Some people filing their 2013 tax returns are probably in for a nasty surprise.
Last year’s passage in Congress of the American Taxpayer Relief Act actually increased taxes for all working Americans. But it also included some big changes that means higher income taxpayers could get snagged by more taxes on income and the loss of many deductions. Here are six tax changes that could have a significant impact on what you will owe when you file your 2013 tax return:
1. Higher tax rates on ordinary taxable income. For workers with higher incomes, the higher tax rate of 39.6 percent will replace the 35 percent rate. That new higher rate applies to single filers with taxable income above $400,000; married filers with income over $450,000; married filing separately over $225,000; and heads of household with taxable income over $425,000.
For instance, due to this tax hike a married couple with a taxable income of $500,000 will owe an additional $2,300.
2. Higher tax rates for long-term capital gains and dividend income. For people in the higher-income groups below, the rate on capital gains and dividend income increases from 15 percent to 20.
A married taxpayer with a taxable income of $500,000, along with $20,000 in capital gains and $20,000 in dividend income, would pay an additional $2,000 of income tax.
3. Medicare surtax on investment income. A part of Obamacare, this tax is designed to raise federal revenue to offset the cost of things like the government subsidies provided to lower income people who buy health insurance on the new health exchanges.
The Medicare surtax amounts to an additional 3.8 percent on on net investment income, which is income from interest, dividends, tax exempt bond interest, royalties, rents, capital gains and so forth. This tax applies to taxpayers with modified adjusted gross income that exceeds $250,000 for married filers and $200,000 for singles. In total, high-income people must pay a tax rate of 23.8 percent on capital gains and dividends.
So for the married taxpayer mentioned above — with $20,000 in capital gains, $20,000 in dividend income and $10,000 in interest — would pay an additional $1,900 of income tax due to this change.
4. Medicare surtax on self-employment income. Beginning in 2013, an additional 0.9 percent was levied on people whose combined salary and income from self-employment is above $200,000 for singles and $250,000 for marrieds. This was another tax increase aimed at raising revenue to offset the cost of the new health care laws.
If you are married, and have net income from self employment of $500,000 in 2013, this additional tax will cost you $2,250 this year.
5. Phase-out of the personal and dependent exemptions. Starting with 2013 tax returns, more folks will see a reduction in the personal and dependent exemptions they could claim in past years. Taxpayers with Adjusted Gross Income (AGI) levels of $250,000 for singles, $300,000 for marrieds, $275,000 for head of household and married filing separately of $150,000, will see the loss of some or all of their previously allowed personal and dependent exemption deductions.
That means a couple with two dependent children with AGI over $500,000 could pay an additional tax of $6,200, or more.
6. Phase-out of itemized deductions. Taxpayers with higher incomes will also lose a portion of the deductions they claim for things like mortgage interest, real estate taxes and charitable gifts. Taxpayers with the same AGI levels as above — singles at $250,000, married jointly at $300,000, head of household at $275,000 and marries filing separately at $150,000 — will see their deductions reduced by an amount equal to 3 percent of their adjusted gross income that is above these thresholds. This can wipe out up to 80 percent of the deductions some taxpayers would have been allowed to claim in 2012.
A couple with about $40,000 in itemized deductions with AGI about $500,000 could pay an additional tax of $2,376.