What it Means to You
On January 1, 2013, certain tax breaks expired. Depending on your level of income, certain tax breaks will either effect you more or less than somebody else.
Exemption Phase Out: From 2010 to 2012, each taxpayer was entitled to a tax exemption (deduction) for themselves, their spouse, and each dependent. Beginning in 2013, the otherwise allowable exemption amounts will be reduced by 2% for each $2,500 ($1,250 for married filing separately) that the taxpayer's adjusted gross income (AGI) exceeds the AGI threshold for the year based on the taxpayer's filing status. The threshold amounts for 2013 have not yet been announced.
Itemized Deduction Phase Out: Only certain itemized deductions are subject to the phase out including, taxes, interest, charitable contirbutions, employee job expenses, and other miscellaneous itemized deductions. If the itemized deductions are subject to the limit, the total of all itemized deductions is reduced by the smaller of (1) 3% of the amount by which the AGI exceeds the annual limit, or (2)80% of the itemized deductions that are affected by the limit. The threshold amounts for 2013 are $250,000 for single filers, $275,000 for head of household filers, and $300,000 for joint married filers.
Payroll Tax and Self Employment Tax: Both the payrool withholding tax and self-employment tax rates have been reduced by 2 percentage points for two years. Payroll FICA withholding will return to 6.2% (up from 4.2%) and self-employment tax will return to 12.4% (up from 10.4%). The payroll tax adjustment is the reason you may have seen a change in your 2013 paychecks.
Long-Term Capital Gains Rates Increase: The tax rate on long-term capital gains will be 0% if income falls below the 25% tax bracket; 15% if income falls at or above the 25% tax bracket but below the new 39.6% rate; and 20% if income falls in the 39.6% tax bracket. The 20% top rate does not include the new 3.8% surtax on investment-type income and gains for tax years beginning after 2012, which applies on investment income above $200,000 (for single filers), and $250,000 (for joint filers) in adjusted gross income.
Marginal Tax Rates: In 2013, the marginal tax rates will be as follows (note that each higher tax rate only affects the first dollar earned after the preceeding rate, for example a single filer earning $8,926 only pays 15% on $1, and 10% on $8,925):
Single filers earning up to $8,925, married joint filers earning up to $17,850, and head of household filers earning up to $12,750 will pay at a rate of 10%.
Single filers earning up to $36,250, married joint filers earning up to $72,500, and head of household filers earning up to $48,600 will pay at a rate of 15%.
Single filers earning up to $87,850, married joint filers earning up to $146,400, and head of household filers earning up to $125,450 will pay at a rate of 25%.
Single filers earning up to $183,250, married joint filers earning up to $223,050, and head of household filers earning up to $203,150 will pay at a rate of 28%.
Single filers earning up to $398,350, married joint filers earning up to $398,350, and head of household filers earning up to $398,350 will pay at a rate of 33%.
Single filers earning over $400,000, head of household filers earning up to $425,000, married joint filers earning up to $450,000, and married separate filers earning up to $225,000 will pay at a rate of 39.6%.
Bonus Depreciation Expires: For Several years, businesses have been able to take advantage of bonus depreciation that essentially allows a 50% depreciation deduction of the cost of qualified business equipment and machinery in the first year it is placed in service. This bonus expired at the end of 2012.
Higher Education Loan Interest: A deduction of up to $2,500 is allowed for interest paid on loans for higher education. This deduction was originally limited to the first 60 months for which the interest payments were required. Congress subsequently temporarily eliminated the 60-month limitation and increased the AGI phase out. Beginning in 2013, the 60-month rule returns and the AGI phase-out ranges (before adjustment for inflation) will be reduced to $60,000-$75,000 for joint filers and $40,000-$55,000 for other filers (except married couples filing separately who are barred from claiming this deduction.
Alternative Minimum Tax: This tax, which was originally meant only to affect top income earners, has been permantly fixed. The AMT, which had been used against middle class earners for years, has been indexed to inflation. This means that if you do not pay the AMT this year, you will not pay it the next year (if your income remains the same).