Although most of us start thinking about taxes during the weeks leading up to April 15, frantically gathering together coffee-stained receipts, misplaced envelopes and pay stubs, you really should be thinking about taxes right now. By December 31, 2012, this country will see one of the largest tax increases in history – affecting middle-income earners and the wealthy.
It is an election year, so anything is possible between now and November as President Obama seeks to position himself favorably to undecided, independent and middle class voters and a Republican-led Congress seek a referendum on the moribund economy. Yesterday, Obama announced plans to extend the current rates for those earning less than $250,000.
Barring any legislation by Congress to extend or modify the Bush-era tax cuts, this is what is going to happen when the clock strikes midnight on New Year’s Eve 2012:
Taxpayers with income over $388,350 will see their tax rates jump from 35 percent to 39.6 percent.
Taxpayers with income between $217,450 and $388,350 will go from 33 percent to 36 percent.
Taxpayers with income between $142,700 and $217,450 will climb from 28 percent to 31 percent.
Taxpayers with income between $70,700 and $142,700 will be spared – their tax rates will hold steady at a slightly less confiscatory 15 percent.
While much is reported about the coming income tax changes some of the most significant tax increases will hit dividend income and capital gains income.
Currently, the top dividend tax rate is 15 percent. In 2013, the top dividend tax rate will jump to 43.4 percent, including the 3.8 percent investment tax under the Affordable Care Act.
The top capital gains tax rate is currently 15 percent. In 2013, the top capital gains tax rate will climb to 23.8 percent, including the 3.8 percent investment tax under the Affordable Care Act.
Even death will not bring relief. The estate tax rate of 35 percent will return to 55 percent in 2013.
In the coming weeks, I am going to talk about what you should be doing right now to prepare for income tax Armageddon.