While a new year is always cause for celebration, an impending, significant jump in tax rates could dampen this year’s excitement for many. Here’s a brief overview of what lies ahead in 2013:
Higher Tax Rates – The maximum income tax rates next year could be as high as 43.4% on ordinary income and 23.8% on long-term capital gains including the new Medicare Surtax (see following paragraphs). Furthermore, the current 2% payroll (social security) tax reduction is set to expire at the end of 2012 (it was reduced from 7.65% to 5.65%).
Medicare Surtax on Investment Income – 2013 will bring a brand new surtax of 3.8% on net investment income that will apply to certain individuals, trusts and estates. The surtax will apply to taxpayers with modified adjusted gross income of over $250,000 for married taxpayers filing jointly; $125,000 for married taxpayers filing separately; and $200,000 for taxpayers filing single or as head of household.
Medicare Surtax on Wages and Self-Employment Income – In addition to the surtax on investment income, a 0.9% Medicare surtax will apply to wages and self-employment income in excess of $250,000 for married taxpayers filing jointly; $125,000 for married taxpayers filing separately; and $200,000 for taxpayers filing single or as head of household.
This combination of tax increases may make 2012 the rare year to accelerate rather than defer income. For example, taxpayers in higher tax brackets may want to take salary (or bonuses) in 2012 to avoid the bracket increase in 2013. It may also be advisable to harvest capital gains to avoid the new Medicare surtax on investment income. Of course, anyone who currently qualifies for the 0% capital gains rate, which is scheduled to expire at the end of 2012, should certainly take advantage of this special rate. With all the looming changes as well as uncertainty about what 2013 will bring it would be very advisable to consult with your tax professional before popping the champagne.