by David L. Marrison, Associate Professor
One change that all taxpayers should be aware of is on January 1, 2013 the tax rates will be increasing for all Americans. What? Didn’t our candidates say they would not be raising taxes? Actually, Congress did not vote to increase your taxes, but rather are allowing the Bush-era tax reductions enacted in 2001 to expire. Thus higher rates will return in 2013.
When you file your federal income tax return before April 15, 2013, you’re filing your taxes using the 2012 income tax brackets so these changes will not be felt then. Instead you will notice them on your first paycheck or monies you earn in 2013. In 2013, the tax brackets will increase to 15, 28, 31, 36 and 39.6 percent from the present levels of 10, 15, 25, 28, 33 and 35 percent. As you can tell this increase will affect the top four marginal brackets and eliminate the 10% bracket, resulting in higher taxes for nearly everybody unless there’s a political solution.
Employers will also have to deal with changes in the payroll tax as well in 2013. A cut in the payroll tax that funds the Social Security pension program was extended earlier in 2012. The current 4.2 percent rate paid, down from the previous 6.2 percent rate, expires on December 31. And it seems highly unlikely that Congress will extend this payroll reduction. This cut had boosted the take-home pay of the average worker in 2012 by about $85 per month, or $1,000 per year.
The capital gains rates will also be changing in 2013. In 2012, there was not a tax on long-term capital gains earned by those in the two lowest rate brackets of 10 percent and 15 percent. Beginning on January 1, 2013, taxpayers in the lowest two brackets will pay 10 percent on long-term gains. For filers in the four higher tax brackets (25%, 28%, 33% and 35%), the long term capital gains rate will revert back to 20% in 2013 from its current level of 15%.A new 3.8% medicare surtax will also take effect in January. This tax will apply to investment income for taxpayers with adjusted gross incomes of either $200,000 or more (if single) or $250,000 or more (if married).
My biggest concern going into 2013, is not the new tax rates, payroll tax or capital gain rates, it is the Federal Estate Tax. If nothing is changed on January 1, 2013 the estate tax exemption is due to drop from $5.12 million to $1 million and the estate tax rate will jump from 35% to 55%. This could affect hundreds of farms, small businesses and recipients of oil & gas lease payments. It is not hard for many of our farms to be valued at over $1 million dollars. Can you afford to pay a 55% estate tax on the value above $1 million when a family member passes away? This could be a nail in the coffin for many small farms trying to transition their farm to the next generation.
Of course with any tax legislation, it is very likely that all of the fore-mentioned changes could be averted by Congress in 2013 which will leave individuals and businesses scrambling to keep up with the changes. Hang on tight as 2013 will be a bumpy tax year!