Potential Federal Tax Increases Loom

New legislation has put the U.S. on a course for increased federal taxes in 2013; however, much certainty remains as many factors that would trigger higher rates must …

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New legislation has put the U.S. on a course for increased federal taxes in 2013; however, much certainty remains as many factors that would trigger higher rates must survive review. The new federal healthcare plan will face scrutiny from the U.S. Supreme Court, while an election and fractured Congress will likely result in an unpredictable tax forecast. If the laws as written passed unaltered, however, wealthy individuals and married couples would face significant tax increases, and all taxpayers would notice higher rates due to healthcare financing, higher general income tax rates, and increases in capital gains, dividends, rent/royalty and estate and gift taxes. For more on this continue reading the following article from JDSupra.

Most Americans are generally aware that the Bush tax cuts will expire in 2013, and that the new healthcare law will also impose some new taxes. As we get closer to 2013, the scope of the increases will come into clearer focus for taxpayers. For those taxpayers who will be subject to them (generally, married couples with income over $250,000 and singles over $200,000), the new amounts of their income that will be sucked into the abyss of what is the federal budget deficit is eye-popping:

INCOME TYPE OLD TOP RATE NEW TOP RATE % INCREASE

Ordinary income, in
general

 35%  39.6%  13.14%
Earned income
hospital insurance (HI)
1.45%  2.35%  62.06%
Capital gains  15%  23.8%  58.66%
Dividends  15%  43.4%  289.33%
Interest, rents, royalties  35%  43.4%  24%
Estate, Gift & Generation
Skipping Transfers
 35%  55%  57.14%
Estate, Gift & GST
Exemptions
 $5.12 Million
 exemption
 $1 Million
 exemption
 80.46% reduction in
 exemption

 
The income tax increases arise from two principal components. First, the maximum rates are being rolled back to the pre-Bush tax cut maximums (i.e., 39.6%). Second, investment income for those over the thresholds are subject to an additional 3.8% tax under Obamacare (e.g., on interest, dividends, capital gains, net rental income, and royalties – but excluding tax-exempt municipal bond interest and withdrawals from qualified plans and IRAs). Lastly, the HI tax on earned income is increased by 0.9% on persons over the thresholds.
 
Note that further increases in taxes will arise in 2013 that are not reflected in the above table. These relate to the return of limits on itemized deductions for higher income taxpayers.

Note that the threshold for the additional 3.8% investment tax and the new 39.6% maximum tax rate is extremely low for estates and noncharitable trusts that do not distribute their investment income (i.e., it is at the same income level that the highest income tax bracket begins to apply). Thus, many of such entities are in for some unpleasant increased check writing to the U.S. Treasury Department come 2013.

Of course, the Bush tax cuts rollback was deferred in 2010 for 2 years, so perhaps this could happen again. Obamacare is also up for review by the U.S. Supreme Court, and there may be a new President or party alignment in Congress after the 2012 elections. So, while all of the above changes will come into law if no new laws are passed, the uncertainty of what will happen in the law that has existed for the last few years will likely persist for the foreseeable future.

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