Some tax changes impact middle income earners

Two hours after going over the fiscal cliff at midnight on Jan. 1, Congress passed the American Taxpayer Relief Act of 2012, with much being said about it raising taxes only for wealthier Americans.

It's true the act preserved lower Bush-era income tax rates for middle income taxpayers. That includes dozens of credits and deductions that were extended.

But as many have already discovered on their paychecks, all wage-earning Americans actually are now paying higher taxes, noted certified public accountant D. Page Misenhimer Jr.

That's because a 2 percent reduction in payroll taxes for Social Security, in effect for two years as part of President Obama's efforts to stimulate the economy, was allowed to lapse for 2013.

“That affects everyone who works,” Misenhimer said.

For a family with $80,000 in income, that translates to an additional $1,600 in taxes per year, he noted. And it's expected to take $125 billion out of consumer income.

Otherwise, Misenhimer said, the tax changes mostly don't affect middle income taxpayers.

Those who make more than $250,000 a year – $300,000 for married couples – are in for another surprise, though. Those are the income thresholds for the phasing out of itemized deductions and personal exemptions, Misenhimer explained.

As for those with individual incomes over $400,000 per year – $450,000 for couples – their tax rate has been increased to a maximum rate of 39.6 percent. And they will be subject to a maximum 20 percent rate on capital gains and dividends.

All other taxpayers will pay no more than 15 percent on investment income.

Other key provisions of the American Taxpayer Relief Act of 2012 include:

• Raises the tax on estates to a 40 percent maximum rate, with a permanent exemption of $5 million, indexed for inflation.

• Permanently adopts Alternative Minimum Tax exemption amounts.

• Extends unemployment insurance for long-term unemployed Americans.

• Extends tuition tax credit and child and dependant care tax credits for five years.

In addition to the impact of the American Taxpayer Relief Act of 2012, higher income Americans also are subject to higher Medicare taxes as a result of the Protection and Affordable Care Act (commonly called Obamacare) signed into law by President Obama in 2010.

Effective Jan. 1, the legislation imposes an added Medicare tax of 3.8 percent on investment income for individuals who make more than $200,000 or $250,000 for married couples. They also will be subject to an additional tax of 0.9 percent on earned income.

Misenhimer said a number of Yumans will be impacted by the tax changes brought about by the two acts.