Congress passed a tax bill late on January 1, 2013. Therefore, I have added some UPDATES to my original article on the "fiscal cliff" shown below. For a nice summary of the tax provisions in the new act, please read this recent Client Tax Newsletter from the California Society of Enrolled Agents.
ORIGINAL ARTICLE POSTED ON 11/20/2012:
I cannot begin to explain all of the possible ramifications of the so-called Fiscal Cliff which is meant to force lawmakers to do something about the federal budget deficit. Automatic spending cuts and tax increases are scheduled to take place if January 1, 2013 arrives without Congress and the President having agreed to an alternative plan. It's possible that if we do go over the cliff, Congress will quickly pass legislation retroactive to the first of the year and the damage will be minor. No one really knows. I certainly don't. On the other hand, the uncertainty is a real concern for our economy (both household and national). With so much up in the air, the coming tax season is also likely to be affected. The IRS may have to delay the start of the filing season if tax rates remain unclear for much longer.
This article lists a few of the specifics regarding the looming tax increases.
UPDATE: The payroll tax cut was not extended. Employees are back to paying 6.2% of wages for social security taxes.
For 2011 and 2012, payroll taxes were cut in order to help stimulate the economy. If the rates revert to normal in 2013, the social security taxes withheld from your paycheck will go up by 2%. Normally, both the employee and employer pay a 6.2% social security tax, but currently employees are paying only 4.2%.
UPDATE: Self-employment tax has gone back up to 14.13%*.
Of more interest to child care providers is the self-employment tax. Self-employed individuals pay self-employment tax on their business profit (reported on Schedule C) to cover social security and Medicare taxes.
As a result of the payroll tax cut, the self-employment tax was reduced to 12.28%* and will revert to 14.13%* if the payroll tax cut expires in 2013.
*These SE tax percentages are a little odd. This is because of the way they are calculated on Schedule SE: 13.3% x 92.35% = 12.28%; 15.3% x 92.35% = 14.13%.
UPDATE: Income tax rates were raised on individuals making above $400,000 and on couples making above $450,000.
Income tax rates will rise in 2013 if the Bush-era tax cuts are not extended. This will affect all taxpayers, unless the president gets what he wants, which is a bill that spares families with incomes of $250,000 or less.
I had to go way back to the early 2000's to find the higher tax rates that could come back. In 2001, the lowest income tax rate was 15% and the highest was 39.1%. Currently, the lowest rate is 10% and the highest rate is 35%.
ALTERNATIVE MINIMUM TAX
UPDATE: Super good news here! The best thing about the fiscal cliff tax bill is that they PERMANENTLY patched the Alternative Minimum Tax by indexing it for inflation.
So far everything I've covered affects taxes for 2013 and future years. One thing that affects 2012 is the Alternative Minimum Tax (AMT).
The Alternative Minimum Tax will affect many middle class taxpayers for this year, unless Congress acts to limit its effect. Passing the annual "AMT patch" has pretty much become a Christmas tradition in Washington, D.C. Now that it's tied up with the Fiscal Cliff issues, however, I don't know what to expect.
Last updated 22 January 2013
Posted on 2012-11-21 05:45:14