MAKING CENTS: Cliff realities in plain English

You can debate and argue all you want over whether the cliff situation was resolved or the can was just kicked down the road. But your reality is that there are new provisions in the tax code that will impact your cash flow starting with this week’s paycheck that you need to understand.

The first change is an increase of 2 percent in the amount of taxes that every wage earner shall pay toward FICA, or basically the entitlement systems under the Social Security umbrella. It is estimated that this increase for all Americans will raise approximately $125 million in revenue for the feds. This cost will be most felt by those who earn less than the 2013 FICA maximum of $113,700.

The most talked-about provisions are those impacting high-wage earners. For single wage earners earning over $400,000 and married taxpayers earning over $450,000, the top tax rates will rise to 39.6 percent for earnings above those threshold amounts. These same taxpayers will also experience an increase in the basic capital gains tax rate from 15 percent to 20 percent. But wait, there’s more. If you are lucky enough to earn more than those amounts and have a capital gain in 2013, you get to pay a special 3.8 percent surcharge to fund the Affordable Care Act, bringing your total rate for the gain to 23.8 percent. For wage earners under the new limits, the rate for capitals gains has been permanently set at 15 percent.

The silver lining for equity investors may be the new tax rate on dividend income. There had been fears that the rate could rise as high as 43.4 percent, but it has gone to a base rate of 20 percent plus the 3.8 percent surcharge, for a total of 23.8 percent.

Another change is the restoration of limits on deductions for higher-earning Americans. For this phase-out, however, Congress wasn’t too generous. For single wage earners making more than $250,000 and married couples earning more than $300,000, deductions for home mortgage interest, charitable contributions and state income taxes and personal exemptions for children and other dependents will be phased out. The significance of reopening these Clinton-era limitations on deductions may rear its head during the next two months of spending negotiations. Keep an eye out for future limits placed on deductions as the spending battle looms.

The estate-tax exemption has been made permanent at the $5 million level, indexed for future inflation, but the top rate has increased from 35 percent to 40 percent. Counting your home state, it is possible that you are once again in the 50 percent estate-tax bracket. The good news is that there are still ways to plan for mitigation or complete elimination of the estate tax for the wealthiest taxpayers interested in planning their affairs to maximize the inheritance for their heirs or charities instead of the federal taxing authorities.

The next shoe to drop, of course, is the spending battle. In this agreement, some $100 million in planned spending cuts were postponed until Feb. 29. Keep an eye on the ball, as the possible outcomes are sure to keep markets volatile.

John P. Napolitano is CEO of U.S. Wealth Management in Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthcompanies.com or on Facebook as JohnPNapolitano and US Wealth

John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

Securities offered through LPL Financial, Member FINRA/SIPC.

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