By Jeffery Levine, IRA Technical Expert
Follow Me on Twitter: @IRAGuru4EdSlott
On January 2, 2013 President Barack Obama signed the American Taxpayer Relief Act (ATRA) into law. Chances are this was pretty good news for you. Although the ATRA does create a new 39.6% tax bracket, this bracket is only expected to impact about 2% of all taxpayers. But just because your ordinary tax rate doesn’t increase in 2013 doesn’t mean you won’t pay more tax this year. In fact, most estimates show that anywhere between 75% and 80% of all taxpayers will pay more tax in 2013 than they did in 2012. Here’s a few reasons why that could be the case for you.
2% Payroll Tax Increase
As part of the 2010 Tax Act passed several years ago, Congress created the so-called payroll tax holiday for 2011, dropping the Social Security tax on wages from 6.2% to 4.2% and on self-employment income from 12.4% to 10.4%. The tax break was later extended through 2012. ATRA did not extend this benefit, so expect your next paycheck to be a little lighter than it was last year. If you and your spouse are both working and each make $100,000, this change will cost you an extra $4,000 in taxes this year. That’s almost a full year’s IRA contribution.
3% Overall Itemized Deduction Limitation is Back
Another way you may pay more tax is through the reinstatement of the “Pease” limitation (named after Donald Pease - the congressman who helped create it), or so-called 3% “haircut.” The Pease limit is a limit on your overall itemized deductions that could reduce your itemized deductions by up to 80%. This is not a new provision, but it had been phased out of the law since 2010. The rule works by eliminating three cents of itemized deductions for every dollar of income you have over your particular threshold. If you’re a single filer the threshold is $250,000 of adjusted gross income (AGI) and if you’re married and file a joint return the threshold is $300,000 of AGI.
Personal Exemption Phase-Out is Back
Beginning in 2013, your personal exemptions ($3,900 for 2013) could, once again, be phased-out. This will impact you if you’re a single filer with more than $250,000 of AGI or a married-joint filer and have more than $300,000 of AGI. If you happen to be in the new 39.6% tax bracket, the loss of just a single exemption could mean over $1,500 in additional taxes. If you’re married with two children, the loss of your cumulative personal exemptions could cost you almost $6,200 in additional taxes for 2013.
And if you think that’s it, think again. There are a host of other ways you might pay more tax this year than last without seeing your ordinary rates increase, including the new 0.9% Medicare surtax and the 3.8% surtax on net investment income that begin to hit certain high income persons this year. Bottom line? Even if you’re tax rate didn’t increase this year, you might want to plan for a higher tax bill and adjust your plans accordingly.
- Even if your income tax rate didn't increase for 2013, you probably will pay more taxes this year
- Several reasons include the 2% payroll tax increase, the 3% overall itemized deduction limitation, the personal exemption phaseout, the 0.9% Medicare surtax and the 3.8% surtax on net investment income