Tax forecast for 2013: Uncertainty
A number of major tax breaks expire at the end of the year. With an election looming, it's hard to know whether any will be extended.
This post is by Laura Saunders of The Wall Street Journal.
Tax planning is seldom simple, but lately it has been next to impossible. At year's end, a host of temporary provisions expire, and lawmakers have put forth radically different proposals for what to do next. Throw in an election year, and predictions become all the more difficult.
For the confused, here is what is clear (not much) and unclear (a great deal) about tax rates in 2013, plus expert guesses about what will actually happen.
Rates on 'ordinary' income
The current rates expire at year-end. The top rate of 35% will rise to 39.6%, and millions of poor and middle-income taxpayers removed from the tax rolls by the "Bush tax cuts" of 2001-3 will again owe income taxes. (Post continues below video.)
A limit on itemized deductions adding up to 1.2 percentage points to the tax rate will return as well.
Next year also brings a new 0.9% Medicare tax on wages for most joint filers with adjusted gross income above $250,000 ($200,000 for single filers). The tax will apply to the income above the threshold, not below.
President Obama's budget seeks to retain current tax rates for people in lower brackets and let them expire for most joint filers with adjusted gross incomes of more than $250,000 ($200,000 single). It also would cap the value of itemized deductions for people in higher brackets.
Obama's budget also calls for replacing the alternative minimum tax, which imposes extra tax on people with big deductions, with a different levy. Known as the "Buffett rule," because billionaire Warren Buffett has famously noted that his tax rate is lower than that of his secretary, the proposal would subject people making more than $l million to an average tax rate of no less than 30%.
The president's budget offered no projections on how much the new tax would collect or details on how it would work.
Lawmakers in the House and Senate each have their own version of a tax based on the Buffett rule, called the "Pay a Fair Share Act," with the same 30% and $1 million thresholds.
According to Roberton Williams of the nonpartisan Tax Policy Center, Congress's version would raise $20 billion in 2015 from 116,000 taxpayers -- assuming no one changed behavior, which many would. By contrast, the AMT has been raising some $40 billion a year from 4 million taxpayers.
Rates on investment income
The current investment-tax rates also expire at the end of this year. The top 15% rate on long-term capital gains (those held over a year) will rise to 20%, and the current 0 rate for those in the bottom two tax brackets will rise to 10%.
Qualified dividends will again be taxed as ordinary income, with a top rate of 39.6%.
In 2013 a new 3.8% tax on investment income debuts for most joint filers with adjusted gross income above $250,000 ($200,000, single).
It covers capital gains, dividends, rents and royalties, among other things. It doesn't apply to gains from home sales unless the gains exceed the cap of $250,000 (for single filers) or $500,000 (joint filers).
Obama favors letting the top 15% rate on capital gains rise to 20%. New this year is a proposal to tax dividends like ordinary income for those with adjusted gross income above $250,000 ($200,000 for single filers).
In addition, both he and the lawmakers sponsoring the Buffett-rule proposal would like to see investment income taxed at an average rate of 30% for people earning more than $1 million.
Estate and gift taxes
The current rules expire at year-end. The $5 million-per-individual estate-tax exemption will drop to $1 million, and the top estate-tax rate will rise from 35% to 55% for most and 60% for some. The gift-tax exemption will fall to $1 million and the rate will rise to 55%.
Obama wants to return these taxes to 2009 levels. That would mean an estate-tax exemption of $3.5 million and a gift-tax exemption of $1 million. The top rate for both would be 45%.
The bottom line
It is an election year and much depends on what happens Nov. 6. Most tax experts believe Congress won't address tax rates before the election -- although legislation is notoriously unpredictable. All the proposals mentioned above, plus others, are in play.
After Nov. 6, the current Congress might pass another temporary extension, as happened in late 2010, says Clint Stretch, a principal at Deloitte Tax in Washington: "A straight extension of the current system will be the path of least resistance, especially if it comes with a promise of tax reform in 2013."
On the other hand, says Michael Graetz, a former top Treasury official now teaching at Columbia University's Law School, the election results could mean that "for 'millionaires and billionaires' with more than $250,000 of income, there may be a substantial tax increase."
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