2013 Tax Rates and Brackets, Standard Deduction and Personal Exemptions Updated in Federal IRS Tax Table

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[Updated with 2013 IRS inflation adjusted tax brackets and fiscal cliff changesCongress and the Obama administration’s fiscal cliff deal (ATRA act) means that 2013 federal tax rates will remain fixed for nearly 99% of the population. Only those earning above $450,000/$400,000 (married/single) AGI will have a higher federal marginal tax rate in 2013, relative to 2012 levels. Below is the official IRS tax table with 2013 tax rates and inflation adjusted tax brackets, reflecting a slight increase over last year.

2013 Federal IRS Tax TablesWith all the tax changes resulting from the fiscal cliff legislation and especially because of the payroll tax credit expiry, the Tax Policy Center estimated around 77% of American households would see a tax increase in 2013 compared to their 2012 tax levels. Here are some other tax impacts you will see this year.

  • The top income tax rate to rise to 39.6% from 35% for couples making more than $450,000 (singles making more than $400,000). The threshold for the top tax rate was raised significantly from the the $250,000/$200,000 originally proposed by President Obama.
  • Personal exemption and standard deduction rose marginally over 2012 levels, in line with standard inflation adjustments.
  • Those in the higher income/wealthy threshold – $450,000/$400,000 – would also see taxes on investment income (long term capital gains, dividends) rise to 20% from 15%. This does not inclue the Obama-care (health care) related taxes on investment income for higher income earners.
  • Personal exemptions and itemized deductions limitations that existed in the Clinton-era would also be reinstated for couples making more than $300,000 (singles making more than $250,000). It also raises the estate tax top rate to 40% from 35%.

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[Updated following the re-election of Barack Obama]  What will happen to tax rates in 2013? This is a question that will become a central focus for American tax payers now that the Presidential  election is over. With the Obama-Bush tax cut extensions on income, capital-gains and estate taxes set to expire on Dec. 31 2012, there will be a sharp rise in tax rates for investors and those in higher income brackets during 2013 if these tax breaks are not extended (being referred to as “taxmageddon”). As the first table shows, the top tax rate will return to 39.6%. Long term capital gains would be taxed at 20%, while dividends and short term capital gains would be taxed as ordinary income. Potential 2013 Tax Rates and BracketsThis excludes the new investment tax, enacted under President Obama’s health care reform act (“Obamacare”), of 3.8% applicable to higher income earners.

Will 2012 tax rates be extended? In his latest budget proposal and per the official campaign policy, President Obama reiterated that he will not be extending the Bush-era tax cuts that benefit higher income earners (earnings > $250,000). The lapsing of the tax cuts will slash about $4 trillion from the deficit, but will raise effective tax rates for over 20 million American families and small business’. The administration contends that middle class Americans will be unaffected.

2013 Tax Rates and Brackets Obama vs RomneyOn the other hand, Republican candidate Mitt Romney has vowed to extend the 2012 tax rates across all income brackets, with a view to making them permanent.

Other tax changes in 2013

President Obama’s healthcare reform will also mean two new taxes (classified as Unearned Income Medicare Contribution Taxes) in 2013. The first is an additional 0.9% levy on top of the 2.9% Medicare tax for those earning more than $200,000, and a new 2.9% surcharge on investment income, including interest income.

Payroll Tax Credit Expiry. A temporary 2% cut in Americans’ payroll taxes, effective in 2011 and 2012, is also likely to expire on December 31st. [See how this will hit your paycheck via this payroll tax credit table]. The payroll tax break or credit dropped an employees payroll withholding rate for social security taxes to 4.2 percent from 6.2 percent, resulting in a potential after tax saving of up to $2000, and affected about 160 million Americans who had an earned income source.

Estate and gift tax exemption increases will also end in 2013. 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%.

The administration and many law makers are also proposing that investment income for those earning over $1 million be taxed at an average rate of 30% (known as the Buffett-rule proposal).

While there is time to extend federal income tax rates, it is unlikely a lame duck Congress (the new Congress is sworn in on Jan 20th) will make any major tax reform changes. This gives rise to three potential scenarios over the next few months:

- All the tax cuts will expire if the Obama administration and Congress fail to reach an agreement before December 31. In this case, the new Congress and Obama administration could act early next year to reinstate some of or all the tax cuts. But this means chaos early next year and a  potentially smaller paycheck for a few months in 2013.

- Band aid solution where the tax cuts are extended temporarily for 6 months or so, giving Congress time to act on a permanent solution—possibly by reforming the tax code. However all this will do is to put us back in the same situation as we are in today, just at a later date.

- Some type of compromise could be reached in the lame duck congressional session, with some taxes extended for lower income earners and others allowed to expire.

In any event, the above changes make tax planning to minimize taxes even more important. For example, take income or capital gains in 2012 prior to the 2013 tax increases. Another strategy would be converting a traditional IRA to a Roth IRA, on which you pay taxes now but none at withdrawal when tax rates are higher.

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{ 7 comments… read them below or add one }

Kelly Marlowe December 27, 2012 at 8:52 am

Familys already struggling to put food on the table. Forgoeing those cherished memories together for the sake of “working longer hours.” With all do respect we don’t need to fork out anymore than we have to. Gas, Groceries, Medical bills ect.. We all have problems the point is, we don’t need anymore.

Reply

Aamay September 8, 2012 at 6:57 pm

You are not really serious are you .
What you are say this is ridicules .
They can,t change the law.

Reply

Andy (Author) October 7, 2012 at 7:47 pm

That is the job of Congress! The above changes are very serious indeed and will affect ALL Americans directly or indirectly in some fashion.

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Mike August 23, 2012 at 12:05 pm

If Congress extends the current income tax rates only for taxpayers earning less than $250,000 as recommend by the president, will dividends and capital gains continue to be taxed at 15 percent for those taxpayers in the under-$250,000 bracket?”

Reply

Jeff August 23, 2012 at 12:05 pm

The president’s proposal would leave the tax rate on long-term capital gains and qualified dividends the same as this year for those with incomes below $200,000 single or $250,000 married filing jointly, says Roberton Williams, a senior fellow with the Tax Policy Center.

Under this scenario, those in the 10 and 15 percent brackets would continue to pay no tax on long-term gains and dividends. For those who are in brackets above 15 percent “but not rich by Obama’s standards,” the rate would remain at 15 percent, he says.

“If they are in Obama’s realm of rich, long-term capital gains would go to 20 percent and dividends would be taxed at ordinary income tax rates up to 39.6 percent,” Williams adds.

Under permanent law i.e. before the Bush tax cuts, dividends were not given a preferential rate like capital gains; they were taxed like ordinary income from a job.

GOP presidential candidate Mitt Romney says he would extend all of the Bush tax cuts, which means this year’s dividend and long-term capital gains rates would remain, with one exception. He would eliminate tax on all investment income – including dividends, capital gains and interest – for couples with income under $200,000, singles under $100,000 and heads of household under $150,000.

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Donald March 13, 2012 at 8:54 am

I simply do not believe that you can count on not paying taxes on your Roth IRA withdrawals especially if you are not planning to retire in the next year or two. I think that investment gains will be taxed to some degree in particular for people with higher incomes. This is why I stick with a Traditional IRA: a bird in the hand is worth two in the bush.

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Ron March 11, 2012 at 8:26 pm

Myth: … will slash $4 trillion …
Reality: Those guys will spend it. Guaranteed.

Reply

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