The New and Improved(?) Tax Rates for 2013
"Nothing is certain except taxes, death and more taxes." – Ben Franklin’s great grandson
No businessperson needs to be reminded of the prescience of this paraphrased adage. Unfortunately, 2013 will see more of the same. The passing of the American Taxpayer Relief Act of 2012 certainly averted the dreaded "fiscal cliff," but at what cost? With its enactment, all legal, American workers will now “contribute” more in payroll taxes and most, the President’s declarations aside, will pay see their income taxes rise.
The “good” news that arises from this situation is only that it could have been worse if all the tax cuts had been allowed to expire. Truly, the voters of the United State always get what they deserve but it is only the taxpayers who foot the bill. With that said, here are five of the more important changes to the tax code that went into effect on January 1st, 2013:
Ordinary Taxable Income Rates
Lawmakers were hesitant to change these rates in any way as they are the most noticeable to the taxpayer and would provoke a storm or outrage over any increases. Instead, the powers-that-be only made a change to the ordinary taxable income rate of those single filers earning over $400,000 and married filers with incomes over $450,000. While all other ordinary taxable income rates remained the same, theirs increased from 35% to 39.6% for any income over the previously described limits.
Long Term Capital Gains and Dividend Income Rates
Similarly, the rates on dividend income and long term capital gains will remain unchanged for the majority of taxpayers; the vast majority of whom have none of this type of income. It is another sidestep by the government to tax the most productive and the most frugal. Still, it is the only sensible tactic as you cannot get taxes from those who don’t work or save. The actual rate increase is also quite startling as it jumps an incredible 33% in a single year.
Phase-Out of Personal and Dependent Exemptions
For no known logical reason other than an expanded grab for cash, singles and married couples, with or without dependents, who earn more than $250,000 - $300,000 respectively, will no longer be granted the status as people under the new American Taxpayer Relief Act of 2012. The ramification is that their personal and dependent deductions will be phased-out. The term “phased-out” is particularly misleading as the status is immediately eliminated as soon as the President signs the bill and is not gradually phased in.
Phase-Out of the Itemized Deductions
Probably the most contentious aspect of the new Act is the elimination of one of the most prized and used tax deductions in United States history, the home mortgage deduction. Again, middle class, single taxpayers earning more than $250,000 and couples with incomes over $300,000 will lose up to 80% of their deductions for mortgage interest, property taxes, state income taxes and charitable deductions. It takes no small leap to understand the ramifications of this policy; there will be significant negative effects on both the housing market and charitable giving by those most able to afford it.
Medicare Surtax
Finally, we reach the tax that will “pay” for ObamaCare. While the revenue generated by this part of the new Act is laughably small in the overall context of the entire cost of the PPACA, it will have a significantly chilling effect on the actions of investors in this country. In the simplest terms, the Medicare surtax places an additional tax on interest, dividends, royalties, rents and anything else they can think of. Again, it only applies to those single filers who make more than $250,000 and couples with incomes over $300,000. It seems reasonable but any objective financial analyst will attest that those funds represent over 90% of the invested capital in this country. If you think that the flight of capital to the Caribbean and other tax havens is atrocious now, you ain’t seen nothin’ yet.
What To Do?
Unfortunately, it’s a Hobson’s choice. You simply must pay your income tax. More importantly, you must be able to prove that you paid the entirety of the taxes in a timely manner or you will be subject to fines and usurious interest. Prudence dictates that a small business owner pay his taxes correctly and on time but many do not have the wherewithal or the patience to do the job themselves. An excellent alternative is to use a Professional Employer Organization. These PEO companies have the expertise, the experience and the time to devote to your company’s tax issues. In addition to their own resources, they can also provide excellent references for any number of reputable accounting and tax consulting firms.
Carolyn Sokol writes about issues that may affect small businesses such as human resources, HR outsourcing, and HRIS systems. She is a founder of PEOcompare.com and contributor to compareHRIS.com, both of which help match businesses to the right HR or payroll service provider for their particular needs. Her background is in marketing and communications, employee education and training, development of policies and procedures and the ongoing delivery of outstanding customer service.
