No matter which political party you support this election as it stands now everyone who works will be hit with a huge tax increase come January 1, 2013. The rich will pay more taxes but so will everyone pay more taxes. Those who are married and have families will see their tax dollars increase because the “marriage penalty” will return on January 1, 2013. Those who have dependent children under the age of 17 will see their taxes increase because the child tax credit will be chopped in half – from $1,000 per child to $500.
Capital gains tax will rise to 23.8 percent from 15 percent so your $100 in dividends just cost you another $8.80 in federal taxes. If you happen to be a parent or guardian of a special needs child, consider yourself capped. Your unlimited FSAs are now limited to $2,500. If part of that means high medical expenses, you’ve been allowed to deduct expenses that exceed 7.5 percent of your adjusted gross income (AGI). In 2013 your new threshold will be 10 percent of AGI.
Sequestration and the Washington DC Metro area
Stephen Fuller of George Mason University predicts sequestration would cause a $215 billion hit to the nation’s gross domestic product. The impact would be $12.8 billion in D.C., $11.5 billion in Maryland and $20.9 billion in Virginia.
Sequestration, along with the expiration of tax cuts and other provisions, is expected to cause a recession in the first half of 2013, which some have likened to falling off the nation’s “fiscal cliff.”
Many of the largest nondefense discretionary programs run by civilian agencies divvy up funds to state and local government through federal grants that support such things as health care, education and child care services. Cuts would mean fewer jobs and services for citizens and less spending with local businesses. According to the July Fuller report, sequestration’s cuts to nondefense spending alone would reduce the U.S. gross domestic product during fiscal years 2012-21 by $77.3 billion.
According to the Fuller report, nearly 2.15 million American jobs could be lost if the Budget Control Act’s sequestration mandate takes effect on Jan. 2. The total includes 746,222 job losses that come directly from the federal government and 468,959 from the contractor workforce. In this region, Virginia stands to lose 207,571 jobs and $10.63 billion in labor income by the end of fiscal 2013 — the biggest job loss next to California. The District is projected to lose 127,407 jobs, behind only California, Virginia and Texas. Maryland would see the fifth-highest loss: 114,795 jobs.
What this means for local Washington DC metro area residents is we have a sandwich disaster coming – Budget cuts on one end and tax hikes on the other which will put a lot of pressure on the Washington Metro area residents.
Here is a listing of all the changes that will occur in 2013 unless there is action by the President and Congress before January 1, 2013. It is very likely you will be paying more in taxes next year and this is why:
First Wave: Expiration of 2001 and 2003 Tax Relief
In 2001 and 2003, the GOP Congress enacted several tax cuts for small business owners, families, and investors (later re-upped by President Obama and Democrat Congress in 2010). The following tax hikes will occur on January 1, 2013:
Personal income tax rates will rise on January 1, 2013. The top income tax rate will rise from 35 to 39.6 percent (this is also the rate at which the majority of small business profits are taxed). The lowest rate will rise from 10 to 15 percent. All the rates in between will also rise. Itemized deductions and personal exemptions will again phase out, which has the same mathematical effect as higher marginal tax rates. The full list of marginal rate hikes is below:
-The 10{fb849818a88037ce04db040329570cd7308144680204f05386d4fa7bf5ad0081} bracket rises to a new and expanded 15{fb849818a88037ce04db040329570cd7308144680204f05386d4fa7bf5ad0081}
-The 25{fb849818a88037ce04db040329570cd7308144680204f05386d4fa7bf5ad0081} bracket rises to 28{fb849818a88037ce04db040329570cd7308144680204f05386d4fa7bf5ad0081}
-The 28{fb849818a88037ce04db040329570cd7308144680204f05386d4fa7bf5ad0081} bracket rises to 31{fb849818a88037ce04db040329570cd7308144680204f05386d4fa7bf5ad0081}
-The 33{fb849818a88037ce04db040329570cd7308144680204f05386d4fa7bf5ad0081} bracket rises to 36{fb849818a88037ce04db040329570cd7308144680204f05386d4fa7bf5ad0081}
-The 35{fb849818a88037ce04db040329570cd7308144680204f05386d4fa7bf5ad0081} bracket rises to 39.6{fb849818a88037ce04db040329570cd7308144680204f05386d4fa7bf5ad0081}
Higher taxes on marriage and family coming on January 1, 2013
As I stated earlier the “marriage penalty” (narrower tax brackets for married couples) will return from the first dollar of taxable income. The child tax credit will be cut in half from $1000 to $500 per child. The standard deduction will no longer be doubled for married couples relative to the single level.
Middle Class Death Tax returns on January 1, 2013. The death tax is currently 35{fb849818a88037ce04db040329570cd7308144680204f05386d4fa7bf5ad0081} with an exemption of $5 million ($10 million for married couples). For those dying on or after January 1 2013, there is a 55 percent top death tax rate on estates over $1 million. A person leaving behind two homes and a retirement account could easily pass along a death tax bill to their loved ones.
Higher tax rates on savers and investors on January 1, 2013. The capital gains tax will rise from 15 percent this year to 23.8 percent in 2013. The top dividends tax will rise from 15 percent this year to 43.4 percent in 2013 – that’s almost triple! This is because of scheduled rate hikes plus Obamacare’s investment surtax.
Second Wave: Obamacare Tax Hikes
There are twenty new or higher taxes in Affordable Care Act (also known as Obamacare). Some have already gone into effect . Several more will go into effect on January 1, 2013. They include:
– The ACA Medicare Payroll Tax Hike takes effect on January 1, 2013. The Medicare payroll tax is currently 2.9 percent on all wages and self-employment profits. Starting in 2013, wages and profits exceeding $200,000 ($250,000 in the case of married couples) will face a 3.8 percent rate.
– The ACA “Special Needs Kids Tax” comes online on January 1, 2013. This imposes a cap on FSAs of $2500 (now unlimited). This is indexed to inflation after 2013. There is one group of FSA owners for whom this new cap will be particularly cruel and onerous: parents of special needs children. There are thousands of families with special needs children in the United States, and many of them use FSAs to pay for special needs education. Tuition rates at one leading school that teaches special needs children in Washington, D.C. (National Child Research Center) can easily exceed id=”mce_marker”4,000 per year. Under tax rules, FSA dollars can be used to pay for this type of special needs education. This Obamacare cap harms these families.
– The ACA reduces the Medical Itemized Deductions in 2013. Currently, those facing high medical expenses are allowed a deduction for medical expenses to the extent that those expenses exceed 7.5 percent of AGI. The new provision imposes a threshold of 10 percent of AGI. This provision is waived for 65+ taxpayers in 2013-2016 only.
Read the rest of my TAXMAGEDDON Report next week, but in the meantime, you MUST watch my short webinar on this topic which explains how 2013 will mean more taxes for YOU and how you protect yourself from Uncle Sam. Watch it HERE
Here are some questions from my blog:
Question: What are the steps to move from an individual proprietor LLC to an S Corp? They need to be charging the business that is in their home for rent. They can’t do that under a LLC but can through the S Corp correct? Also, can they backdate that, or does it not start until the change of company happens?
Answer: Not sure what you mean by “business in their home” but if you are referring to home based business, then it does not matter what type of entity it is, you can get a deduction for the business use of home. However, there are other advantages to incorporating. I will refer you to my website and if you want a free consultation to discuss further, I will oblige. Read more HERE
Question: Currently I am just accounting for mileage for cars as I use them for the business, but I am using a lot of miles and am not accounting for any wear/tear. When is it good to consider purchasing a car or leasing a car for the business? Could the business buy one of the cars from me? If I did that, I no longer account for miles, correct? What is the {fb849818a88037ce04db040329570cd7308144680204f05386d4fa7bf5ad0081} of time that I can reasonably use a business car for personal miles (if at all). IE, could I ever drop off my kids at school in the business car? If I purchased or leased a business car I could then account for repairs/oil changes/tires, etc. for that car, correct? Could I be accounting for a {fb849818a88037ce04db040329570cd7308144680204f05386d4fa7bf5ad0081} of the repairs, etc. on each of my cars in alignment with the {fb849818a88037ce04db040329570cd7308144680204f05386d4fa7bf5ad0081} of time that I use them for business?
Answer: What you deduct as a business expense on the car solely depends on business use. It does not matter if it’s a personal car used for business or a business car used for business. Only business miles driven or percentage of business use can apply in both instances. There are two ways of determining the car expense – Actual or Miles. So it depends on which one gives you the better result. See IRS link for more details http://www.irs.gov/publications/p463/ch04.html#en_US_2011_publink100033921
