Tax Changes For 2013 And What They Mean To Your Finances

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2013 taxes, taxes, estimated taxes, tax changes, tax law, financial planning
The following is a post by MPFJ staff writer, Toi Williams, who is a professional personal finance blogger of Fine Tuned Finances. She has backgrounds in personal finance, sales, and real estate.

For 2013, Congress has enacted some tax changes that could have an effect on your finances in the new year.  Because the national legislation changed tax regulations, many employees and small business owners will find that their personal income taxes and paychecks are affected.  In most cases, any withholding changes have been entered into the payroll system of the employer, so individuals will not have to take any additional withholding action. 
Here are some of the tax changes you can expect to see in 2013.

Tax Change #1: Expiration Of Social Security Payroll Tax Reduction

In 2013, the social security portion of the payroll tax is increasing from 4.2% to 6.2% for all workers.  This will reinstate the 2% temporary reduction in the tax passed by Congress in December of 2010.  This higher tax amount will be taken directly from the employee’s paycheck along with all other payroll taxes owed.  The increased deduction will begin with paychecks issued in January, affecting biweekly employees’ January 9 paychecks and monthly employees’ January 31paychecks.
This increase in the tax rate affects all Americans that earn a paycheck from an employer.  The tax reduction had increased the after-tax wages of employees and with the reduction reinstated, employees will see a reduction in their take home pay.  Experts have calculated that the average American family earning $50,000 annually will pay around $1,000 more out of their paychecks over the year to cover this tax rate increase. 

Tax Change #2: Top Marginal Tax Rate Increase

The top marginal income tax rate will increase to 39.6% from 35% for all taxable incomes of more than $450,000 for couples or $400,000 for single filers.  This is the result of legislation extending the Bush-era income tax cuts for filers earning incomes below this threshold, but allowing them to expire for higher incomes. 
This will not have a large effect on anyone making less than the threshold for the increased tax rate.  All of the other tax brackets – with marginal income rates of 10%, 15%, 25%, 28%, 33%, and 35% – will remain the same as prior years.  The new tax tables released by the IRS will provide guidance on the taxable income thresholds for each tax bracket. 

Tax Change #3: Personal Exemption Changes 

The personal exemption deduction will increase to $3,900, from $3,800 in 2012.  However, personal exemptions will be phased out for adjusted gross incomes of more than $300,000 for joint filers or $250,000 for single filers.  The personal exemption will be reduced by 2% for each $2,500 above the listed income thresholds.  The personal exemption is eliminated completely for those with adjusted gross incomes of $422,500 for couples filing jointly or $372,500 for individual filers.

Tax Change #4: Standard And Itemized Deduction Changes 

The standard deduction for married couples filing jointly will increase to $12,200, up from $11,900 in 2012.  The standard deduction for individuals will rise to $6,100 from $5,950 in 2012.  This will allow these filers to reduce their gross income a little bit farther, decreasing their tax liability and the amount that they will ultimately pay out of pocket if they owe taxes.
Itemized deductions will be limited for adjusted gross incomes of more than $300,000 for joint filers or $250,000 for single filers. The amount of the deductions allowed is reduced by 3% for incomes over the threshold.  This means that taxpayers that make more than the income threshold will not be able to take all of the deductions that they could previously take.  Medical expenses, investment interest, and gambling losses are not subject to the limit.

Tax Change #5: Alternative Minimum Tax Exemption Increase

For 2013, the Alternative Minimum Tax exemption amount has increased to $51,900 for individual filers and to $80,800 for married couples filing jointly.  In 2012, the exemption amounts were set at 50,600 for individual filers and $78,750 for joint filers.  In the future, the amounts will be indexed for inflation as set forth in the American Taxpayer Relief Act of 2012.  The Alternative Minimum Tax was designed to prevent some of the richest Americans from avoiding taxes by requiring them to give up some deductions due to their higher income.  It is estimated that nearly 4 million taxpayers are subject to the tax. 

Other Tax Changes To Be Aware Of

#6 – Earned Income Credit Increase – The maximum amount of the earned income credit allowed for those with three or more qualifying children will increase to $6,044 for married couples filing jointly.  This is an up from $5,891 allowed under the rules in 2012.

#7 – Capital Gains Tax Increase – The tax rate on dividends and capital gains will increase to 20% from 15% for taxable incomes over $450,000, or $400,000 for single filers.

#8 – Estate Tax Increase – For estates larger than $5 million, the tax rate will increase from 35% to 40%.  Beneficiaries will have a basic exclusion amount of $5,250,000, up from $5,120,000 allowed for the estates of decedents who died in 2012.

#9 – Investment Income Surtax – A 3.8% surtax will be levied on investment income for all taxpayers with taxable income exceeding $250,000 when filing jointly or $200,000 for single filers.

#10 – Increase In Wages Subject To Social Security Taxes – The amount of wages that are subject to Social Security taxes will increase in 2013.  The taxes will now be assessed on the first $113,700 of income, up from $110,000 in 2012.

#11 – Hospital Insurance Payroll Tax Increase – The Hospital Insurance portion of the payroll tax will increase by 0.9% for incomes over $250,000 for joint filers or $200,000 for single filers.  The additional tax will only apply to wages earned above this threshold, with the withholding beginning once the threshold is reached and continuing for the rest of the year.

How about you all? How will these tax changes affect you?


Share your concerns by commenting below!

    ***Photo courtesy of http://www.flickr.com/photos/68751915@N05/6355404323/

    Comments

    1. Seems like a lot of good news unless you are paying taxes in the top rate area. All those deduction increases should help out.

      • Toi Williams says:

        I agree. It seems as if most of the tax increases are for those in the top tier and the tax reductions are geared towards the bottom half of earners, except for the social security tax readjustment.

    2. myfijourney says:

      #1 and #10 on your list have been particularly detrimental to me. I had to scale back my spending this year in order to make up for the 2% increase in social security and still meet my savings goals.

      I understand the need for Social Security, but I'm not very happy with how it's run and thus very uncomfortable sending more money into it, when that money would be way more productive in my investments. I'd opt out of Social Security entirely if I could.
      My recent post Should Americans Be Forced to Save For Retirement?

    3. studentdebtsurvivor says:

      Right now the only one that I think will effect me is the expiration of the payroll tax reduction. My paychecks are already a little less because of this one. Haven't filed my taxes yet, so I guess we'll see how it all goes.
      My recent post How to Spend Too Much This Valentine’s Day

    4. #1 and #10 on your list have been particularly detrimental to me. I had to scale back my spending this year in order to make up for the 2% increase in social security and still meet my savings goals.

      I understand the need for Social Security, but I'm not very happy with how it's run and thus very uncomfortable sending more money into it, when that money would be way more productive in my investments. I'd opt out of Social Security entirely if I could.

      My recent post Should Americans Be Forced to Save For Retirement?

    5. John S @ Frugal Rules says:

      Good breakdown. Thankfully not of them really will have a big impact on us. We run our own business so we have to pull out both sides of the social security tax. We never adjusted for the 2%, so we were already living without having it.
      My recent post Giveaway: An Online Shopping Tool for Frugal Shoppers

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