Your New 2013 Tax Rates

Well, glad that Fiscal Cliff thing is over.  Seriously – we sweated a crisis that was created by politicians, that politicians are now happy they averted.  Consider that!

Dividend Cliff… Kind of Averted

Since most of you readers are also avid investors (check out our stock picks for 2013, and our solid S&P 500 beating performance from last year), you know one of the rates we were keeping a careful eye upon was the dividend rate.  You’ll be happy to know that even though it went up, it remains the same as the capital gains tax rate.

Max Capital Gains Tax Rate (Federal): 23.8 % (20% base rate plus 3.8% in surcharges under the Patient Protection and Affordable Care Act investment surcharge)
Max Dividend Tax Rate (Federal):
23.8% (Same)

The 20% Base rate applies for households making over $450,000 and singles making over $400,000.  The 3.8% surcharge applies to households earning over $250,000 and singles making over $200,000.

So, averted?  Not quite – the top rate on investments is now 59% higher, and 19% higher than the rates under President Bill Clinton.  However, it remains to be seen how that will affect investment purchases.  Hopefully you took our year end tax tips?

Income Cliff… Mostly Averted

Another Stock Cliff Image!

Another Stock Cliff Image!

The income tax cliff? For every household making under $450,000 or single making under $400,000, you now have a marginal rate of 39.6%.  For everyone else?  Proceed ‘normally’, since your bracket is unchanged from the so called “Bush Rates” from 2001 and 2003.  This fiscal cliff deal locked those rates in permanently, so any increases on taxes from here on out will have to come from a vote.

Payroll Cliff… Hope Your Brought Your Parachute!

On the payroll cliff, we went cliff-diving.  For the last two years the “individual contribution” part of the Social Security tax was 4.2% instead of 6.2%, so you (and “your employer”) were paying 13.3% instead of 15.3%.  The threshold has also increased – Social Security taxes are on the first $113,700 of income, up from $110,100.  So, if you made $113,700 in 2012 and make $113,700 in 2013?  You “paid” (your share, not your employer’s) $6272.85 in 2012, and you’ll pay $8698.05 in 2013, an increase of $2,425.20.

Or, call it $93.28 less a paycheck, if you get paid every two weeks.

State Taxes

Many states also jacked up tax rates in 2012.  California is the best known – we now have a top rate of 13.3%, for earners of $1,000,000+ in 2013.  Even with the deduction factored in, you’re talking close to a 51% tax rate if a millionaire has short term capital gains (where the 3.8% surcharge applies) – an absurdly high number considering that capital losses are capped at $3,000.  That’s right – your risk is only worth 49% if you guess correctly.

Maryland also increased tax rates (Virginia says thanks!), but ‘only’ to 5.75% for incomes over $250,000.  That seems downright quaint from my vantage-point here in CA, but since Maryland’s 2007 tax hikes failed to raise revenue, look for further increases in that state in the next few years.

Okay, your turn.  Were the increases necessary?  Is the economy on solid enough footing to sustain a hike?  Will we see the revenue increases predicted?  Was $41 in tax increases for every $1 cuts a good deal in the fiscal cliff package?

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  1. AvgJoeMoney says

    I’m disappointed that we kicked the expense can down the road another 60 days. I think until the filibuster rule is changed, we’ll see nothing from the next Congress either….

    • says

      Ha, I stand 180 from Howard Schultz and the deadlock crew. If I had a few billion I would organize a counter protest – where as long as there is gridlock I’d continue to give money to politicians.

      The way I see it? More gridlock, less laws. Of course, we don’t have true gridlock right now… we’ve got gridlock on taxes and spending, but both sides are 100% in agreement on personal liberty issues. Of course, those things don’t get press so…

  2. John S @ Frugal Rules says

    It just makes me embarrassed to be an American to see our do nothing Congress beat out the deadline on a problem they caused themselves. Then they kicked the can down the road for a bit longer on expenses, so we get to relive the majority of this whole thing in a few short months. That said, I think it was and is inevitable that taxes will go up so it really was not a huge surprise.

    • says

      Yeah, the $400,000/$450,000 limit was the shock to me – I didn’t expect to see anything like that. I figured that we would just “go over”, so to speak, then the Democrats would negotiate from the position of higher taxes.

      Here’s the bright light though – we’ll see new taxes coming from a mile away since this time the taxes were ‘permanent’. That means we won’t be hit by strange things like expiring tax rates after 10 years, payroll tax resets or whatever.

  3. squeaky says

    This whole thing has been a joke. I spent new years eve thinking one thing thenonnew yearsday I thougt things had been done to help the poor middle class who pay the majority of taxes while millionaires keep getting tax breaks. The middle class now has disappeared. You are now poor or a multi millionaire.TY MR Obama for not forcing the senateand congress to protect us

    • says

      I wonder if the goal is to turn the US into the Bay Area, where bromides about helping the middle class contrast with the fact that there isn’t really a middle class. We’ve got, roughly, technology and service in the South Bay, and no large middle class to speak of.

  4. Bichon says

    Perhaps one day the gubimint will realize that stability and giving their servants the ability to make financial plans long term will go a long way in aiding with the recovery.

    In other news, I am happy SS tax is back up to where it should be. It isn’t enough that we have shortfalls looming AND that we have borrowed all the SS funds (not counted in the debt BTW), but then we throw the program under the bus. Of course, I think SS is an important program for the US and should continue.

    And, I’m leaning more and more towards a VAT IF it can control, stabilize and lower (not in that order necessarily) income taxes. Why? My federal income tax liability for 2011 was close to $40k. My brother-in-law and his wife make about $40k/yr as the IRS sees it (and they have 4 kids, so they not only have $0 tax liability, they get PAID by the feds). In actuality, since they do a lot of work for cash, under the table, they make another $30-$40k. But, I tire of them bitching about how poor they are. And I’m sure we all have some similar story, but at least with a VAT, it ensures everyone is paying SOME taxes. Of course, as Herman Cain showed, this is a very unpopular plan.

    • says

      I pointed that out to my wife – since our taxes easily cover more than one government employee, when we call to complain we should have one person dedicated to keeping us happy. Am I right?

      Seriously, you’re right – the Payroll tax cut was a dangerous law. I’m glad it’s resetting. Sure, I don’t like the programs that tax funds – but I would like it even less if it was just promised benefits from the General Fund, which would make it even harder to track how the program was doing. It’s byzantine enough, don’t make it worse, thanks.

      I don’t know if you’ve made it to our podcast yet, but I’m going to do a segment on the Fair Tax (coupled with a repeal of the 16th Amendment, since it’s my segment and if people don’t like it I’ll take my ball and go home). That’s scheduled… soon.

      • says

        Instead of our own gummint worker, I’d like to have our very own cranky & crotchety SS retiree, maybe even keep a framed picture on the mantel. Just like those charities where you get to sponsor a child in Guatemala or Benin.

        • says

          Or we can combine the ideas – since the US is adding about a Trillion in debt a year on top of 2.6 in revenues, we can get 1/2.6 Social Security beneficiaries, and a free Government worker for the simple cost of inflation, our current taxes, an I.O.U. from our future earnings and increased taxes on our children. Win-win-win-win!

  5. Brick By Brick Investing says

    This is a very slippery slope that we are going to regret heavily! Any person with a sound background in economics knows that the more you tax people the less you collect in tax revenue because PEOPLE WILL LEAVE!

    • says

      Well, if the concept is “if you tax something, you get less of it” we’re certainly headed in the wrong direction. The payroll tax though? I like the idea that people know they are paying for it – if it is just another line in the general fund people won’t understand how much it is costing us. And, yes, I think it’ll continue to rise.

    • Bichon says

      So if we apply a tax to the ~50% of people who don’t pay taxes, they will just go leave? What are we waiting for?

      Generally the, “if you tax something, you get less of it” is something I agree with. On a state level, there is some movement across state lines. Texas doesn’t have income taxes, but there is no way I’d ever move back. So, I won’t just abandon my state b/c of higher income taxes, but some people will.

      But, the US is truly the greatest country I have ever stepped foot on. And many people realize this. You’d be a fool to give up your citizenship and very few people will. So, raising taxes will discourage people from making above the obscenely highly thresholds they set (mainly because of how it adds to LTCG’s and Divs), but VERY few people will leave and it will hardly ruin the country.

      This is why across the board tax increases and/or something like VAT is far superior, but unfortunately much much more less popular.

      • says

        Haha – I hadn’t thought about the ‘tax those who aren’t being taxed part’. Personally, I picture the mobile rich in a sort of France-in-the-present-day sort of way, although I haven’t seen Hollywood leaking to Canada yet.

        I think the point may be that tax rates matter – but when discussing macroeconomics, it’s best to note the relative differences between countries. We benefit from the US mostly advocating Democracy to other countries and American Hegemony, which has led to cheap goods all over. We also have the best legal system, for all its problems. Education as well.

        That probably explains the state to state migration patterns, but for the most part we haven’t seen too many John McAfee’s running off to South America. Still – things continue… until they don’t. I’d say there is a point when people will start to leave the United States, but it’s impossible to know ‘where’ that point is until we reach it (and it’s a moving target based on the performance of other countries).

        • Bichon says

          I think the tuff part with the US is, you cannot just leave and avoid taxes without giving up your citizenship. When I did some work overseas, most of the guys who worked rotational and were from the UK lived somewhere other than the UK. The answer is simple, you don’t live in the UK, you don’t pay taxes in the UK. No filing is needed. The US is far from that simple, as you are legally required to file in the US each year, even if you never step foot on US soil.

          McAfee has not be avoiding taxes, he has just been doing whatever it is he enjoys doing in Central America. And since his deportation back the US, if he hasn’t been paying taxes, I’m sure a team of IRS agents are salivating like Pavlov’s Dogs.

          The question is, how much do your FEDERAL income taxes need to go up to cause you to never come back the US again? A) There would need to be a country, willing to give ex-US citizens citizenship and offer lower taxes and B) it would need to offer a “western” standard of living. While I’ve only been to about 20 countries on 6 different continents, I have yet to find one I would give up my citizenship for, regardless of what the tax rate is in the US.

          I’d say the point where people give up their citizenship is pretty high. Especially with the way the income tax is setup. So, if you want to avoid the 40% (or whatever it is) bracket, you just stop producing before you get to it. Or, maybe you are willing to produce less at the higher bracket? The dangerous thing with how they have setup the Div and LTCG is how you get taxed more if you are over a certain limit, and then it hits ALL your income (derived from Divs and LTCG’s). It is the same on the other end of the spectrum, as many retiree’s live simple, yet satisfying lives where they pay no Div and LTCG taxes. I assume the moderately rich can keep themselves under the threshold for not getting hit the add’l LTCG/Div tax. It only hurts those in the “bottom of the bracket.”

          • says

            I didn’t know that about McAfee – I thought he was off the grid in Belize researching drugs or convincing people on drug web boards to take drugs. I guess my go-to example has to be Eduardo Saverin, but I suppose he was only marginally attached anyway?

            You have to appreciate the Gérard Depardieu thing too, even though it’s France. Here’s a guy who leaves a country with, ostensibly, a long history of Democracy and Capitalism… and picks up a citizenship in Russia.


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