You may not realize it, but your take-home pay is going to decrease significantly on January 1, 2013. In fact, some are already referring to 2013 as “Taxmageddon.”
According to the New York Times, new tax laws will hit the middle class especially hard, reducing “after-tax income for the median household” to 1998 levels (adjusting for inflation).
Unless Congress acts to pass changes in the tax law before this date arrives, all wage earners, as well as self-employed individuals and independent contractors, will be hit hard in multiple ways by these changes. Understanding what these tax changes are and how they may affect you will help you to plan and budget accordingly for the coming year.
New Tax Laws for 2013
1. Federal Insurance Contributions Act (FICA) and Medicare
If you are a salaried or hourly employee, your employer deducts FICA and Medicare withholdings from each of your paychecks. The FICA withholding rate is currently 4.2 percent for the first $110,100 earned per taxpayer for 2012. This figure will increase up to 6.2 percent for 2013.
Furthermore, it is anticipated that it will be applied to the first $112,500 earned per taxpayer. The Medicare withholding rate is currently at 1.45 percent, and this will increase to 2.35 percent for 2013.* There is not an income limit in place for Medicare taxes. This means you can expect the U.S. government to take an additional $3,403 in FICA and Medicare taxes from you in 2013 for the first $112,500 you earn, which equates almost to $300 per month.
It should be noted that self-employed individuals are not exempt from this tax increase. This is because these changes will result in changes to the self-employment tax that all independent contractors and self-employed individuals are responsible for.
In addition to the changes associated with FICA and Medicare for 2013, there are also a number of key changes regarding tax deductions and exemptions that will affect millions of U.S. taxpayers.
2. Personal Exemption and Itemized Deductions
3. Qualifying for Medical and Dental Expense Deductible
It will become harder to qualify for the medical and dental expense deductible in 2013. Currently, taxpayers are permitted to deduct qualified medical and dental expenses that exceed 7.5 percent of their adjusted gross income.
In 2013, only those who are age 65 and older will enjoy the 7.5 percent AGI limit. Those under age 65 will only be allowed to deduct medical and dental expenses that exceed 10 percent of their adjusted gross income.
4. Dependent Care and Child Credits
Dependent care tax credits will decrease from $3,000 to $2,400 in 2013. The childcare credit will decrease from $1,000 to $500 per child. Furthermore, the childcare credit will not be permitted for calculation with the alternative minimum tax, and there will be a phase out on earned income tax credits based on the number of qualifying children.
5. Students Loans
Adjustments to the student loan interest deduction will go into effect in 2013. According to About.com there will be a 60 month phase out period, and the amount of the student loan interest deduction will be limited for those who earn $50,000 or more in adjusted gross income as an individual filer, or $75,000 or more in AGI as a married couple filing jointly.
These are some of the most significant changes that are planned for the 2013 tax year. It is important to understand how these changes will affect your paycheck. This can help you to plan your monthly budget for changes to your take-home pay, and it can help you to make adjustments to your withholdings so that you avoid having a huge tax liability at the end of the 2013 tax year.
Ryan Devereux, a freelance financial blogger, believes in understanding the facts before making any financial decisions, from tax planning to choosing a career.
*11/14/12 Update: The original version of this article did not specify that the increase in Medicare taxes applies to taxpayers who earn an excess of $200,000 annually, or $250,000 if married and filing jointly.