Posted by Katie Vlietstra-While Congress avoided hitting many self-employed Americans with higher income tax rates, those individuals making less than $400,000 and couples making less than $450,000 will see their income tax rates remain the same, all Americans will see their paychecks a little lighter in 2013 due to expiring tax holidays and two new health reform law-related taxes.
While addressing the individual rate captured most of the attention, Congress did address other expiring tax issues in their last minute deal, two of interest to the self-employed: the Alternative Minimum Tax (AMT) and the Estate Tax. In a bold move, Congress approved a permanent fix to the AMT, a tax mechanism that when created was not indexed to inflation. This meant that every few years, Congress would have to approve a “patch” to increase the tax threshold so that middle-income earners were not taxed at a higher rate. With respect to the Estate Tax, Congress made permanent the $5 million exemption level, indexed to inflation, while also allowing a $5 million lifetime gift to children and grandchildren.
However, with all of the talk about ensuring that the middle class and America’s small businesses were not hit with an increase in their tax liability, this is simply not the case. All Americans will see their tax liability increase in 2013 due to expiration of the payroll tax holiday (i.e. the Social Security tax), the increase of the hospital insurance tax (pulled from the payroll tax deduction), and the new unearned income Medicare contribution tax established under health care reform law.
No doubt the situation could have been much worse if Congress had not acted. Yet, for many of the self-employed working hard each and every day, the addition of new taxes will undoubtedly cause a few headaches in the first quarter of 2013.