the biggest ‘winners’ as a result of the New Year vote? That’s an easy answer: those households with income between $US200,000 - $US400,000. Don’t gloat, you winners: you are still going to be ‘tax prey’ unless the US economy improves.
And who are the other winners? Well, between now (3 January) and the day I submit the complete book to the publishers, I expect to come across several winners, those whose lobbyists got exactly what they wanted written within this 150 page document that will only now be read (but not by any member of Congress – I’d bet on that one).
And the biggest losers? W-2 Wage earners who no longer will have that 2 percent holiday on payroll taxes. The average earner in this category will have $US1,000 take home pay during 2013.
O.K. Here’s my summary of that which I think you need to know about the new law…..My ‘top five’:
1)All individual income tax rates that you’ve grown accustomed to remain in effect unless you are within the top .7% of individual income tax filers. A new, ‘old’ tax rate of 39.6 percent is imposed for these filers for all taxable income to be reported on their 2013 tax return – next year in 2014. If you are single and have taxable income of $US400,000 or over, then that amount ‘over’ is subject to the 39.6 percent tax rate. Head of Household (HOH) filers get a $US425,000 threshold while Married Filing Jointly families get the $US450,000 threshold.
2)You will start losing your personal exemptions and itemized deductions if you are in the elite two percent: if you are an single filer, the threshold above which your exemptions and deductions will start declining kicks in at $US250,000. HOH filers? $US275,000…..& if you file MFJ, declining exemptions and deductions start happening once you have $US300,000 of taxable income.
3)The wealth penalty on capital gains - For all taxpayers subject to the 39.6 percent tax rate, there’s a third ‘wealth surcharge’ that you’re going to be responsible for: you’ve now got a 20 percent long term capital gains (LTCG) and qualified dividend tax. For everyone else, nothing changes: the 15 percent LTCG tax rate stays right there for the middle tax bracket tax filers while the zero rate remains unchanged for taxpayers in either the 10 percent or 15 percent tax rate brackets.
4)The payroll tax stimulus has expired – yesiree, folks, for those of you of more modest means than those who are going to be hit up for more taxes as described above, you too will be asked to contribute if you are a salaried employee subject to US Social Security and Medicare withholding. The W-2 employee has had a 2 percent stimulus tax reduction since 2010. It’s gone, now, and there’ll be a lower paycheck for the W-2 employee from the first check issued in 2013. The government estimates that this will cost an average of $US1,000 per family in reduced in-pocket, expendable income. This will hurt a lot of people.
5)Surprise, surprise (to me, at least, I never thought this would happen)! The gift tax and estate tax exclusions will remain the same: $US 5 million (indexed for inflation, though – for 2012 that amount came to $US5,120,000). The gift tax rate, though, goes up from 35 percent to 40 percent. Also, the surviving spouse’s exemption amount will now be permanently increased by the unused portion of the deceased spouse’s exemption. Now don’t say that estate taxation is something that only impacts ‘the wealthy’ because I know of many who are cash poor and very land rich, even after many of the world’s real estate bubbles burst with the start of the current depression (hell yes, it is a depression, don’t deceive yourself!) and whose heirs are not going to get everything that their predecessors had planned for. US estate and gift taxes are something that more people will have to plan for in the future, simply as a matter of wealth preservation.
The other things I feel you should be aware of…..
a)I have had American investors in China and India who have brought friends and family into U.S. real property partnerships. I have a British client whose deceased father owned U.S. real property that is now part of a trust. The IRS’s right to withhold tax on gains from the sale of a U.S. real estate interest has been made ‘permanent’ under this new law and the withholding amount has been increased to 20 percent. But it is not just those potential penalties as much as the current ones for which you are potentially liable for because of not reporting things the IRS has never previously enforced. Obviously my client is concerned. For those of you to whom this applies or to someone you know it will apply to – warn that person in advance…..the penalties (see the section I wrote about penalties in this book) are ‘draconian’!
b)Most of you, filing as overseas U.S. tax filers, use the standard deduction. There are sufficient number of you who itemize, as well, so you should be aware that there is a revised medical care itemized deduction threshold. The threshold for the itemized deduction for unreimbursed medical expenses has increased from 7.5 percent of Adjusted Gross Income to AGI) 10 percent of Adjusted Gross Income EXCEPT for the years 2013 – 2016 if either the taxpayer or spouse has turned 65 before the end of the year. As an old fart who is still eligible for the lower threshold, trust me when I tell you that I am happy never to come close to ever exceeding the medical threshold – happiness is definitely a low medical cost of life!
c)This is the last item regarding the new law I deem worthy of recognition: Medicare’s tax on investment income.
Think back, those of you out there in tax readership land: new laws reforming health insurance were enacted by both houses of Congress and signed into law by the President, a while back……there’s now an additional tax surcharge because of this. Effective 1 January 2013, a new tax is imposed upon individuals equal to 3.8 percent of the lesser of either that individual’s investment income for the year or the amount that individual’s modified adjusted gross income (i.e. you’ve got to add back the foreign earned income exclusion you took to get modified AGI) exceeds the threshold amount of $US250,000 if you file Married Filing Jointly (MFJ), $US125,000 for Married Filing Separately (MFS) and $US200,000 for everything else. I wonder just how much it is going to cost the IRS to re-tool their computer system to make this one work?
Let me repeat: The New Year theatrics coming out of Washington DC were only partially ‘Shakespearean’ (i.e. ‘Much Ado About Nothing). There really is a fiscal cliff but I don’t think anyone is going to come falling or tumbling down that decline. I do think, though that it will be tougher and tougher to change an economic decline unless some far more serious steps are taken soon. And I do not think that the political grandstanding on either side warrants much respect. Are our legislators at fault or is the system at fault…..and most importantly, what can be done about it?
A last minute deal? Ha! Ever try to write a 150-page piece of legislation, ‘last minute’? It is impossible! And to me, if no one else, it is deplorable that absolutely no Congressperson or Senator publicly complained about not being given adequate time to read what they voted upon before they cast their vote. Sadly, I doubt that given the time, any of them would have read it, anyhow. I defy anyone to tell me that I am wrong about stating this!! (and I ask, once again: are our legislators at fault or is the system at fault?)
Who wrote all that legislation? Who is it written for? What is the true economic impact? How long will it take to figure this one out?????
Have things always been like this? Will it ever change…..?
What is income
– at least what the IRS considers income and which categories you fall under, having to classify your income. For all intents and purposes, this is a good ‘executive summary’ of what the U.S. tax system is like. Other than some numerical updates, in fact, nothing has been changed in this section – after all, if it works, then why ‘tamper’ with it???
Why is this in bold face? Well, dear
