2013 TAX CHANGES

American Taxpayer Relief Act (ATRA) ■ US Patient Protection & Affordable Care Act ■ Expiration of Payroll Tax Holiday

Tax Cut or Tax Increase?
Ask someone in Congress and they will probably answer “tax cut.” Congress did, after all, wait until taxes officially increased in January of 2013 to pass the American Taxpayer Relief Act (ATRA). Ask any taxpayer and you’ll likely get a different answer.

2013 Distribution of US Federal Tax
Most taxpayers have seen a decrease in their paychecks because of the expiration of the 2% payroll tax holiday. Top earners will see additional tax increases starting in 2013.

$80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $

$74,317

2013 Average Dollar Tax Increase by Income Level

$191
Bottom 20%

$834
Middle 20%

$6,157
Top 20% Top 1%

Source: Urban-Brookings Tax Policy Center Microsimulation Model.

Share of Total Federal Tax Change
The Tax Policy Center estimates those earning over $100,000 will pay 67% of the new tax increases.
Source: Urban-Brookings Tax Policy Center Microsimulation Model.

13%
Income LESS Than $50,000

20%
Income $50,000–$100,000

25%
Income $100,000–$500,000

42%
Income ABOVE $500,000

American Taxpayer Relief Act of 2012

Tax Cut or Tax Increase?
In the case of the American Taxpayer Relief Act, it depends on whom you ask.

tax tax cut cut for for of of taxpayers taxpayers

99% 99%

tax tax hike hike for for of of taxpayers taxpayers

1% 1%

A $4.6 Trillion Tax Cut over next 10 years as most of the Bush tax cuts become permanent for most Americans.

A $620 Billion Tax Hike over next 10 years as some Bush tax cuts expire for the top 1% of earners.

Source: Center on Budget and Policy based on Joint Committee on Taxation Calculations.

Bush Tax Cuts vs. New Revenue
$620 Billion
$20 Bil – Increased Estate Tax $150 Bil – Reinstated PEP and Pease for $250k–$300k Earners $55 Bil – Increased Capital Gains / Dividend Rates for Top 1% $395 Bil – Expiration of Bush Tax Cuts for Top1%

New Revenue Raised Over Next 10 Years

$650 Bil – Net Interest

$1,200 Bil – Extended Bush Tax Cuts

tax cuts expire

18%

tax cuts made permanent expire

18% 82%
tax cuts

82%
made permanent

tax cuts

$290 Bil – Extend Current Capital Gains / Dividend Rates $370 Bil – Estate Tax

18% of Bush tax cuts expire for high income earners, which boosts revenue over the next 10 years.

ATRA extends $3.9 trillion in tax cuts over the next 10 years for 99% of Americans. The Congressional Budget Office predicts a $4.6 trillion budget shortfall after factoring in the net interest.

$135 Bil – Refundable Tax Credits $200 Bil – Other

$1,800 Bil – Alternative Minimum Tax (AMT) Patch

$4.6 Trillion
Source: Congressional Budget Office, Center on Budget and Policy based on Joint Committee on Taxation Calculations.

Revenue Shortfall (over next 10 years)

American Taxpayer Relief Act of 2012 (ATRA)
What are the main changes for taxpayers under the Act?
39.6%
New Top Tax Rate

Individuals

Filing Jointly

35%

20% 15%

Tax on Investment Income

Earning $400,000+

Earning $450,000+

Taxable Income

4.6% Additional tax
Ordinary income tax increases from 35% to 39.6%.

5% Additional tax
Long-term capital gains and qualified dividend income taxes increase from 15% to 20%.

Source: Urban-Brookings Tax Policy Center Microsimulation Model.

40%

35%

$5 million

More in Estate Tax
$5 million exemption made permanent (adjusted annually for inflation)
Source: Urban-Brookings Tax Policy Center Microsimulation Model.

5%

Itemized deductions Eliminated

80%

Up to

Limitation on Itemized Deductions
The Pease Amendment reduces most itemized deductions by 3% of the amount by which AGI exceeds $250,000 for individuals and $300,000 for joint filers up to a maximum reduction of 80% of itemized deductions. It is seen by many as a 3% tax on the amount of AGI over the income threshold.

Source: Urban-Brookings Tax Policy Center Microsimulation Model.

US Patient Protection & Affordable Care Act (Obamacare)
Surcharge on Investment Income

3.8%

Tax on Net Investment Income

Individuals

Filing Jointly

0.9%
Earning $200,000+ Earning $250,000+

Additional Medicare Tax

Modified Adjusted Gross Income

3.8% +
Examples of Net Investment Income are income from interest, dividends, annuities, royalties, rents, and capital gains.

.9%
Unlike FICA, which applies to the first $113,700 of income in 2013 (adjusted annually for inflation), the Medicare Hospital Insurance tax applies to all income.

Source: Urban-Brookings Tax Policy Center Microsimulation Model.

Pay Holiday

% 2 roll Tax
E ND s

The Tax Relief Act of 2010 reduced employee payroll tax contributions from 6.2% to 4.2%. Scheduled to last 1 year, it ended up being a 2-year tax holiday.

Payroll Tax Rates
Employer / Employee Contributions (1937–2013)

Medicare
Employer / Employee Contributions (1966–2013)
Employee and employer contributions had been split equally. Beginning in 2013 top earners will pay an additional .9% on modified adjusted gross income.
Employee Employee Contribution Contribution

12.4% 12.4% 10.4% 10.4% 7.2% 7.2% 3.6% 3.6% 2% 2% 1%1% 1%1% 3.6% 3.6% 4.2% 4.2% 6.2% 6.2% 6.2% 6.2%

Employer 6.2% 6.2% Employer

Contribution Contribution

2.9% 2.9% 0.7% 0.7%

3.8% 3.8% Employee Employee
Contribution Contribution Employer Employer Contribution Contribution

1937 1937

1966 1966

2012 2012

2013 2013

1966 1966

2012 2012

2013 2013

Social Security is primarily funded through the Federal Insurance Contributions Act (FICA) tax.

+ +

Social Security Amendments, signed by President Johnson in 1965, established Medicare for the elderly and Medicaid for the poor. President Truman, who advocated for similar legislation in 1945, was the first to enroll in Medicare in 1966.

President Roosevelt signed the Social Security Act in 1935 as part of the Second New Deal.

Sources: Social Security Administration, http://www.ssa.gov/OACT/COLA/cbb.html and http://www.ssa.gov/OACT/ProgData/taxRates.html, last accessed September 27, 2012.

A tax increase, but it could have been worse...
Average Tax Increase by Income Bracket
Income Bracket: $500,000 –$1,000,000

Average Tax Increase by Income Bracket

$38,969 $14,812

$100,000–$200,000

$6,662 $1,784

What could have been if all fiscal cliff provisions had gone into effect.

$75,000–$100,000

$3,688 $1,206

$40,000–$50,000

$1,729 $579

With all Fiscal Cliff Provisions Current 2013 Tax Changes

$20,000–$30,000

$1,064 $297

$–

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

Average Tax Increase
Source: Urban-Brookings Tax Policy Center Microsimulation Model.

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Infographic2013TaxChanges Doc #1118 GACRW

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