Potential Three Strikes for California Taxpayers

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By Craig Spraker

There are three new or potential changes in income tax law that will affect federal and California taxpayers beginning January 1, 2013:

1. Patient Protection and Affordable Care Act (sometimes referred to as 2010 Health Care Act or Obamacare) – As we reported in the August issue of Knowedge Applied (visit https://www.wndecpa.com), Obamacare was ruled constitutional by the U.S. Supreme Court in June and businesses must be prepared to comply with its provisions.

2. End of the “Bush-era” tax cuts – Unless Congress acts, they will end December 31, 2012. President Obama has proposed extending them, but only for those making less than $250,000 per year.

3. California Proposition 30 on the November ballot – California Governor Jerry Brown’s budget solution to close the California budget deficit. Money raised by the measure through higher sales taxes and a surcharge levy on highest earners would be used primarily to prevent cuts in schools. Proposition 30 is the linchpin of the budget Brown signed in June. The measure would add a quarter-cent to the statewide sales tax through 2016 and add, on a sliding scale, one to three percentage points to the income tax rates of individuals earning more than $250,000 a year. The income-tax hike would expire Dec. 1, 2019.

Major Income Tax Impact:
1. Obamacare
a. New 3.8% Medicare contribution tax on interest, dividends, annuities, royalties, rents, and capital gains (investment income). Charged on lesser of 1) net investment income or adjusted gross income above $250,000 for joint filers.

2. End of “Bush-era” tax cuts
a. Increase in maximum income tax rate from 35% to 39.6%.

b. Increase in capital gain rate from 15% to 20%.

c. End of 15% preferential rate on qualified dividends. Would be taxed at ordinary income rates, which the maximum is 39.6% (plus 3.8% from Obamacare above).

3. California Proposition 30
a. Creates three new high-income tax brackets for taxpayers with taxable incomes exceeding $250,000, $300,000 and $500,000. This increased tax will be in effect for 7 years. For individual files they are:
i. 10.3% – $250,001 – $300,000
ii. 11.3% – $300,001 – $500,000
iii. 12.3% – More than $500,000

b. Remember there is still a 1% surcharge to supplement mental health care on those making more than $1,000,000 from passage of a previous proposition. Therefore the maximum California income tax rate is 13.3%.

c. Proposition 30 also raises California’s sales tax to 7.5% from 7.25%, a 3.45% percentage increase over current law.

The above items are just the major income tax provisions of these policies. There are many more minor provisions. Additionally, there are provisions that affect gift, estate taxes, sales taxes and provisions that affect many more nonfinancial areas. White Nelson Diehl Evans will continue to monitor developments during the fall election season and will publish updated and more detailed reports on these issues as needed.

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