I have written about this topic before…the expiration of the Bush tax cuts…but it is worth repeating. Despite Congress’ apparent lack of concern over the federal budget, most households are concerned about their own budgets. Start planning now
for 2013, because in 7 months, it may get worse. There are many tax advantages this year that are hanging by a thread and depend on Congressional renewal in order to continue into next year.
And there are no guarantees the current tax rates, which are set automatically expire on December 31, will be extended. If they are extended, you will probably be too busy watching the ball drop in Times Square.
Many policymakers have convinced the public that tax increases will shore up the federal budget deficit and affect only the wealthy. Of course, the question is, who are the wealthy? Let’s take a look:
- Capital gains taxes: If you are currently in the bottom two tax brackets, you pay 0 percent on capital gains. Next year, you will pay 10 percent. (Most income earners in the bottom two tax brackets don’t think of themselves as wealthy.)
- Dividends taxes: Anybody of any income level that has a savings account or mutual fund earns interest or dividends. Qualified dividends are currently taxed at the
same low rates as capital gains. Starting in 2013, they will be taxed at the ordinary income tax rate, ranging from 15 percent to 39.6 percent. (Most people with ordinary savings accounts or a little money put away in mutual funds do not consider themselves “wealthy.”)
- Federal income taxes: Current marginal income tax rates range from 10 percent to 35 percent. Well, forget that in 2013. Rates will revert back to pre-2001 levels, ranging from 15 percent to 39.6 percent. Funny, most taxpayers in the 15 percent bracket don’t consider themselves “wealthy.” By the way, the marriage penalty returns too. (Marriage is hard enough without the tax penalties, and most married couples trying to make ends meet and save for their kids’ college expenses don’t consider themselves “wealthy.”)
- Estate Tax: Don’t forget about the estate tax. Estates are currently entitled to a $5 million exemption with a top marginal tax rate of 35 percent. It’s time to start giving it away, since 2013 will bring back a much lower exemption of $1 million and a top marginal rate of 55 percent. (Rural landowners in Mississippi may not consider themselves “wealthy.”)
- New Medicare Taxes: For the filthy rich, let’s not forget the new Medicare taxes on unearned income. Couples earning more than $250,000 a year will be subject to this tax. Of course, there is much debate on whether $250,000 a year really makes a household rich. Houston? Maybe. Manhattan? Not so much.
The bottom line is, if all tax cuts expire, then we are ALL considered “wealthy.” Workers of all income levels will share the pain.