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Your 2013 Tax Bill Probably Went Up. Here's Why.

April 15 is right around the corner, and many last-minute filers are getting ready to finish up their tax returns for 2013. Whether you filed your taxes months ago or are just getting around to finishing your return, millions of Americans saw their 2013 tax bills go up.

Source: Phillip Ingham, Flickr.

The fiscal-cliff deal that Congress hammered out at the beginning of 2013 seems like ancient history, but it's only now having an impact on the tax returns that are due this Tuesday. The deal prevented what could have been a much more extensive rise in taxes for every taxpayer in the nation. Although the compromise extended many of the tax cuts that had been slated to expire, it still allowed rates to rise in a number of critical areas.

Higher payroll taxes
Under the deal, nearly every wage-earner saw a rise in the taxes that are taken directly out of workers' paychecks. The law allowed the payroll tax cut that had been available since 2011 to expire, and so workers started having an extra 2% of their paychecks go toward Social Security taxes as of the beginning of last year.

For a typical household, the tax-rate rise amounted to about $1,000 in extra taxes. With the maximum Social Security wage base of $113,700 for 2013, however, the higher payroll taxes cost some joint-filing couples as much as $4,548.

Higher taxes for high-income taxpayers
Lawmakers agreed to impose higher marginal tax rates for high-income earners, with the key income levels being $400,000 for single filers and $450,000 for joint returns. Above those levels, the current 35% rate went back to its previous level of 39.6%.

On the investing front, the maximum tax rates on dividends and capital gains rose to 20%. However, those under the $400,000 or $450,000 limits continued to pay a maximum of just 15%, while previously existing 0% rates for those in the 10% and 15% ordinary income-tax brackets were extended.

In addition, high-income earners paid some brand-new taxes on their 2013 returns. Single filers earning more than $200,000 and joint filers with income over $250,000 could be subject to these two new taxes.

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

The second tax applied to investment income, including interest, dividends, and capital gains. For this income, you owed 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.

Other tax increases
Less obvious but still important is the return of provisions that reduce the amount of personal exemptions and itemized deductions that high-income taxpayers are eligible to take. The provisions target two areas: personal exemptions and itemized deductions.

One rule, known as the PEP, reduced 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, cut 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 could have ended up paying thousands of extra dollars in taxes by losing the value of those deductions.

But one key tax benefit from the bill was the permanent extension of alternative minimum tax relief. By raising the AMT exemption and indexing it to inflation automatically going forward, taxpayers didn't have to worry at the end of 2013 about whether the AMT would hit them at the last minute. The measure was especially useful for upper-middle-income taxpayers in high-tax states, as they were the most likely to get snagged by the tax.

Outside the income-tax context, estate taxes also rose somewhat, as the top rate went from 35% to 40%. The exemption amount remained at $5 million, with inflation adjustments making the 2013 exemption amount $5.25 million and the 2014 amount $5.34 million.

Dealing with higher taxes
These tax increases make it more important than ever to make smart decisions to cut your tax bill. Although no similarly major tax increases took effect at the beginning of 2014, it's still possible that further reforms will make taxes even more complex in the years to come.

Take advantage of this little-known tax "loophole"
Recent tax increases have affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.


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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 April 15, 2014, at 7:00 PM, cmalek wrote:

    As usual the politicians get the mine, and the citizens get the shaft.

  • Report this Comment On April 15, 2014, at 8:53 PM, Tiingall wrote:

    Hi Dan,

    Perhaps you can - with your extensive background - clarify for Fools how much of the Federal Tax take is used for purposes related to helping the people, and how much goes back to the banking family owners of the Federal Reserve to pay for the "national debt"; the debt created for all citizens when the Federal Reserve prints cash notes for a few cents and charges the government the full face value of the note, plus lots of interest.

    I've seen other reports that say 90% of Federal Tax receipts go to repay this false "debt" into the pockets of the exclusive banking families.

    And how much would the average annual family Federal tax bill become if the the government printed the nation's cash, rather than the privately owned Federal Reserve?

    As President Thomas Jefferson stated: "I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."

    And as President Woodrow Wilson stated a few years after creating the Federal Reserve "“I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world - no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men.”

    Wilson created the Federal Reserve in 1913. Later that year, Federal Income Tax was introduced for all citizens; apparently to pay for Wilson's catastrophic error.

    You might also like to comment on how to close the Federal Reserve and put the production of currency back under control of the people, as Jefferson advised.

  • Report this Comment On April 16, 2014, at 6:35 PM, Lucaskasan wrote:

    You should not conflate FICA with Income Tax. The average person may posibly pay an extra $1000 FICA, but that money becomes part of the calculation of future Social Security benefits. The tax "cut" may have put an extra $1000 in the pocket today, but over time, people have lost the future benefit which would be much greater than $1000.

    Considering that studies show that nearly all Americans are on track to have insufficient retirement savings and will likely have to depend more on Social Security, this is not a trivial matter.

    The remaining points of the article pertain to the richest 2% in America. I wouldn't worry about them. Their high-priced CPAs are making sure they pay the least tax possible.

    Estate tax is always a red herring. The great majority (maybe 95%) will never even have to submit an Estate Tax Return. For those who do, it is mostly a report explaining to the IRS all the deduction and credits resulting in quite a small tax (most often zero) relative to the total estate. Very few people (maybe counted with 3 digits) every pay any significant estate tax.

    More important, when the media created the popular opinion that the "death" tax had to go, Congress simply removed "stepped-up basis". This provision, which actually does affect many many average Americans, went under the radar until tax season when people discovered to their dismay that they would have to pay the capital gain on Grandpa's portfolio.

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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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