Are You Ready for the Higher Taxes Coming January 1, 2013?

September 10, 2012

We are now only a short time away from higher federal income taxes set to take effect January 1, 2013 absent action by Congress and the President.

Here is a brief overview:

FEDERAL INCOME TAX RATES

The current six (6) income tax brackets will be reduced to 5 as follows:

Current Rate Bracket
New Rate Bracket
10% 15%
15% 15%
25% 28%
28% 31%
33% 36%
35% 39.6%
CAPITAL GAINS RATES

The maximum rate on long term capital gains will be increased:

 
Current Rate
New Rate
15% 20%

DIVIDENDS

Dividend income, which is currently taxed at 15%, will now be taxed at ordinary income rates so depending upon your tax bracket, dividend income could be taxed as high as 39.6%.

NEW 0.9% MEDICARE TAX

As part of the President’s healthcare legislation that was recently found constitutional by the United States Supreme Court, the current Medicare tax on salary (and net self-employment income) will increase 0.9% on combined salary (and/or net self-employment income) above:

- $250,000 for a married couple filing a joint tax return

- $200,000 for an individual filing as unmarried

- $125,000 for an individual filing as married filing separately

NEW 3.8% MEDICARE CONTRIBUTION TAX

As an additional part of the President’s healthcare legislation referenced above, there will be a new 3.8% tax on net investment income that will apply if adjusted gross income is above:

- $250,000 for a married couple filing a joint tax return

- $200,000 for an individual filing as unmarried

- $125,000 for an individual filing as married filing separately

This new tax will apply to annuities, capital gains, dividends, interest, rents and royalties unless the income is generated from a trade on business that is not a passive activity of the taxpayer.  Distributions from retirement accounts (such as 401(k) plans and IRAs) will not be subject to this new tax.

STATE OF CALIFORNIA

Depending upon the outcome of certain initiatives on the November 2012, ballot, California State income tax rates for certain taxpayers (as well as the California State sales tax) may be increasing January 1, 2013 as well.

Please contact Stanley E. Heyman, Esq., for more information.

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