Your New 2013 Tax Rates

January 2nd, 2013 by 

Well, glad that Fiscal Cliff thing is over.  Seriously - we sweated a crisis that was created by politicians, that politicians are now happy they averted.  Consider that!

Dividend Cliff... Kind of Averted

Since most of you readers are also avid investors (check out our stock picks for 2013, and our solid S&P 500 beating performance from last year), you know one of the rates we were keeping a careful eye upon was the dividend rate.  You'll be happy to know that even though it went up, it remains the same as the capital gains tax rate.

Max Capital Gains Tax Rate (Federal): 23.8 % (20% base rate plus 3.8% in surcharges under the Patient Protection and Affordable Care Act investment surcharge)
Max Dividend Tax Rate (Federal):
23.8% (Same)

The 20% Base rate applies for households making over $450,000 and singles making over $400,000.  The 3.8% surcharge applies to households earning over $250,000 and singles making over $200,000.

So, averted?  Not quite - the top rate on investments is now 59% higher, and 19% higher than the rates under President Bill Clinton.  However, it remains to be seen how that will affect investment purchases.  Hopefully you took our year end tax tips?

Income Cliff... Mostly Averted

Another Stock Cliff Image!

Another Stock Cliff Image!

The income tax cliff? For every household making under $450,000 or single making under $400,000, you now have a marginal rate of 39.6%.  For everyone else?  Proceed 'normally', since your bracket is unchanged from the so called "Bush Rates" from 2001 and 2003.  This fiscal cliff deal locked those rates in permanently, so any increases on taxes from here on out will have to come from a vote.

Payroll Cliff... Hope Your Brought Your Parachute!

On the payroll cliff, we went cliff-diving.  For the last two years the "individual contribution" part of the Social Security tax was 4.2% instead of 6.2%, so you (and "your employer") were paying 13.3% instead of 15.3%.  The threshold has also increased - Social Security taxes are on the first $113,700 of income, up from $110,100.  So, if you made $113,700 in 2012 and make $113,700 in 2013?  You "paid" (your share, not your employer's) $6272.85 in 2012, and you'll pay $8698.05 in 2013, an increase of $2,425.20.

Or, call it $93.28 less a paycheck, if you get paid every two weeks.

State Taxes

Many states also jacked up tax rates in 2012.  California is the best known - we now have a top rate of 13.3%, for earners of $1,000,000+ in 2013.  Even with the deduction factored in, you're talking close to a 51% tax rate if a millionaire has short term capital gains (where the 3.8% surcharge applies) - an absurdly high number considering that capital losses are capped at $3,000.  That's right - your risk is only worth 49% if you guess correctly.

Maryland also increased tax rates (Virginia says thanks!), but 'only' to 5.75% for incomes over $250,000.  That seems downright quaint from my vantage-point here in CA, but since Maryland's 2007 tax hikes failed to raise revenue, look for further increases in that state in the next few years.

Okay, your turn.  Were the increases necessary?  Is the economy on solid enough footing to sustain a hike?  Will we see the revenue increases predicted?  Was $41 in tax increases for every $1 cuts a good deal in the fiscal cliff package?



PK started DQYDJ in 2009 to research and discuss finance and investing and help answer financial questions. He's expanded DQYDJ to build visualizations, calculators, and interactive tools.

PK lives in New Hampshire with his wife, kids, and dog.

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