The fiscal cliff tax deal preserved the status quo for the vast majority of taxpayers, 99% of whom will pay income taxes at the same low rates they did during 2012 and prior years. However, one group of taxpayers got pushed off the fiscal cliff: the wealthy. Their tax rates for 2013 and later have gone up. Moreover, most high earners will have to pay some new taxes starting in 2013 to help fund "Obamacare." Just how much more tax the wealthy will have to pay depends on how wealthy they are.
Taxpayers with Income Over $400,000/$450,000
For income tax purposes, "wealthy" means singles with taxable income over $400,000 and marrieds filing jointly with income over $450,000. The top tax rate for people in this group was raised an additional 4.6% in income taxes--from 35% to 39.6%. Remember, however, that 39.6% is the top marginal rate--you only pay this rate on the amount of income above the $400,000/$450,000 threshold.
Special capital gains tax rates apply if you earn a profit from selling a "capital asset" such as corporate stock or your house. For singles with income above $400,000 and marrieds filing jointly with income over $450,000, the capital gains rate goes up from 15% to 20%. For everybody else, the rates remain the same.
How many people do these tax increases affect? Amazingly few. Only about 89,000 singles make $400,000 or more, accounting for only .1% of all taxpayers. Only 579,000 of marrieds earn $450,000 or more, accounting for just 1% of all taxpayers.
Taxpayers with Income Over $200,000/$250,000
Singles with income over $200,000 and marrieds filing jointly with income over $250,000, but less than $400,000/$450,000, were not affected by the fiscal cliff tax deal. However, they will be paying more tax in 2013 because of Obamacare.
New Medicare Payroll Tax
Starting in 2013, the 2.9% Medicare went up by 0.9% for married taxpayers with wage or self-employment income of $250,000 and single taxpayers with income of $200,000. Only the amount over these thresholds is subject to the additional 0.9% tax.
New Medicare Tax On Investment Income
Starting in 2013, high income taxpayers became subject to a brand new Medicare tax on their "unearned income." The tax applies only to investment income. This includes:
- gross income from interest, dividends, annuities, royalties, and rents other than those derived from an active business
- the net gain earned from the sale or other disposition of investment and other non-business property, and
- any other gain from a passive trade or business.
This includes just about any income not derived from an active business or from employee compensation.
The Medicare investment tax rate is 3.8%. This amount must be paid on the lesser of (1) the taxpayer’s net investment income, or (2) any excess of modified adjusted gross income over $200,000 ($250,000 for married taxpayers filing jointly). Thus, all single taxpayers with MAGI over $200,000 and married taxpayers with MAGI over $250,000 will be subject to this tax.
Taxpayers with Incomes Over $250,000/$300,000
There is yet another tax increase in store for marrieds filing jointly with over $300,000 in income and singles over $250,000. The fiscal cliff law brought back the "Pease limitation," which had expired in 2009. This provision reduces a taxpayer's itemized deductions by 3% of the amount his or her AGI exceeds a threshold amount. In addition, personal tax exemptions for such taxpayers are phased-out. This will increase their income taxes by about 1%.