New Year, New Taxes: What Matters to Families

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New taxes for New Year

Source: web

With the January finally here and the end of the unceasing talks about the fiscal cliffs and other looming government tax decisions, it’s finally time to start determining what really matters to families. How much are we paying in taxes this year and what has changed since last year for the average person?

Taxes Go Up: End of the Payroll Tax Holiday

The biggest change is one you’ve probably already noticed by now. You’re paying a bit more in taxes on every paycheck. The new rate most families will notice immediately is the end of the payroll tax holiday. For the last three years, your Social Security tax withholding rate was only 4.2 percent instead of the normal 6.2 percent. This slight reduction likely saved you between $1,000 and $2,000 in tax payments – up to $4,000 for a working family per year. That reduction left you with a bit more cash in hand every month.

Now the holiday is over and you’re seeing less in each paycheck. This was the least shocking change that happened throughout the discussions of the fiscal cliff, but many households are still surprised to see that despite political promises and the like they are now paying more taxes. This particular tax hit everyone in the country who pays into Social Security, and it’s going to take some families quite a bit of time to adjust to lower paychecks every two weeks.

Taxes Stay the Same – Mostly: Ordinary Income Rates Remain

If you make less than $400,000 ($450,000 if you’re married), you’re not affected by increased taxes on your ordinary income. The tax rates we’ve had for years have stayed the same, which means your income tax rate adjusting does not need to change and you don’t need to plan to pay more at tax time if you’re just working with a W-2 from your company and standard deductions.

The current tax rates range from 10% for the lowest incomes to 35%. The very top earners this year moved from 35% to 39.6%, however, so households making over $450,000 should plan to pay a bit more with income tax filing.

Taxes Go Up: Stocks and Dividends

Perhaps the most contested part of the new tax plan, the sale of stocks is now going to be taxed a bit differently. If you hold stocks or mutual funds and you make over $400,000 ($450,000 if you’re married), the capital gains tax you pay on the profits from selling stocks or mutual funds crept up from 15% to 20%. This affects only the highest earners (again), which leaves the average citizen paying the normal 15% tax on sales of stock.

In addition to the higher capital gains tax, there is a new surcharge tax tacked onto investment income as well. The surcharge is part of the new healthcare initiative, and a 3.8% tax is added to cover the expansion of Medicare. The Medicare rise has been expected for quite some time, but the new bump in capital gains taxes is a product of comprise and fierce debates in Washington over the Fiscal Cliff.

Taxes Go Up: Phasing Out Deductions

Normally when you file your taxes, you enter your income and then you can take the standard deduction for you and each dependent in the household. The standard deductions along with your itemized deductions cancel out your income to determine how much you still owe in taxes or how much you get back in terms of a refund.

Now there is a new element to the standard deductions. If you make more than $250,000 ($300,000 if you’re married), you’re going to lose some of your deductions. The more you make the less you can take as a deduction until some deductions are completely phased out. Naturally, without deductions to help offset some of your income, your tax rate is going to go up substantially and you’ll pay quite a bit more out of pocket on April 15th.

The Bottom Line: All Taxes Are Going Up

The writing was on the wall for a long time, no matter which political candidates you preferred or which spiel about protecting the middle class you listened to. Taxes are going to go up, and now they have. For the vast majority of us making less than $300,000, the only difference you’re going to see if in your paycheck. You won’t be paid quite as much every month since your employer is withholding more and sending it off to the Social Security coffers.

For those households making more than $300,000, things start to change pretty quickly and taxes go up considerably higher thanks to phasing out deductions, new surcharges and higher rates on capital gains. If you make more than $400,000, you’re hit with the highest taxes of all. It may take a bit of getting used to, but rest assured that your tax payments are paltry in comparison to some. In France, the government is trying to tax the top earners at a 75% tax rate!

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About Author

Rebecca holds advanced degrees in business and information science. She is a proud small business owner and balances her career with family and classroom instruction. She understands the real world of personal finance and how to make money work for you.


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CREDIT DAD is an independent, advertising-supported website. Many debit cards, credit cards and other financial offers that appear here are from companies from which CREDIT DAD Websites receive compensation. This compensation may impact how and where products appear on this website (including, for example, the order in which they appear). CREDIT DAD Websites do not include all card offers in the marketplace.