On the heels of the IRS announcement that pushed back the 2013 tax filing season, the IRS has released updated withholding guidance and other tax rate changes.
Income tax withholding tables were realigned and supersede the tables that were issued by the IRS on December 31, prior to Congress passing the American Taxpayer Relief Act.
A revised Notice 1036, available on irs.gov, includes the percentage method income-tax withholding tables and related information that employers and payers will follow to ensure accurate payroll deductions for federal tax.
Because the 2011 and 2012 reduction in Social Security tax was not upheld into 2013, the new rate of 6.2 percent is now in effect. Employers will need to make adjustments to accommodate this change as well.
The IRS has issued guidance to employers, stating the new revised withholding tables and Social Security tax must implemented no later than Feb. 15, 2013. Employers are encouraged however not to wait until the February date, in order to prevent any under-withholding.
For any Social Security tax under-withheld before that date, employers must make the appropriate adjustment in workers’ pay by March 31, 2013 in order to avoid any penalties.
While the American Taxpayer Relief Act provided some respite to the typical American family, high earning individuals and households will feel the pinch. Consider:
New Tax Rate
A new tax rate for high earners is now in effect. Tax percentages for American workers start at 10 percent, and then bracket out at 15, 25, 28, 33 and 35 percent, respectively. Single filers earning more than $400,000 ($450,000 for joint filers) will now be taxed at a rate of 39.6 percent.
For those same high earners, they will see a bump up in taxes paid on their long-term capital gains and dividends. The increase changes tax from 15 to 20 percent.
Phase Outs
Personal and dependent exemptions, as well as percentage limits on itemized deductions, have both returned under new legislation. In the last three tax years, the IRS eliminated the ceiling for exemptions and deductions.
Beginning this year, single taxpayers earning more than $250,000 (Joint filers are at $300,000; Head of Household at $275,000; Married Filing Separate at $150,000) will lose some or all of their exemption deductions. For example, a joint filing couple with two dependent children, earning $450,000, would pay an additional tax of $6,200.
Itemized deductions have always been tempered by certain percentage limitations, but the overall phase-outs based on gross income are now back as well. Taxpayers with the same income levels as above may see an 80 percent loss on deductions claimed for mortgage interest paid, property taxes, state income taxes and charitable deductions.
The same joint filing couple, earning $450,000 and claiming $40,000 in itemized deductions on their Schedule A, could now pay higher taxes of around $12,600.
Additional tax law changes in effect for 2013:
- The Standard Deduction was raised from $5,950 to $6,100 for single filers. Joint deductions were raised from $11,900 to $12,200.
- Personal Exemptions continued to see a slight increase. The 2012 amount of $3,800 saw a hundred-dollar increase, to $3,900.
- The minimum threshold where the Alternative Minimum Tax may kick in was raised from $50,600 to $51,900 for single filers. The threshold for joint filers was raised from $78,750 to $80,800.
- The maximum amount available for the Earned Income Tax Credit was raised from $5,891 to $6,044. Individuals with three or more qualifying children may be eligible for the max credit.
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