Regardless of what happens with the fiscal cliff, there are some pretty major changes to our tax situation. Of course, some of them will only affect those at the upper ends of the income scale, but it’s worthwhile to evaluate what your net income will be starting next week- now.
For starters, no one expects Congress to change the Social Security payroll tax holiday. So, if you are paid wages- or you are self-employed, the payroll tax for social security is going to jump 2%. That won’t affect the employer portion, who had no such holiday, just the employee portion. Also, the maximum wages to which this tax is subject is changing from $ 110, 100 to $ 113,700. Given these facts, employers must insure that they pay their withheld taxes in a timely fashion, because the threshold of $ 2500 will be reached sooner than it had been inn 2012. (Of course, for those employers that the IRS has informed must pay taxes every 2 weeks, every month, or 3 days after payroll is made- this won’t change your deposit requirements.)
Moreover, the Medicare payroll tax is going up- not by a percentage, but also on the income upon which it is based. Until this year ends, the tax rate is 1.45% for all payroll amounts. But, starting in 2013, there is an additional 0.9% tax (which makes it 2.35%) for those individuals making more than $ 200K (couples earning more than $ 250K)- but the employer portion stays at 1.45% throughout the wage scales.
There also is an additional 3.8% (for 2013) tax on investment income. However, that tax is income related- i.e., it’s based upon one’s adjusted gross income, which is $ 250K for couples ($125K if filing separately) and $ 200K for individuals.
While not a tax, there are changes to the flexible spending accounts that work with high-deductible health care plans. Up until 31 December, the limits were $ 1200; next year the values are $ 1250 for individuals and $ 2500 for families. However, there is another wrinkle- not all insurance plans are adjusting their deductibles to match these values. That means you may not have any means to fund your health care savings plan. (This is true for a lot of the “Blue” plans…)
Along those lines, the healthcare deduction limits on schedule A (for those who itemize) skyrocket from 7.5% of adjusted gross income to 10%. That further limits one’s ability to deduct health care costs. Of course, those who are self-employed do get a partial deduction (which reduces one’s gross adjusted income) for the cost of health care (found on page 1 of your 1040 tax return).
Now, for the potential problems if Congress does jump off the fiscal cliff (or, is that walking the plank?)…Here’s the bad news… I guess you need to send some mail to your congressperson, if you are dissatisfied with these numbers!
Always hated the 7.5% figure. Only ONCE was able to deduct anything. 10% makes it that much harder.
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That’s why I advocate that my clients all adopt a health care provision in their charters! (It also helps if you have an HSA- healthcare saving acccount.)
Thanks for the visit and the comment, Alessa!
Great Post..Lots of info that we NEED to know..Thanks Roy!!
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Glad to oblige, Jaime!
I had to direct the blog to NOT put your post in spam, so next time I can find it easier.
Wow Roy. It really looks like it is all going to depend on what you make this next year. I used to work at H&R Block (not a tax consultant, but the electronic filing coordinator) and it was rough when we had prepares that new all the rules. I can just imagine what it is going to be like this year with all the new rules. Yikes!
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It is going to be even worse, since our Congress is (not our Congress?) doing nothing- and that means no one knows what payroll deductions to be preparing for the first payroll of the year next year. That is going to cost a whole bunch of employers extra headaches and money, Gen!
Ouch, no matter how you slice it. Thanks for a great summary, Roy.
Just imagine if Congress does (not) do what it does best- doing nothing. Then, it really WILL hurt, Cathy!
Thanks for the visit and the comment! (Or, is that lament?)