Congress will reconvene after the November elections and is expected, among other things, to consider legislation to address the individual income tax rates that will apply after 2012.
Individual income tax rates
Under current law, ordinary taxable income of individuals will be taxed through 2012 at six statutory rates—with the two highest rates set at 33% and 35%.
After 2012, unless Congress and the president enact new legislation to change the individual income tax rates, these will return to the higher rates in effect prior to 2001—with the two highest rates set at 36% and 39.6%.
The lower rates currently in effect—reflecting the “Bush tax cuts”—were enacted as part of the Economic Growth and Tax Relief Reconciliation Act of 2001. They were scheduled to expire at the end of 2010, but were extended through 2012 by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.
Different rates apply at different levels of ordinary taxable income. The tax brackets and rates for single taxpayers and married taxpayers filing a joint return through 2012 and after 2012 are shown in the table below.
|
Starting points for tax brackets (2011 dollars) |
|
Statutory tax rate on ordinary taxable income |
|
Single Filers |
Joint Filers |
|
2011-2012 |
After 2012 |
|
$0 |
$0 |
|
10% |
15% |
|
$8,500 |
$17,000 |
|
15% |
15% |
|
$34,500 |
$69,000 |
|
25% |
28% |
|
$83,600 |
$139,350 |
|
28% |
31% |
|
$174,400 |
$212,300 |
|
33% |
36% |
|
$379,150 |
$379,150 |
|
35% |
39.6% |
Source: KPMG LLP
Individual capital gains and dividends rates
Under current law, capital gains and dividends are taxed at a maximum rate of 15% for assets held more than one year. As in the case of the current individual income tax rates, the rates for capital gains and dividends reflect the Bush tax cuts, but here the tax cuts were made by the Jobs and Growth Tax Relief Reconciliation Act of 2003. As subsequently extended, the reduced rates for dividends and capital gains will expire at the end of 2012.
Unless further extended by Congress and the president, the rates for capital gains and dividends will return to their pre-2003 levels—that is, capital gains would be taxed at a maximum rate of 20% and dividends would be taxed as ordinary income with a top rate of 39.6%.
|
Investment Income |
|
|
2011-2012 |
After 2012 |
|
Long-term capital gains |
15% |
20% |
|
Qualified dividends |
15% |
39.6% |
Source: KPMG LLP
In addition, the Health Care and Education Reconciliation Act of 2010 contained a provision that expanded the 3.8% Medicare tax base to include net investment income (including interest, dividends, and capital gains) of individuals with modified adjusted gross income in excess of $200,000 ($250,000 for married taxpayers filing a joint return). The expanded tax base is effective for income earned in 2013.