate for employees was reduced from 6.2% to 4.2%. The employers' rates remained at 6.2% for 2011 and 2012. This 2% reduction was eliminated by the 2013 Tax Relief Act. For 2013, the 6.2% Social Security tax is applied to wages up to $113,700. Employees have that tax withheld from their paychecks and employers match it. Self-employed individuals pay both amounts.

Medicare Taxes

The existing 1.45% Medicare tax continues with both employees having it withheld from their paychecks and employers matching it.

The 2011 health care law (Affordable Care Act) included two provisions that begin in 2013.

  • The Medicare portion of payroll taxes withheld from employee paychecks includes a 0.9% surtax on wages in excess of $200,000 for single taxpayers and $250,000 for married couples. The additional 0.9% surtax is only paid by the employee.
  • The health care law also imposes a tax of 3.8% on net investment income (dividends, interest, capital gains, and others) for single taxpayers with modified adjusted gross income above $200,000 and married taxpayers with incomes above $250,000. This amount will be calculated and included on personal tax returns.

Potential for Further Changes

While the 2013 Tax Relief Act made substantial changes in the tax rules, few expect that the rules will not continue to be changed as the federal government tries to deal with its finances. There has also a movement in Congress to consider reforming both individual and corporate taxes in a way similar to what was done in 1986. American taxpayers will just have to wait to see what is done in the future.

Be sure to consult your tax advisor to learn how the current and future tax laws will apply to your situation.

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