Finally at the end of 2012 Congress saved us all from falling off the Fiscal Cliff by making some decisions. Now, we’ll start to see what their decisions do to our income taxes and payroll taxes.
Tax Changes in 2013
- Tax Rates. Next time you estimate your taxes, you might notice some changes on your IRS tax table. The tax brackets have shifted, and there’s a new one at the top: 39.6%. But unless you make $400,000 or more this rate won’t be on your tax table.
- Person Exemption Phaseout. This will affect individual taxpayers making $250,000 or more. They will see that they won’t be getting the entire $3,900 for themselves and dependents, only partial amounts. Affecting only the well off: personal exemption will entirely disappear for individuals making over $372,500. This can drastically alter the taxable income, which of course in turn affects which IRS tax table the taxpayer fits into. Move through enough tables and you slide into a whole new tax bracket if you were on the boundary to begin with.
- Employee’s Social Security Taxes. Also affecting which IRS tax table you fit into will be how much you pay in social security taxes. There will be a two percent jump for working taxpayers.
- Itemized Deductions. Also affecting those making $250,000 or more, the Pease provision will limit itemized deductions. LOTS of them. From charitable donations to the mortgage interest deduction, they are disappearing for taxpayers at this level of income.
Why Tax Estimators Won’t Work
The IRS hasn’t even released the 2013 tax brackets yet- so it’s kind of impossible to see what the new tax laws are going to do to your 2012 income tax return. Why?
Because basically what a tax calculator does is to
- start with your annual income including your interest and dividend income
- subtract deductions
- subtract exemptions (like the personal exemption mentioned above)
- arrive at your Adjusted Gross Income (AGI)
- subtract the amount of any tax credits you have
- take the resulting amount and look it up on the correct IRS tax table
That last step requires some explanation. The IRS tax tables are pages and pages of income spreadsheets, where you can find your taxable income, read across the line to the column that represents your tax filing status (individual, married, Married filing jointly, or head of household) and that will be the amount of tax you owe the IRS that year. Here’s a look at an IRS tax table from a prior year.
But these IRS tax tables haven’t been published yet for 2013 so there’s no way you can yet estimate your income tax.