More Tax Changes on the Horizon

Tax laws set to change at the end of the year when the Bush tax cuts expire, leading to increased taxes on qualified dividends and other modifications

 

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In part one of this series, I outlined the expiration of the current capital gain tax rates and some of the options if Congress does nothing when the tax cuts expire. There is another twist to the capital gains tax increase, and that is the tax on qualified dividends.

Qualified dividends have enjoyed the same tax rate of 15 percent as long-term capital gains, which also expires Dec. 31, 2012. However, if Congress does nothing, the long-term capital rates will increase to 20 percent but the qualifying dividends will be taxed at the ordinary income tax rates, which are currently scheduled to revert to the old law rates which will include a top tax bracket of 39.6 percent! They will no longer receive a preferential tax rate. Some corporations are considering declaring a special dividend to their shareholders. If you qualify you may want to talk to your tax advisor to see if it makes sense for you.

As for the individual tax rates, when the Bush tax cuts expire at the end of this year, the current marginal tax rates of 10, 15, 25, 28, 33 and 35 percent will be replaced by 15, 28, 31, 36 and 39.6 percent. Not only will the tax rates leap for both the top and lower income taxpayers but keep in mind that the 2 percent payroll tax cut will also expire.

Now add to the mix the Patient Protection and Affordable Care Act (PPACA) and the Health Care and Education Reconciliation Act of 2010 and you have a whole host of other individual and business tax provisions. The PPACA is currently being debated by the Supreme Court and we should have a decision in June. However, should PPACA stand, 2013 will see a 0.9 percent increase in Medicare tax on higher-end individuals as well as a 3.8 percent Medicare contribution tax on unearned income. That is the tip of the iceberg. Once the Supreme Court makes its decision, we will have to examine all of the other provisions that could directly impact you.