Some things to be aware of, should Congress not change the tax laws before December 31.
Income tax rates will increase across the board. The lowest rate will go from 10% to 15%. The highest rate will move to 39.6% from 35%. All other rates will also go up.
The capital gains tax rate will go back to 20%, up from 15%. Dividends will once again be taxed like ordinary income (between 15 and 39.6%, depending on your marginal tax rate).
For higher income earners, there will be limitations on itemized deductions (mortgage interest, state income tax, property tax, charitable deductions, etc). There will also be a phase out on personal exemptions for higher income earners.
The Patient Protection and Affordable Care Act brings two new taxes. The first is a 0.9% Medicare surtax for earned income in excess of $200,000 for single taxpayers and $250,000 for married taxpayers. There will also be a new 3.8% Medicare surtax on unearned income (dividends, interest, capital gains, annuity income, royalties, and rental income), again for those in the $200,000+ (single) or $250,000+ (married) income levels.
One other notable PPACA effect: deductions for out-of-pocket medical expenses are allowed when they are greater than 10% of your adjusted gross income (currently this is set at 7.5% of AGI).
Finally, the estate tax exemption will go down to slightly more than $1 million per individual (from the current $5.12 million), and the tax rate on estates in excess of $1 million will be 55% (up from 35%). Keep in mind that your estate is comprised of any real estate you own, your retirement accounts, life insurance that is held in your name, investment account, bank accounts, automobiles, and more. You may be over the $1 million limit without even realizing it.
Now might be an excellent time to begin working on an estate plan, if you haven’t got one. If you’ve made a will and an estate plan in the past, now is also an excellent time to review that plan and make sure it still accomplishes your goals.
(thanks to Stephanie Buckley at Pepperdine for her summary of the upcoming tax changes, from which I drew these notes)