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

A host of tax increases probably made your taxes rise. Find out the details here.

Apr 13, 2014 at 7:25PM

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"
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Dan Caplinger and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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