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New Taxes in 2013: What You'll Pay

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The New Year's Day compromise on the fiscal cliff was designed to prevent massive tax increases from taking effect that many feared would devastate the economy. Yet even with the compromise, several new taxes in 2013 will raise tax bills for millions of Americans, and the groups that are the most affected by the changing of the calendar may surprise you.

Here's a list of new taxes that took effect as of Jan. 1:

Payroll taxes: Returning to old levels
For the past two years, just about everyone who has a job got a tax break of 2 percentage points on the Social Security taxes withheld from their paychecks. But on Jan. 1, the rate of tax withheld from employee paychecks rose from 4.2% to 6.2%, representing about a $1,000 tax increase for typical families earning $50,000. Already, anyone who's received a paycheck in 2013 has likely seen the impact of this tax, with those who get paid twice a month having about $40 extra taken out under the FICA on their paychecks.

Few analysts expected the fiscal cliff negotiations to extend this tax break further. But given that it hits at just about everyone, it could have the biggest impact of any of the new taxes in 2013.

Medicare surcharge
High-income earners will see a brand-new tax this year. Single filers earning more than $200,000 and joint filers with income over $250,000 could be subject to two new taxes.

With one tax, if your earned income goes above the threshold, then you'll owe an extra 0.9% of your earnings in Medicare withholding. In some cases, this additional money may be taken directly out of your paycheck, although for joint filers, your employer may not be able to do so accurately because it doesn't know what your spouse earns in order to get the calculation correct.

The second tax applies to investment income, including interest, dividends, and capital gains. For this income, you'll owe an extra tax of 3.8% for any amount that exceeds the threshold. The idea behind this part of the new tax is to treat investment income for high-income earners the same way as earned income, making both types of income subject to the same higher Medicare tax rate.

New tax brackets and rates for high-income earners
The biggest news from the fiscal cliff compromise was the return of the 39.6% tax rate for singles earning more than $400,000 and joint filers with income above $450,000. This rate is a carryover from the old rate structure that existed before the tax cuts of the early 2000s and represents a 4.6 percentage point rise from the old 35% rate.

In addition, taxpayers whose earnings are above these thresholds will see their taxes on dividends and capital gain income rise from 15% to 20%. Given that dividend rates could have risen as high as the 39.6% ordinary income tax rate, investors were fairly pleased with the eventual outcome.

Disappearing deductions and other hidden taxes
In addition to the explicit increases in taxes, some old provisions are back that will have the same tax-increasing impact. In particular, two separate rules that phase out certain deductions for high-income taxpayers came back this year after having been absent from tax law since 2009.

The phase-outs target two areas: personal exemptions and itemized deductions. One rule, known as the PEP, reduces the value of your personal exemptions by 2% for every $2,500 in additional income you earn over thresholds of $250,000 for singles and $300,000 for joint filers. The other rule, called the Pease phaseout, cuts the amount you can claim in itemized deductions by 3% of the amount of additional income you earn over those same thresholds, subject to a maximum reduction of 80% of your itemized deductions.

Those calculations are a bit complicated, but the net result is that you can end up paying thousands of extra dollars in taxes by losing the value of those deductions.

Finally, the estate tax rate rose from 35% to 40% this year. With the $5 million exemption made permanent, however, the impact of the tax will be limited to far fewer families than would have paid tax without the fiscal cliff compromise.

Start planning
These new taxes for 2013 won't make anyone happy, but by knowing about them early on, you can start planning for them right away. Doing so may not let you reduce your tax bill too much, but it'll at least get you prepared for the hit to your paycheck and your tax refund next year.


Read/Post Comments (21) | Recommend This Article (40)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 19, 2013, at 2:12 PM, daliya wrote:

    I am pleased that people with a lot of money will pay their part. The very well heeled have been protected from this participation and its about time we pay out part. Where is the patriotism in this county?

    We not only send others' sons to war so we can profit from the munitions industry but we don't even pay our right full tax on social security . Shame on all of us who are concerned about ou extra tax participation in maintaing our country . I would like FOOLISH readers to volunteer to rebuild out country and offer more tax and not worry about sharing in the expense of running the country, How about foolish readers starting a fund to rebuild a road or fix vet hospitals or vet retirement centers . How about talking about funding a few schools in deprived areas instead of counting our lousy money.

  • Report this Comment On January 19, 2013, at 3:03 PM, MMWCPA wrote:

    The top 2% of income earners pay about 80% of al taxes, or something like that. The bottom 30% of income earners pay no taxes, or something like that. There are far more people in the bottom 98% of income earners that are using the nation's infrastructure (federal highways, bridges, government buildings, national parks, etc.) and government services (national defense, FEMA assistance, etc.) Shouldn't that 98% (especially the bottom 30% who pay no taxes) pay their fair share?

  • Report this Comment On January 19, 2013, at 3:22 PM, JacquesleFou wrote:

    It would really be helpful if all articles related to the new tax thresholds specified whether the income referred to is Adjusted Gross Income or Taxable Income.

  • Report this Comment On January 19, 2013, at 3:35 PM, Rick1635 wrote:

    Mom always said to be happy if your paying taxes, it means your making money.

  • Report this Comment On January 19, 2013, at 5:09 PM, TheRealRacc wrote:

    Please, somebody correct me if I am wrong because I do not know myself. Every piece of news refers to a "2-year time span" where we received the Social Security tax cut. If I'm not mistake, but maybe I am - the original payroll tax cut was enacted in 2001, and extended in 2010. Thus, we've had the tax cut for 11 years, not 2. Please correct my facts, thank you.

  • Report this Comment On January 19, 2013, at 7:16 PM, gwc11 wrote:

    Why should the rich be taxed at a higher rate than a middle income earner? A flat rate tax that all pay is the only fair way where all pay an equal share. I think 20% would be a fair tax and all should pay.

    Higher rates on the wealthy suppresses investing and destroys capitalism. Give me one reason I should have to support someone who refuses to work.

  • Report this Comment On January 19, 2013, at 7:44 PM, TMFGalagan wrote:

    @TheRealRacc - I think you're referring to the original *income* tax cuts, not the payroll tax cut. Prior to 2011, the Social Security withholding tax rate for employees had been 6.2% since 1990:

    http://www.ssa.gov/policy/docs/statcomps/supplement/2010/2a1...

    best,

    dan (TMF Galagan)

  • Report this Comment On January 19, 2013, at 8:31 PM, harmonyjoe wrote:

    gwc11 asks: "Why should the rich pay at a higher rate than a middle income earner?" He further says that "A flat rate tax that all pay is the only fair way where all pay an equal share." Is it really the only fair way? Lets look at the figures:

    a) Take a middle class earner making $40,000 annually... 20% of his pay is $8,000, then you take Payroll taxes of 6.2%, which is $2,480. Not even looking at what could be the effect of State and local taxes, of which there are many, his income has been reduced by $10,480, leaving only $29,520 to live.B) Alternatively, if we take our rich guy making $400,000 annually... 20% of his pay is $80,000, then you take Payroll taxes of 6.2% against only $113,000 of his income,or $7,006. Incidently, this is only 21.7% of his income while the guy making $40,000 has to pay 26.2% of his. Regardless of that circumstance however, the rich taxpayer is left with $312,994 of his income while the middle income guy only has $29,520. I fail to see where this is equitable. That guy with the $312,994 remaining could send the middle income guy $29,500 and never miss it, whereas the middle icome guy is just scrapping by.

    Secondly, higher tax rates on the wealthy do not in anyway suppress investing or destroy capitalism. If anything, they increase investing because the investor feels a need to invest further to regain income reduced to taxes which furthers Capitalism.

  • Report this Comment On January 19, 2013, at 8:32 PM, Davemuse wrote:

    For TheRealRace

    Sorry, but the FICA tax rate for both employees and employers was set at 6.2% for each in 1990. The Bush Tax cuts did not change this. The 2% reduction was enacted in 2010 to start Jan 1, 2011 and expire Dec 31, 2012, as it was seen as a short-term income boost to help revive our ailing economy. There was not much sentiment in Congress nor in the White House to extend this tax, given the fact that the Federal Budget was obligated under the law to replace this lost revenue in the FICA account with a transfer from the general fund. Thus, as things turned out, the transfers merely increased the national debt by my own calculation about $170 billion each year. That amount will now be collected in 2013.

  • Report this Comment On January 19, 2013, at 11:13 PM, HerrGlock wrote:

    I am tired of hearing everyone calling the 6.7% deducted from your payroll check as a tax....it is the funds that when you are eligible for SS, what your monthly payments will be. The less you put in, the less you will get in retirement. That is not a TAX, more like saving for retirement. Put nothing in and you get nothing out.

    People have paid that all their lives, I know that I have, and happy that now that I collect SS (I'm 67) that I get a reasonable amount each month.

    So don't cry to me when you're not happy with your benefits, I know that I paid for mine for 46 years.

  • Report this Comment On January 19, 2013, at 11:53 PM, uncolamn wrote:

    MMWCPA yes they should

    .

    harmonyjoe: if a correct world that would be the way but in this world people believe that the gov't owes it to support them. They deserve it, just ask them.

    HerrGlock We would be better taking that money and investing ourselves. After all the way DC blows money they are going to syphon off of that fund too.

  • Report this Comment On January 20, 2013, at 6:49 PM, navadin wrote:

    daliya; It would wonderful if everyone payed an honest share and equal share,BUT that ain't gonna happen, Ever. Such as life.

  • Report this Comment On January 20, 2013, at 10:33 PM, nolanl66 wrote:

    I vote for flat tax, same % for every dollar earned. No deductions, none, ban earmarks, take goverment back down to small size. Put the elected officials on pay by performance and freeze spending. Why should they get away with inside trading and it against the law for us. They force us to pay them for poor service and give our money to them so they can pick and choose winners. I will be the next president if you vote for me an not take a salary. Your right it ain't gonna happen,

  • Report this Comment On January 21, 2013, at 1:09 AM, JULPAC wrote:

    @ harmonyjoe

    "Secondly, higher tax rates on the wealthy do not in anyway suppress investing or destroy capitalism. If anything, they increase investing because the investor feels a need to invest further to regain income reduced to taxes which furthers Capitalism."

    So now the rich have to work a little more.. gotcha.

    By the way - its good to see that the bottom 30% risk their free'd up capital to start a new business. Oh wait...

  • Report this Comment On January 21, 2013, at 7:31 AM, CSARebel wrote:

    I don't remember the exact numbers but let me tell you from memory: 50% of the nation pay 0 federal income tax; Something like the top 5% of wage earners pay 95% of the federal income tax. Don't blow your horn about the rich not paying their fair share. If anything we should change the tax code and have everyone pay something. 50% of the country are net takers .... pay no taxes but get the benefit of federal highways, military protection, etc. I doubt that I will ever get a check from the federal government ... nor do I want one!

  • Report this Comment On January 21, 2013, at 11:07 AM, 48ozhalfgallons wrote:

    I'm amazed that anyone making more than a 100 grand a year reads this column. What on earth are they doing with their time? The alternative costs must be astonishing.

  • Report this Comment On January 21, 2013, at 11:11 AM, 48ozhalfgallons wrote:

    To CSARebel: Your taxes are the insurance premium to prevent anarchy. Study Russian history, idiot!

  • Report this Comment On January 21, 2013, at 11:25 AM, 48ozhalfgallons wrote:

    To harmonyjoe: Nothing like simple math to illustrate truth. The taxes are now fact. Energy is more wisely spent forcing government to balance a budget rather than griping about redistribution ignoring consequences.

  • Report this Comment On January 21, 2013, at 11:50 AM, Morgana wrote:

    To gwc11: the "rich" pay more taxes at every level of income. Someone at $80,000 pays more than someone at $40,000. Better to ask why the graduated income tax rate STOPS and does not apply to the wealthy? Same tax code but different rules for wealthy. My solution: lower the jumps in the graduated tax scale at lower levels and even out jumps at all levels.

  • Report this Comment On January 21, 2013, at 9:40 PM, mikecart1 wrote:

    There should be a flat tax up to a certain amount and then increased taxes after like $250,000 or so a year. For those making $0.01 to $249,999, people should pay 20% in taxes. This would solve the debt problem fast and would give an incentive to actually strive to make more money.

    The people not paying taxes have no incentive to do anything. Those in the higher incomes have less incentive to make more because that means they will just pay more taxes.

    This isn't that complicated.

  • Report this Comment On January 22, 2013, at 7:15 PM, newvette2010 wrote:

    i believe a government big enough to give you what you want is big enough to take everything you have. Social security and medicare are funded by the working americans look at your pay stub. Why does our president keep talking about not wanting to make cuts in these programs, were paying for them.. We need to limit congressman and senators to two terms not lifers, make them abide by the same rules we do. no retirement plan I dont get one and ive been in the same job for 25 yrs. cut the b.s. why are we going to try to make over 11 million illegal aliens LEGAL???? Why did we just give the Egyptian government yes i said give 30 brand new state of the art F-16 fighter jets??? I dont mind paying taxes but I hate seeing all the waste. these are just two of the thousands if not millions of examples of government waste. France keeps raising taxes people there are defecting.. good luck to all of us who support this government.

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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