As it currently stands, Americans will be facing one of the biggest tax hikes in history next year. However, there is still a big shroud of uncertainty so tax planning for 2013 is next to impossible.
Here are two of the main sources of tax increases that affect a lot of people.
Expiration of Bush era Tax Cuts
Unless Congress intervenes, the Bush era tax cuts are set to expire in December 2012, resulting in higher tax rates across the board. This includes both higher tax rates for the various tax brackets, as well as the increase of long term capital gains tax from 15% back to 20%. In addition, income from qualified dividends will no longer be taxed at the current 15% rate, but rather at the ordinary income-tax rates, which is likely to be much higher.
Taxes remain a highly debated issue in this election cycle and chances are there may be last minute extensions similar to the extension we saw in 2010 so it is too early to tell if any of the tax rate increases related to the expiration of the tax cuts will come to fruition.
Unearned Income Medicare Contribution Tax
Medicare taxes are currently imposed at a flat tax rate of 2.9% on wages, salaries, and business or farming income earned by self-employed individuals. There’s no limit on the amount wages subject to Medicare taxes. This tax is paid half by employees through payroll deductions and half by the employer.
Starting in 2013, higher-income earners — individuals who earn more than $200,000 per year, $250,000 for joint filers — will face a new Medicare tax. This new tax is calculated by multiplying the tax rate, 3.8%, to the amount of adjusted gross income above the threshold or the net investment income (including interests, dividends, capital gains, etc), whichever is lower.
The additional 0.9% imposed on wages and salaries are to be paid by the employees only. Employers will only be responsible for paying the regular 1.45%.
This tax is enacted by the Patient Protection and Affordable Care Act, commonly known as the healthcare reform law or ObamaCare. As you may already know, the constitutionality of this law is being reviewed by the Supreme Court. If the Supreme Court declares this law unconstitutional, the new Medicare tax will also be struck down.