The New Tax Law and the Latest Update from Washington

  •  The new tax law enacted last month raised the top income tax rate to 39.6%, increased the maximum rate on dividends and long-term capital gains to 20%, and reinstated cutbacks in itemized deductions and personal exemptions.
  • The phaseout of tax benefits will push your marginal rate above the 39.6% bracket in the new law. The rate applies to taxable income over $400,000 for singles and $450,000 for joint filers.
  • The cutback in itemized deductions can add an additional 1.0% to your marginal rate.  Starting in 2013, these write-offs are reduced if your adjusted gross income is over $250,000 for singles;  $300,000 for joint filers.
  • The loss of personal exemptions can also cause an addition of 1.0% per exemption to your true rate.  Exemptions disappear once AGI exceeds $372,500 for singles and $422,500 for joint filers.
  • Marginal rates on long-term gains and dividends can be higher than expected. The 3.8% surtax raises the effective rate on gains and dividends to 18.8% for filers below the 39.6% tax bracket and to 23.8% for those above.
  • The marginal rate can be higher if you owe  AMT.

Unfortunately, Washington is not done with changing the tax code.

Senate Democrats want more tax hikes, on top of the ones above. They want to cap the value of itemized deductions at 28%.  As a result, taxpayers in 33%, 35% and 39.6% brackets would lose some of the value of their itemization…home mortgage interest, state and local taxes, charitable contributions and the like. Filers in the 39.6% bracket would see their taxes rise by 11.6% of their itemization.

This limitation would apply to other tax breaks such as, write-offs for IRAs, self-employed’ health insurance premiums and the domestic production deduction. They are also looking at 401(k) contributions, tax free interest and the exclusion for employer-provided medical insurance.

House Republicans are not happy with the above tax increases.  It is their belief that the new tax hikes already will raise enough revenue. Their focus will be on trimming federal spending.

Stay Tuned!! AND CONTACT US for more detailed information regarding your specific situation.

Nick DiBartolomeo,CPA, Tax Partner