If your income was more than $250,000 (married filing jointly (MFJ)) or 200,000 (filing single), you’ll pay more in taxes and be in for a shock! Even if your income is below these thresholds you’ll likely have a higher tax bill.
Wages: Salary/wages (NOT investment income) up to $113,700 ($117,000 for 2014) will be subject to 6.2% Social Security withholding (up from 4.2%). For someone making $100,000 this is a $2,000 tax increase. The Medicare payroll tax increased from 1.45% to 2.35% for salary/wages above $200,000 (single) and $250,000 (MFJ) though your employer will NOT have to match the extra 0.90%. The extra 0.90% tax is part of the Affordable Health Care Act (Obamacare).
Individual tax rates: Tax rates in general went up. The new tax legislation extends the existing tax rate structure for incomes up to $400,000 (single) and $450,000 (MFJ). Income above these levels are now taxed at 39.6%.
Capital gains/dividends: The top long-term capital gains and dividend rates are increased to 20% for taxpayers with incomes above $400,000 (single)/$450,000 (MFJ). For taxpayers below these thresholds, the 15% long-term capital gains rate remains.
To add another layer of complexity, there is an additional 3.8% Medicare surtax associated with the Affordable Health Care Act (Obamacare) that will kick in on investment income (interest, dividends, short-term capital gains, long-term capital gains AND rental income) for those with incomes greater than $200,000 (single) and $250,000 (MFJ).
How this plays out:
- MFJ taxpayers with income greater than $250,000 will pay an additional 3.8% surtax on Long Term Capital Gains. Your Long Term Cap Gains rate is now 18.8% (15% +3.8%). Investment income subject to ordinary income tax will also be subjected to the additional 3.8% surtax.
- MFJ taxpayers with income above $450,000 will pay the 3.8% surtax on investment income but their Long Term Capital Gains base rate is now 20% not 15%. For these folks the combined rate is 23.8%; a 58.7% increase over 2012!
Limits on itemized deductions/personal exemptions: Deductions and exemptions start to phase out for taxpayers with income above $250K (single) $300K (MFJ). Remember, exemptions are counted for living, breathing people and this year, start to phase out for those couples earning more than $300,000 and completely go away if you earn more than $425,000. No exemptions means you can’t write off the kids!
There are also new limits on itemized deductions (charitable, property taxes, mortgage interest, etc.) For married couples filing jointly, your deductions are reduced by 3% for every dollar over $300,000 of income. For example, if you have $50,000 of itemized deductions and income of $475,000 ($175,000 over $300,000) you will lose $5,250 of deductions ($175,000*3%). The threshold for those filing single is $250,000.
Estate and Gift Tax: On a positive note, the estate tax law was made permanent and is historically favorable. For 2013, the estate tax rate is 40% with a $5,250,000 exemption (per person). If you are married, the total exemption for your family is $10,500,000. This relieves pressure for many families and provides tremendous estate planning opportunities for ultra-high net worth individuals. For 2013 & 2014, the annual gift tax exclusion amount is $14,000/beneficiary. If married, you can split your gift and give $28,000/beneficiary.