Five Huge 2013 Tax Law Changes That Will Impact Your Bank Account in a Big Way

Posted in Tax • October 21, 2012

tax law changesYou 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

Phasing out the $3,800 personal exemption for higher income taxpayers is one change to come about in 2013. The income level for the phase out has not been announced, but it is believed to be around $174,000 for single taxpayers and around $261,000 for taxpayers who file under the status of married filing jointly. The standard deduction for married couples who don’t itemize deductions will decrease from $11,900 currently to $9,900.

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.

Related: 10 Common Tax Deductions You Shouldn’t Miss

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.

See the Results of the Fiscal Cliff Tax Negotiations

Ryan Devereux, a freelance financial blogger, believes in understanding the facts before making any financial decisions, from tax planning to choosing a career.

See the references used in this article.

*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.

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We would love to hear your comments and feedback

  • 8

    Greece here we come!

  • Pam Rudd

    So, Kathryn York Zorning – you say everyone that does not have health care will pay a fine every single month you don’t have health care – Does this include the 20 year that has never worked, has 4 children, that me and every other tax payer is taking care of, but only files her taxes so she can get all the credits and get her refund check? I tired of paying for everyone else – these people need to stop having children and a law needs to be put in place to address that.

  • http://facebook ohn

    thank to all you obama supporters

  • paul

    these bush tax cuts expiration will bring
    in around 600-800 billion dollars over a
    ten year period. furthermore, we need to
    cut spending to balance the federal budgets too. The afghan war costed about
    one billion dollars monthly. the replacement cost of these military hardware
    will extremely high given the desert environment which they were operating right
    now. also, one of five veterans are coming back with PTSD. their caring cost
    will strain the pentagon budgets for years
    to come. all in all, it is a difficult
    situation regardless who is the president.
    we got in this situation ten years ago.
    we will not be able to get out tomorrow.
    world war 11 enabled this country to get
    out of the 1929 depression.

  • Yafit

    an average med insurance cost to business per person about
    5K-20K depending on the plan.
    Why would a business pay that much if they can get away with $2k penalty?
    How can a plan that cost $2k provide the same care as a plan that cost
    $5k-$20K?

    WHO ARE WE KIDDING?

    For the 10% of people that did not have insurance (5% chose not to have)
    They changed the Medical structure for 90% of the people !

    Where is the logic????

  • Colleen Murphy

    This is how it was before the Bush cuts that got us into this mess and now we have health care even if we have pre-existing. It has nothing to do with President Obama, they were due to expire. It was a temporary measure. I guess it’s sour grapes that the zillionaire super pacs couldn’t buy the election. I guess a lot you drank their Kool-aid. Luckily the independent thinkers won and didn’t get bought.

  • Jerry Black

    “Independent thinkers”, is that the new name for
    Socialist/Communist? Colleen, it is apparant that you don’t remember that “great” Dodd and Frank Housing Bill that was pushed through by these two Marxists back during the early years of the Bush Administration. President Bush warned Congress frequently that “Fanny May and Freddie Mac” was dangerous to our country because of forcing lending institutions to give home loans to people that could not afford them.
    Now do you remember what happened to the housing market? The housing markey collapse was caused by the Marxist Democrats in Bush’s administration.By the way, the Marxist Democrats
    controlled both the Senate and the House for the last two years of Bush’s Administration. I suppose you forgot about that too. Oh yes, one more thing, I spent many years in the U.S. Air Force fighting against communism in the 1950s,1960s and 1970s and you Democrat clowns have now allowed them to come through the “back door” and take our country and place a Marxist in as President! In my opinion, that is treason!

  • Bojangles

    Maybe Colleen Murphy doesn’t want to believe
    in facts. She would probably follow the
    Pied Piper.

  • Robert

    From a book written almost 200 years ago called “Democracy in America”:

    “A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world’s greatest civilizations has been 200 years.”
    ― Alexis de Tocqueville

    “The American Republic will endure, until politicians realize they can bribe the people with their own money.”
    ― Alexis de Tocqueville

  • Greg

    The people need to take the goverment back. And tell the people running Washington. To out get thenselfs a job and let the people run the goverment.

  • PD77

    to yafit, the reason companys like mine will not drop insurance is because thier contribution is tax deductable if the pay the tax (fine) it is not and they would actually lose money

  • Starr1sg

    I see so many people that disagree with Obama, everywhere is anti Obama or Pro Romney. It still continues, the onlly people routing for Obama is the News Media, the welfare receipients and illigeal immagrants. I truly don’t understand how he got so many votes. If I didn’t know better, I’d think the voting counting was rigged.

  • Jules

    Did we forget about the Electorial College, the voting in Alaska had not even been completed and all votes were not counted, when it was announced that Obama was re-elected.Can we all agree, that apparently the people of these electorial States are all unemployed, on welfare and probably do not even have the right to vote. On another note, please get your fats straight, it is not called a fine for not having insurance coverage, YOUR PRESIDENT AND HIS CROONIES call it a TAX. So KYZ, please read the bill your own damn self, before you start quoting the PORK STUFFED OBAMA CARE CRAP!!! Please read it, it is so full of PORK, that it does not cover but maybe 1/16th of Health care the rest is PORK!!!

  • So Tired of The Drama

    Cant believe we are still insulting people for their right to vote. I AM NOT on Welfare, I AM NOT RECIEVING goverment sub. I HAVE MY OWN BUSINESS while being a AT-HOME-MOM. MY HUSBAND IS A REPUBLICAN and he didnt vote for PRESIDENT OBAMA the first time but DID VOTE FOR HIM this time. I VOTED FOR HIM BOTH TIMES. We are part of the middle class!!!!! NOW WHAT IS LEFT FOR YOU TO INSULT!!!! NOTHING .. WE ARE A HARD WORKING WHITE MIDDLE CLASS HOUSE HOLD THAT VOTED FOR OBAMA AND WE PAY TAXES!!!! Enough with the insults just do something each day YOURSELF to make this country right!

  • poor working stiff

    This nation is in major trouble and giving non working Americans welfare checks is not the answer to making it better. This country has become dependent on the government and soon many more will say if you can’t beat them than join them and then we as a nation is truly sc%&#ed.

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