President Barack Obama’s election has brought worries from the wealthy over tax increases.
With a progressive tax structure in mind, the Obama administration has started to reverse the Bush administration’s tax cuts for the rich while trying to preserve the stability of the middle class.
Major Tax Changes in 2011
Next year could be a devastating year for taxpayers in the top two income tax brackets. Those in the top income tax bracket will experience an income tax hike to 39.6% from 35%. Those in the second highest tax bracket will experience an income tax raise to 36% from 33%.
Investors will have to account for an increased capital gains tax of 20%, from the current rate of 15%. Qualified dividends will be taxed at the ordinary income rate instead of the lower capital gains rate.
Major Tax Changes in 2013
Health care reform legislation will add to some Americans’ tax burden as well.
The bill adds an extra 0.9% Medicare Hospital Insurance Tax on earned income over the first $200,000 (taxed at 1.45%) for single taxpayers, or $250,000 for married couples.
Also, there will be a new 3.8% surtax on investment income, known as the Unearned Income Medicare Contribution for taxpayers with adjusted gross incomes exceeding $200,000 for single filers ($250,000 for married filers).
Less Money for High Earners and Investors
Keep in mind that these are changes to federal taxes, which doesn’t include state taxes, property taxes, sales taxes, and Social Security contributions.
Taxpayers within the top bracket whose income comes mainly from investments will be affected the most. They would be hit by every one of the aforementioned major tax changes. When you add state, property and sales taxes and Social Security contributions, the wealthy could lose a hefty portion of their income (more than 45% in some states).
All investors could feel the effect of an increased capital gains tax and a qualified dividend tax that would take small chunks of their returns.
For those planning for retirement, two possible ways to avoid these taxes would be to utilize a Roth IRA or invest in tax-exempt securities in a taxable brokerage account. For more information on opening a Roth IRA, click here.