I start writing this the day after the United States edged away from the so-called “fiscal cliff”.
However, the realization that other fiscal battles loom tempered any sense of any celebration.
Congress passed the American Taxpayer Relief Act of 2012, which ensures that workers will pay more in payroll taxes and the highly successful will pay more income taxes.
So taxes are going up this year for almost everyone, but one group of top earners will feel the pinch more than others: the so-called .7 percent. It’s an exclusive club created by President Obama’s new tax plan. Already the most progressively taxed nation in the world, the U.S. becomes more top heavy with the new tax code, analysts say.
A question to think about: Can the U.S. sustain a situation where the top 1 percent of its citizens pays 40 percent of the tax burden, while the bottom half (roughly, on average) pays no income taxes at all? (Data shows about 37 percent of the federal income tax burden falls on the top 1 percent, while 41 percent have a zero or negative tax liability.)
This could create a huge division in society. It is also unsustainable because it disconnects voters. The bottom half of the population that pays no income tax now has an incentive to lobby for more federal spending, and it disconnects them from the cost of the federal government.
Unfortunately, we see that in yachting when crew don’t think twice about overspending for the boat; crew members are not in touch with the ones footing the bill.
While most taxpayers were shielded from increases in their income taxes, payroll taxes went up for everyone. The IRS issued new withholding guidelines for employers in early January. Some workers have already seen the higher deductions in their first paychecks this year.
The good news is that many of the new tax rules are permanent, which will give individuals and business owners a welcome sense of stability. Also, these changes were better than the higher income taxes that would have burdened just about all taxpayers had the tax cuts been allowed to simply expire without further action.
Below is a summary of the new tax rules that have been made permanent by the new law. I will not go into much detail of the changes for those making more than $400,000.
For workers with taxable income below certain levels, their tax rates will remain at 10, 15, 25, 28, 33 and 35 percent. For single filers with taxable income above $400,000, the new 39.6 percent rate will replace the 35 percent tax rate.
The Social Security tax withholding rate is expected to return to 6.2 percent after two years at 4.2 percent. For someone earning the 2011 median income of $50,054, that translates into $1,001.08 a year or about $40 less in a biweekly paycheck.
Capital gains and dividend income
Like the income tax rates for people with incomes below certain levels, the tax rates that apply to their capital gains and dividends will remain the same. This is good news for those who earn less than $400,000 or who are retired and living off their investment income.
But for taxpayers with higher incomes, their capital gains and dividends tax rate increases from 15 percent to 20 percent.
Actually, this was a tax increase that was tucked away in the Obama health care laws to offset the cost of health care legislation. The so-called Medicare surtax is a 3.8 percent tax on net investment income, which is income from interest, dividends, tax exempt bond interest, royalties, rents and capital gains, among other things.
This tax only applies to taxpayers with modified adjusted gross income that exceeds a threshold ($250,000 for married filers, $200,000 for singles).
Personal and dependent exemptions
Beginning this year, taxpayers with incomes in excess of certain adjusted gross income (AGI) levels (singles at $250,000, married jointly at $300,000, head of household at $275,000, married filing separately at $150,000) will lose some or all of these exemption deductions.
Taxpayers with the same AGI levels as above can lose up to 80 percent of their deductions for mortgage interest, property taxes, state income taxes and charitable deductions.
So again, make a plan and stick with it, but review periodically. For my clients that stuck with their plan and continued to dollar cost average, they did well through the “fiscal cliff” drama.
Information in this column is not intended to be specific advice for anyone. You should use the information to help you work with a professional regarding your specific financial objectives.
Capt. Mark A. Cline is a chartered senior financial planner. Comments on this column are welcome at +1-954-764-2929 or through www.clinefinancial.net.