Beware Of The Backdoor Tax Increase In 2013

By Steve Barlotta, CPA

In my last blog I detailed the                                                                                                    bill in Congress that was signed by the President to avert the so-called fiscal cliff. The strangely named American Taxpayer Relief Act will actually increase taxes on all workers through the expiration of the two-percentage-point cut in the employee portion of the Social Security tax. Also, as I explained, the top tax bracket will increase from 35% to 39.6% for individuals with at least $400,000 of taxable income or married couples with at least $450,000.

But, that’s not the whole story here. Included in this act are some less transparent tax increases that could significantly impact high-income taxpayers starting this year. Two of these “backdoor” tax increases are the phaseout of the personal exemption and the limitation of itemized deductions.

The personal exemption would phase out for couples with $300,000 or more of adjusted gross income, or singles with $250,000. The exemption gets phased out completely for married taxpayers at $422,500 of adjusted gross income, and $372,500 for single taxpayers. The personal exemption for 2013 is expected to be $3,900. So, to put this in perspective, a couple with three children could lose as much as $19,500 of their exemption.

The itemized deduction limitation, called the “Pease” provision, is more complex and it includes all itemized deductions including mortgage interest and charitable contributions. Under the provision, married taxpayers with $300,000 or more of adjusted gross income, or singles with $250,000 or more, could lose as much as 80% of their itemized deductions. Experts say this phaseout could add one percentage point to an individual’s effective tax rate, including the top rate on capital gains.

So if you think you dodged the higher rates because your taxable income is below $450,000 of $400,000, you need to look at these backdoor taxes more closely because their impact for 2013 and beyond could be substantial.

Source: The Wall Street Journal, How Much Will Your Taxes Jump?, Laura Saunders, January 4, 2013.

Source Image: usawatchdog.com