The 3 biggest implications of new tax laws in 2013

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By Emma Underwood

There are changes on the 2013 1040 form that will affect the amount of federal income tax many people pay this year. Just about every taxpayer will be affected one way or another by these changes to the tax codes.

What specifically are those changes, and who will be affected the most by each individual change?

1. Payroll taxes:

Most working people took home less money in January 2013 than they did in December 2012, even if they were earning the same amount of money. That's because Congress allowed the payroll tax holiday to expire.

The Social Security tax withdrawn from paychecks has traditionally been 6.2 percent. In December 2010, however, Congress enacted a two percent payroll deduction. There is some political controversy over whether or not this cut was intended to be temporary. Most Democrats argue that the payroll reduction was a temporary measure; some Republicans argue otherwise. Be that as it may, the entire 6.2 percent is now being withheld, and the Social Security wage ceiling has been raised to $113,700.

Additionally, high earners will see a raise in the amount of Medicare tax withheld from their paychecks. For people earning more than $200,000 a year, an additional 0.9 percent will be withheld.

Finally, self-employed individuals who have been paying a self-employment tax of 10.4 percent since 2010 will see their self-employment taxes rise back up to 12.4 percent in 2013.

2. Higher capital gains taxes for higher earners:

Gains from the sale of assets held for one year or less will no longer qualify for long-term capital gains tax treatment.

For single individuals who earn $400,000 a year or more, and for married couples filing jointly who earn $450,000 a year or more, capital gains taxes will now be 20 percent instead of 15 percent.

This may have a visible effect on the purchases and sales of stocks and other financial assets. Higher taxes means less money to invest in the stock market and other investment opportunities, which in turn means less opportunity to benefit from asset appreciation.

Additionally, households with adjusted gross incomes of $200,000 (single filer) or $250,000 (joint filer) are now subject to the 3.8 percent surtax that was passed in 2010 as part of the new health care legislation. This could conceivably drive capital gains taxes for some individuals up to a rate of 23.8 percent.

The new tax bracket for individuals earning $400,000 or more, and couples filing jointly earning $450,000 or more, is now 39.6 percent, up from 35 percent. However, this will not affect people filing their 2012 taxes.

3. Changes in deductions and exemptions:

Congress also enacted a great many changes in the ways that deductions operate. People at the high end of the earning spectrum will no longer be allowed to take all their itemized deductions. Those cut off points are $250,000 for single individuals, $275,000 for individuals filing as heads of households, and $300,000 for married couples filing jointly.

The itemized deductions that are subject to this phase-out include:

• Charitable contributions
• Job-related expenses
• Other taxes
• Interest (but not investment interest)

The rules for calculating the new rates for itemized deductions as they are being phased out are very complicated. Higher income earners will also be hit by a reduction in the personal exemption to which they hitherto have been entitled.

About the author: Emma Underwood is an economist and guest author at How Do I Become A..., where she contributed to the online How Do I Become An Economist guide.