Well, folks, the New Year starts off with a new group of tax rules. Let’s go over some of the highlights. While the folks in Congress gave it a pretty name, the fact is that they didn’t do many of us any favors. First off, payroll taxes are going to increase. Some people find this a little confusing because technically it’s not considered an increase, but what happened was that during the Bush Administration payroll taxes were reduced by two percentage points. Those reductions were set to automatically expire on December 31, 2012 so, in effect, when Congress allowed that tax reduction to expire the two percentage point reduction in the employee share of Social Security tax was increased back to the pre-Bush tax levels. In other words, your payroll tax went up two points. Therefore, all employees will get a slightly smaller paycheck because the rate returned to “normal.” This will also affect self-employed taxpayers.
Medicare Surtax: In 2010 Congress passed a law which increased the Medicare surtax by .09% as part of health care reform. However, they delayed the effective date until 2013. Welcome to the future. This applies to wages as well as self-employment income. The tax bump applies to single folks earning more than $200,000 and married couples in excess of $250,000. The effective rate for those affected is 3.8%.
Estate and Gift Tax: The estate and gift tax exemption for 2013 is increased to $5,250,000. The tax rate increases to 40% and the annual gift tax exclusions climbs to $14,000 per person.
Personal Tax Rates: Tax rates on folks in the highest income brackets have been increased for the first time since 1993. The new tax rate for those in the highest bracket is now 39.6%. This applies to taxable income over $400,000 if single or $450,000 if you are a married couple filing a joint tax return. The lowest tax rate is now 10% and the highest is 39.6%.
Standard Deduction Rises: Married couples now get a standardized deduction of $12,200. If one of the spouses is 65 or older, it increases to $13,400, and if both are over 65 the deduction is $14,600. Single folks can claim $6,100 or $7,600 if they are over 65 years old. The new standard deduction for head of household is $8,903.
Capital Gains: The top rate for capital gains and dividends is now 20%. This only applies to single taxpayers who have an income in excess of $400,000 and married couples above $450,000.
The Social Security Wage Base: The Social Security wage base climbs this year $113,700. This is $3,600 higher than it was last year.
As a side note, the earnings limits also increased, which means that anyone turning 66 this year does not lose any Social Security benefits so long as they make $40,080 or less a year before they reach age 66. If you are in the age between 62 and 66 then you are limited to making $15,120 if you don’t want to lose any benefits.
Mileage Allowance: The standard mileage allowance that you can deduct for business travel is 56.5 cents per mile. This is one cent more than last year. Don’t forget you can also deduct 24 cents a mile for traveling for medical purposes and job related moves.