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What will the Fiscal Cliff Do to Income Taxes?

by | Dec 29, 2012 | dividends, fiscal cliff, income taxes, ordinary income

On January 1, 2013 income tax rates are set to dramatically increase. Taxes on wages, investment interest, and other types of ordinary income, the top rates will rise from 35% to 39.6%.

In addition, the 3.8% Obamacare Medicare surtax will start January 1, 2013. The total rate that a top-bracket taxpayer will face will be 43.4%. In addition there is a .9% increase in the Medicare Tax on Wages above $200k ($250k for married joint returns.) The total jump from 35% to 43.4% is the largest tax increase in decades.

Investors will really suffer. The 2013 tax law will eliminate the maximum rates on dividends of 15% and instead treat dividends as ordinary income. The result would be dividends with taxes at the same top 43.4% rate that applies to ordinary income. The effect is dividend income tax would almost triple from 15% to 43.4%.

As of December 28, 2013, Congress and the President keep playing “chicken” with our tax laws and economy.