There’s the truism that nothing is certain except death and taxes. A new one should be that tax rates are going to rise, given the huge deficits the federal government is experiencing and faces in coming decades.
Some tax increases are already on the books, unless Congress changes them, including the following:
The Affordable Care Act included two increases in Medicare taxes that go directly to the Medicare trust fund. The first will increase the payroll tax on taxpayers earning more than $200,000 if single or $250,000 if married and filing jointly by .9%, from 1.45% to 2.35%. The rate paid by employers will not increase, but the rate for self-employed individuals will increase from 2.9% to 3.8% on income over these thresholds.
In addition, the Affordable Care Act imposes a new Medicare surtax of 3.8% on unearned income (dividends, capital gains, annuities, rental income, for example) for taxpayers whose Modified Adjusted Gross Income exceeds the same $200,000 and $250,000 thresholds.
Revised Threshold for Deducting Medical Expenses
Currently, taxpayers may deduct their medical expenses to the extent they exceed 7.5% of their adjusted gross income (AGI). Beginning in 2013, they will only be able to do so to the extent such expenses exceed 10% of their AGI. However, the 7.5% threshold will continue for taxpayers over age 65 through 2016.
Sunset of the Bush Tax Cuts
The biggest potential tax increase is the sunsetting of the Bush tax rates at the end of this year if Congress does not act to intervene. In that event, the lowest income tax rate will increase from 10% to 15% and other rates will also increase with the highest rate going from 35% to 39.6%. The long-term capital gains tax rate would also increase from 15% to 20% and dividends would again be treated like ordinary income rather than receiving the current preferential rate of 15%.