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 BY: ANTHONY E. PARENT, ESQ. and THOMAS S. GROTH, ESQ.

Rome wasn’t destroyed in a day.

It took, time, my man. Time.

CLICK HERE FOR 1-2-2013 UPDATE to  American Taxpayer Relief Act of 2012 which adds an additional tax brackets for high income earners.

And no. The Roman Empire wasn’t destroyed by barbarians. But rather, by over-taxation, grotesque government spending, and currency debasement. Sound familiar?

As the United States government appears to be waddling down the same, sad, predictable path, Congress and this president haven’t quite decided on how quickly to accelerate the descent into ruin.  Because of their indecisiveness, many US taxpayers are trying to figure out what the individual tax rates for 2013 are going to be. And here’s the thing: At this point, nobody knows. In this article tax attorneys Anthony E. Parent and Thomas S. Groth discuss the three most likely scenarios, giving the IRS tax brackets for each scenario.  


Tax brackets

And this is the nice part of town

 

 

 

The election is over, so now our government can back to “governing.” With the infamous fiscal cliff looming, the donkeys, elephants, dogs, and RINOS that run our government have every incentive to compromise. In this article we’ll discuss the anticipated changes in tax rates and tax brackets are likely to see if a compromise is reached, as well as the changes in tax rates that will happen if the government fails to act.

IRS tax tables

 As the saying goes, nothing is certain but death and taxes. we’d like to clarify that bit of common wisdom. You see, as certain as the payment of taxes may be, what isn’t certain is how much individual Americans will be paying. If the legislature and the president can figure out a way to work together, it is likely that at least those Americans making over $200,000 (or married taxpayers making $250,000) will see their top marginal rates go back up to the pre-Bush Tax Cuts level of 39.6%.

Bush tax brackets

So what does that mean?

As we explained in January, the current top marginal rate for 2012 is 35% on every dollar of taxable ordinary income earned by an individual or married couple over $388,350.00. President Obama has proposed increasing that rate to 39.6% for every dollar of taxable earned income earned over $390,051. He has also proposed raising the second-highest marginal rate from 33% to 36%, so that every dollar of taxable ordinary income earned between $193,501 ($241,901 for married couples) and $390,051 will be subject to 3% additional taxes. The result, if President Obama gets his way, is that many middle-class families will be paying higher taxes in 2013.

Obama tax hike

And wait there’s more in the package

On top of these proposed increases in marginal rates, additional taxes are set to be imposed on middle and upper-income families by the Affordable Care Act (AKA Obamacare.) Individuals will also pay an additional 0.9% in hospital insurance payroll taxes on wages over $200,000.

 And I haven’t even discussed changes in the dividend and capital gains tax rates yet. The preference for qualified dividends is set to expire in 2013. That means that the qualified dividend will disappear without government intervention. And even if the government can reach a deal, it is likely that President Obama will insist that dividend taxes go up as part of any grand bargain. This goes along with his desire to impose the so-called “Buffet Rule.” Top rates on dividends would increase to 39.6% under Obama’s proposals during the presidential campaign. Right now, qualified dividends are taxed at similar rates as long-term capital gains, with a top rate pegged at 15%. No matter where the top rate on dividends ends up, Obamacare tacks on an additional 3.8% to all dividends and capital gains for certain taxpayers. The result is staggering. If you were paying 15% on dividends in 2012, you could be paying almost three times as much (or 43.6%) on those same exact dividends in 2013. Capital gains rates are also set to increase. In 2012, the top rate on Long-Term Capital Gains was 15%. The top rate is set to increase to 20%, and it is also subject to the 3.8% Medicare contribution tax discussed above.

The Republican-led House wants to see the Bush Tax Cuts extended for all Americans in 2013. If the House gets its way, people will be paying roughly the same amount in taxes that they paid in 2012. However, this is unlikely because of what will happen in the case of a political stalemate on this issue. It’s likely that President Obama will get what he has been asking for the entire campaign season. “Wealthy” (but really middle class) Americans will pay “a little bit” more and that’s because if a deal can’t be struck, everyone loses.

To see why, let’s imagine a deal can’t be struck. What happens then? In that case, the Bush tax cuts will expire for everyone. That’s right, everyone’s taxes will go up. Currently, income that falls within the lowest tax bracket is taxed at a rate of 10%. That rate will increase automatically to 15% if our government fails to act. The other rates will changes as follows: 25% to 28%, 28% to 31%, 33% to 36%, and 35% to 39.6%. One result of this scenario is that less Americans will be subject to the Alternative Minimum Tax. Instead of 36% of taxpayers being exposed to the AMT under current tax rates, 20% will be exposed to the AMT if congress does nothing. That’s because they will be paying more in taxes under the progressive tax structure.

 

The reason the Romans welcomed the barbarians, is the same reason we will welcome our new giant-ant-overlords from outer-space

Worse news. It gets worse. For everyone. Well unless you are in Congress or work in Congress. Cause there’s never any bad news for you ever.

 Right now, anyone receiving W-2 income is receiving a 2% break on their portion of payroll taxes (as are those individuals required to pay Self-Employment taxes), and that break will disappear if congress fails to act (and is likely going away even if a deal is struck.) The bottom line is that we all should be prepared to deal with an increase in our 2013 income tax rates. There isn’t much that can be done to avoid whatever the government tosses at our feet. Taxes are certain. If you thought the coming changes in income tax rates is scary, then you’ll want to take a look at our other article about death taxes, gift taxes, and how to plan for the coming changes in 2013. We will continue to follow developments in the changes to tax rates and tax brackets as our government begins the grueling process of avoiding taxmaggedon and other parts of the looming fiscal cliff, so be sure to check back here for updates.

 

Oh…but there is great news about those IRS taxes.

We could not end this on a sad, angry note. But rather a positive, sentimental tone — what’s known in the industry as the schmaltz.

Now charging people taxes is one thing. But getting paid is another. And right now, on account of the 5th straight year of horrific economic conditions, most likely caused by the government (don’t worry, it was bipartisan),  the IRS is having a real hard time collecting that revenue it imposed on people.  As we have worked hundreds of IRS collection cases over the last ten years, never before have we’ve seen an IRS so willing to negotiate tax debt settlements (unfortunately the kinder, gentler IRS does not work for the US taxpayers with undisclosed offshore accounts who the IRS will hunt down and destroy just because they can).

And because we are short on space, we’ll just give a plug for our tax debt settlement guide below. We call it “Seven Steps to Sanity,” for two reasons. This first is that there are seven steps. The second, is that “Stop the Insanity” was already taken by some strange cultural icon from the 1990′s, and obviously, we don’t want to tangle with someone who has such untangleable hair.

But serious, this tax debt settlement system  is the real thing and we can successfully solve any tax debt problem in the quickest amount of time to set ourselves up for the best result. Sign up and you’ll get our first lesson in minutes. The Number 1 reason why nearly every one fails at ending their tax problems. Once you read it, you’ll understand how easy it is to get this wrong, yet how easy it is to get this right. So yeah, sign up below. We promise not to hammer your inbox with emails. After the first 7 lessons, we’ll send you an email with actual content about every month.

 

 

Sign up now.

 

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7 Comments
  1. And then of course, is the Alternative Minimum Tax (AMT). A Congressional Research Service article, The Alternative Minimum Tax for Individuals (September 20, 2012) explains the effect of allowing the AMT exemption amount revert to the 1993-2000 level. In 2009 about 3.8 million taxpayers were subject to AMT. In 2012 30 million taxpayers will be subject to AMT. This increase has nothing to do with the fiscal cliff or Obamacare. It was written into the law under the Tax Relief, Unemployment Insurance Reauthorization and the Job Creation Act of 2010 (PL111-312)

  2. We are so struggling now….I can’t imagine all of these consequences….I can see us losing our home.

  3. I I lost my wife in 2007. I lost my job in 2008. I lost my home and everything in 2010. It can get any worst for me.

    • Wow!!! and I thought I had it bad when I only received a 3.5% pay raise this year and we only took two vacations instead of our usual four.
      Keep the faith, We will say a prayer for you.

  4. Don’t forget the Obamacare tax increases. My FSA used to have $5600 eligible for medical and dental expenses but the new healthcare limits it to $2500 unless both work. Since i am disabled we can only have $2500 so we will see $3100 of medical costs now be taxed for Federal, State, SS and Medicare. No one seems to be complaining much about it though.

  5. We will be retiring soon from our US Fed jobs here in DC and then move back to Mexico to live like King and Queen. :)

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