The tax filing season will shortly be upon us and the question on every business owners mind is will I have to pay more or less taxes this year? The simple answer is a tax rate increase, the first one in 20 years was approved, but many of us here in the Wenatchee Valley will not but adversely impacted by the higher rate, but we will, and probably already have, felt the impact of the expiration of the 2% FICA holiday.
The payroll tax “increase” that everyone is buzzing about really isn’t an increase as much as an expiration of a 2% holiday. The official rate has long been 6.2% of your gross pay (up to $110,100 of income each year) for Social Security plus another 1.45% for Medicare. Over the past two years, the government reduced the employees 6.2% Social Security deduction to 4.2%. The 2% holiday on Social Security tax has simply ended. In addition, with the start of the Patient Protection and Affordable Care Act (often referred to as Obama Care), individuals who make more than $200,000, the Medicare tax will increase to 2.35% (from 1.45%). The impact of the double whammy, for those making in excess of $200,000 (or $250,000 for married couples filing) will definitely be noticed.
There is much better news on the income tax front, unless you have a household income of $1 million or more, where 90% of the scheduled tax increases will impact you. The new rules keep tax rates low on middle class, up to $400,000 married filing joint, with permanent extension of the lower tax brackets for individual tax payers (10%, 15%, 25%, 28% 33% and 35%). Taxpayers that make above $400,000 will see tax rates increase up to 39.6% from 35% $450,000 for married filing jointly and $225,000 for married filing separate). Taxes on capital gains and qualified dividends will continue to be taxed at 15% for most taxpayers with taxable incomes below $400,000. Taxpayers who are subject to the 39.6% rate on regular income will be subject to a 20% rate. Since this income will also be subject to the Medicare surtax (3.8%), the income will effectively be taxed at 23.8%.
Obama Care means that there is a 3.8% Medicare Surtax on Investment Income such as Interest, Dividends, Cap Gains less Capital Losses and Rental Income less Rental Expenses calculated on investment income or modified AGI that exceeds $250,000 for married couples. As anticipated, there are increased deductions and limitations for Section 179 expenses and personal exemption phase out (PEP) is coming back.
Overall, the new tax landscape remains largely unchanged for middle class Americans and much more complicated for higher earners despite the Alternative Minimum Tax rules being rewritten. Below is a chart that encapsulates the overall impact of the changes. Tax forms are not yet finalized due to the tardiness of decision making this year, and filings will not be accepted prior to January 30th for most individuals. However, if you have residential energy credits, depreciation, amortization or general business credits you will not be able to file until February or March.
If, you have any questions about your tax filings, please feel free to contact, Tricia McCullough, Owner of Augustedge PLLC - CPA, EA, CMA, Financial Planner at 509-494-8500.