Fiscal Cliff Deal + Obamacare = Higher Taxes on the Rich

By Nick Summers

How much will your 2013 tax bill rise as a result of the yearend deal in Congress and the Affordable Care Act? Using Tax Policy Center data and three hypothetical taxpayers, here’s a look at what’s new — and what stays the same. The figures in GREEN represent additional taxes. Calculate your own at calculator.taxpolicycenter.org

First name AMY

Last name WILSON

FILING STATUS

Single

Married

• Head of Household

Dependents: TWO CHILDREN UNDER AGE 13

A Wages $733,700

B Investment income $141,300

C Exemptions & deductions $(56,700)

D Adjusted gross income (add A and B) $875,000

First name BOB

Last name SMITH

FILING STATUS

Single

• Married

Head of Household

Dependents: ONE CHILD IN COLLEGE

A Wages $360,000

B Investment income $30,000

C Exemptions & deductions $(72,200)

D Adjusted gross income (add A and B) $390,000

First name CAL

Last name JONES

FILING STATUS

• Single

Married

Head of Household

Dependents: NONE

A Wages $69,000

B Investment income $1,000

C Exemptions & deductions $(6,100)

D Adjusted gross income (add A and B) $70,000

1 Income tax

Rates remain the same on earnings less than $400,000, or $450,000 when filing jointly. Income above those cutoffs will be taxed at a new top rate of 39.6 percent.

Amy’s income puts her in the new top bracket. New limits on exemptions and deductions (see below) further increase her bill. $34,384

Because Bob and his wife make less than $450,000, they are not subject to the higher rate. Even so, the new limits on exemptions and deductions increase their taxable income, and therefore their tax bill. $511

Cal’s income tax remains the same. $0

2 Payroll tax

After being temporarily lowered to 4.2 percent in 2011 to help stimulate the economy, the Social Security payroll tax reverts to 6.2 percent.

The payroll tax applies to wages up to $113,700, so both Amy and Bob pay $7,049, up from $4,775 under the old law. $2,274

Cal will pay $4,278, up from $2,898. As a percentage of income, the payroll tax is more of a burden to Cal than to Amy or Bob, making this a regressive tax. $1,380

3 Capital gains & dividends

There’s a new 20 percent rate for filers in the top bracket. People in the middle pay 15 percent. The lowest earners pay nothing.

Amy’s investment income — excluding taxable interest — is taxed at the new 20 percent rate. (Interest is taxed as ordinary income.) $6,600

Because Bob and Cal aren’t in the top tax bracket, their capital gains and dividends are taxed at the same 15 percent rate as last year. $0

4 Obamacare taxes

Taxes to fund the Affordable Care Act include an extra 3.8 percent tax on investment income and a 0.9 percent payroll tax — but only for individuals making more than $200,000, or $250,000 for couples.

On top of the 20 percent rate on investment income (see above), Amy pays the 3.8 percent surtax on that income, plus 0.9 percent on her wages above $200,000. $10,172

Bob also pays the surtaxes. $2,130

Cal is unaffected. $0

5 Personal exemptions

PEP (the personal exemption phaseout) is back after being suspended for three years. Exemptions are phased out for high earners — the thresholds vary with filing status — so the more you make, the less you’ll be able to claim.

Amy’s income is high enough that her personal exemptions are eliminated entirely. Last year she would have been able to claim $11,700. $4,633

Bob’s exemptions get whittled down but not erased: They go from $11,700 to $3,276. $2,780

Cal is untouched by PEP. He gets a full $3,900 exemption. $0

6 Itemized deductions

Like exemptions, Pease limits — named after Representative Donald Pease — are back after a three-year absence. High-income taxpayers see their deductions reduced by as much as 80 percent.

Amy can claim $56,700, instead of last year’s $74,700, increasing her taxable income and adding to her bill. $7,128

Bob loses $2,700 in deductions, with a much smaller impact on his final tally. $891

Cal is unaffected. (He’s better off taking the standard deduction, anyway.) $0

7 Alternative minimum tax

The AMT was invented to ensure the wealthy paid enough tax. Problem: Because of inflation, middle-class filers were affected. That’s now been fixed.

Unchanged, the tax could have hit earners with income as low as $70,000 in 2013, according to the Tax Policy Center. Calculating its effect is complicated, but now that the AMT has been patched, it will affect about 4 million households — instead of 30 million.

Total extra taxes

Includes items not shown above, such as tuition credits and other adjustments

$41,461

$5,975

$1,380

Figures are based on Tax Policy Center assumptions on charitable giving, medical costs, and other items

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