Thomas Jefferson coined the famous phrase that nothing is as certain as death and taxes. Unless Congress acts and extends the tax cuts in 2013 all taxpayers (regardless of income) will experience a tax hike. Several members of Congress are in favor of not extending the Bush Tax Cuts because it stops the tax cuts for the wealthy but for that to happen everyone will have to pay a little more in taxes.
Assuming that the Bush tax cuts won’t be extended and no reform happens here is what to expect:
Current Tax Laws:
Right now individual marginal tax rates are at 10 15 28 33 and 35%.
Right now employee-side payroll tax cuts (that were put in place in 2012 in the Middle-Class Tax Relief and Job Creation Act) is at 4.2%.
The Resulting Change:
If nothing is changed the individual marginal tax rates will revert to 15 28 31 36 and 39.6%.
The employee-side payroll tax will revert to its original rate of 6.2%.
How you can plan for the change:
With much higher tax rates looming on the horizon taxpayers must become more aware of what they are paying in taxes and their deductions. You can talk with your CPA about shifting the timing of your taxes in hopes to offset a higher tax rate next year. For example deferring your deductible expenses of this year into 2013 might help reduce the taxes you will pay until the new reform can be put into place.
Another option to consider is accelerating your income to reduce your overall tax liability. You can do this by avoiding installment sales that defer gain selling appreciated property billing earlier and accelerating bonuses.
Nothing is set in stone at this moment but tax reform is inevitable. There are a few options that can happen between now and year end: Option 1: the current tax rates that you pay will be extended Option 2: a completely new/lower tax rate will be put in place and Congress will ignore the tax rates before the Bush Tax Cuts or Option 3: higher tax rates will be put in place in hopes to reduce the national deficit. We will keep you updated as any changes occur.