Many times, changes to the tax code do not have much impact on the average person's day-to-day life. They don't notice a small percentage increase or decrease. It's not at all surprising when someone is suddenly sticker-shocked by a tax change because rarely do people care much (That's why they have a CPA! *Hint* *Wink* #Shamelessplug)
But I'd like to tell you, start to care! Pay attention! Changes to tax laws can have a large impact on you now, and in the future. Currently, significant negative changes are set to happen for 2013 if Washington cannot come to terms. Here are the ones that are most likely applicable to you:
Social Security tax withholding (aka FICA payroll tax) break expiring
What it means: For the last 2 years, everyone's take-home pay has been increased by 2%. This tax break reduced the social security withholding from 6.2% to 4.2%. Beginning 1/1/13, the rate will revert back to the 6.2% and everyone will see their check reduced by that 2%. For those who are self-employed, your payroll taxes will increase back to 12.4% from 10.4%.
Long-Term Capital Gains Rate increasing
What it means: Since 2003, people have been able to enjoy a lower tax on long-term capital gains. The rates were reduced from 20% to 15% (for 15%+ tax brackets). Long-term capital gains are gains on investments you have held for more than 1 year. If you bought 2 shares of Apple on 1/4/2010 for $214 and sold them at $600 this year, you would have a long-term capital gain of $772. This year, you would have paid 15% of that $772. However, next year, you'll have to pay 20%. People almost exclusively fund their savings and retirements through stock and bond investments, so this could have a far-reaching impact (Any investments gains in a 401k or IRA have different tax treatment and this might not apply, however).
Regular tax rates set to increase
What it means: The income taxes that you pay every April are determined by the set tax rates. Since 2001, people have enjoyed lower rates. Those rates are set to increase back to pre-2001 rates. Here's a nifty table to help out. A majority of people fall within the 15-28% brackets.
Dividend income tax treatment to expire
What it means: Dividends are payments made by companies to shareholders of their stock as a 'reward' for holding the stock. Most companies that pay them, dish them out quarterly. During the early 2000's, a distinction was made on dividend income. If you held the stock for 30 days prior to and 30 days after (60 days total) the dividend, the dividend would be treated as "qualified" and taxed at the long-term capital gains rate. If the dividend was "ordinary" (see "not-qualified"), then it was taxed at your regular tax rate, shown in the table above. This differentiation is going away, causing a steep increase in taxes on dividends for those in higher tax brackets. Shareholders of all types would be affected as many companies, mutual funds, and ETF's pay dividends.
Medicare Tax increase
What it means: To help fund President Obama's health care law, the "Medicare payroll tax" will be increased from 2.9% to 3.8% for higher income individuals. Further, an additional Medicare tax equal to 3.8% will also be tacked on to investment income (interest, dividends, capital gains, rent, etc) that those individuals make. This is in addition to any taxes already paid on those earnings. So theoretically, a person in the highest tax bracket will pay a rate of 43.4% on dividends they receive, an increase from 15% during the current year. Yikes!
More potential changes exist as well, but I will not go into them here. Simply searching '2013 tax changes' yields you a laundry list of articles detailing them. Happy Googling!
Next time: 5 simple, beginning steps to make your finances much stronger