November 19, 2012

Post Election Tax Updates

2012 Election is Over
Barack Obama has won a second term, the Republicans have retained control of the House, and the Democrats have retained control of the Senate.

Will the continued division of power in Washington prevent compromises from being reached before the end of the year to avoid the scheduled tax increases and spending reductions?

Preferential Federal Rates Expiring
The Bush tax cut rates are set to expire at the end of 2012.  On top of that, the increased Medicare tax on wages and investment income is set to start next year.  Without any new legislation, the following would be effective beginning January 1, 2013:

  • For those earning more than $200,000 ($250,000 for married filers), the total Medicare payroll tax, would rise from 2.9% to 3.8%
  • The top four regular income tax brackets would see rate increases.  The 25% bracket would rise to 28%, the 28% bracket would rise to 31%, the 33% bracket would rise to 36% and the top bracket would rise from 35% to 39.6%.  Please note that the Alternative Minimum Tax (AMT) rates are not expected to change.
  • The tax on long-term capital gains would rise from a maximum of 15% to a maximum of 20%.  Additionally, a 3.8% capital gains surtax on high-income individuals would make the top capital gains rate 23.8%.
  • The tax on qualified dividends would rise from 15% to ordinary wage tax rates.  Additionally, a 3.8% dividend surtax on high-income individuals would make the top dividend tax rate 43.4% (39.6% plus 3.8%).
2012 2013
Ordinary Services Income 37.9% 1 43.4% 2
Ordinary Interest Income 35.0% 43.4% 2
Qualified Dividend Income 15.0% 43.4% 2
Short-Term Capital Gains 35.0% 43.4% 2
Long-Term Capital Gains 15.0% 23.8% 2

Retroactive California Tax Increase
The following is retroactively effective beginning January 1, 2012:

Joint Tax Return Income (1) 2011 2012-2018
$500,000 to $600,000 9.3% 10.3%
$600,000 to $1,000,000 9.3% 11.3%
Over $1,000,000 10.3% 13.3% 2

1 Tax brackets for single individuals are 50% of joint bracket amounts
2 Includes Mental Health Tax of 1% on joint income over $1M

Taxpayers who have already made their 2012 quarterly estimated tax payments based on the prior marginal tax rates will not be subject to underpayment penalties related to the tax rate increase.

We will consider the evolving tax laws when addressing your quarterly and year-end tax planning. If you have any questions, we welcome the opportunity to speak with you.