Tag Archives: Tax
In our September 2012 print edition, we brought you information about the (fraught with uncertainty) near term future of the tax code. Read on for more.
Another handful of provisions are set to expire by the end of 2012, and it is unlikely that Congress will address these provisions until after the Presidential election. The IRS warns that late-year law changes make for an administrative nightmare and often result in delayed filings. While taxpayers (and the IRS) remain hopeful for tax reform, we may not see progress until late December making tax planning nearly impossible. Expiring provisions include the following:
- Bush-era tax cuts in marginal income tax rates
- Reduced tax rates on dividends and long-term capital gains
- Marriage penalty relief provisions
- Expanded refundable credits for the child tax, adoption and earned income credit
- The moratoria on the phase outs of itemized deductions
- The payroll tax cut, which reduced an employee’s share of Social Security taxes by two percentage points, and
- A variety of previously extended temporary tax provisions (tax extenders) which affect individuals, businesses, charities, energy, community development, and disaster relief.
What’s New For 2013?
Despite the uncertainty of what will happen to the expired and expiring tax provisions, the recent Supreme Court ruling to uphold the “Affordable Care Act” will affect taxpayers beginning January 1, 2013. This ruling requires all Americans to purchase health insurance or pay a penalty beginning in 2014. To fund this health care mandate, the following two items will be effective in 2013. (We will address the 2014 health care mandate in another issue of the Small Biz Builder).
Medicare Tax Increase: Beginning in 2013, higher-income taxpayers will be subject to an additional 0.9% tax on earned income. The tax applies to income in excess of a single person’s wage and self-employment income over $200,000, or a married couple exceeding $250,000. There is no employer match as this tax increase is entirely paid by the employee or the self-employed individual. There will be employer withholding, but if you are self-employed, you will need to build this into your quarterly tax estimates.
Investment Tax Increase: Beginning in 2013, higher income individuals with net investment income will be subject to a 3.8% tax of the lesser of two amounts: net investment income or the excess of the taxpayer’s modified adjusted gross income over a $200,000/$250,000 threshold amount. Net investment income includes Interest, dividends, annuities, royalties, and rents,income from a passive business, capital gains and other net gains from the sale of property.
“So, now what?”
So what does all this mean for you as a taxpayer and how will this impact your tax planning for 2012 and 2013? The threat of Taxmageddon is “real” and will likely affect every American household, regardless of income. It’s important for each taxpayer to understand that the outcome of the Presidential election coupled with the potential tax law changes make for a foggy and unpredictable future.
Today, due to this uncertainty, your trusted tax advisor may not have answers to all of your tax questions and tax concerns. Padgett is active in Washington DC, explaining to lawmakers the problem this uncertainty is causing and encouraging them to give small business some predictability in the tax laws they must comply with. While Padgett may not be successful in changing Washington, we can however ensure your concerns are heard and keep you informed once the rules are known. So what should you be doing today in these uncertain times?
While taking the most conservative planning approach, by assuming all of the laws will expire or will not be extended, may cause you to pay higher than necessary estimated tax payments or to withhold too much federal tax from your wages, taking a more aggressive approach could cause you to have an unprecedented tax liability at the end of the tax year, as well as additional penalties. Taking a middle ground approach, may put you into either one of the aforementioned predicaments. In the end, it all comes down to being flexible and “staying in the know” so that whatever the outcome, you are prepared, ready to act quickly, and can make educated decisions.
Here are some tips from the IRS that may help you lower your taxes and avoid tax problems:
1. Make sure summer employer classifies you correctly. Summer workers sometimes are misclassified as independent contractors (self-employed) rather than as employees. Employers who do this usually fail to withhold taxes from the worker’s wages, often leaving the worker responsible at tax time for paying income taxes plus Social Security and Medicare taxes. Workers can avoid higher tax bills and lost benefits if they know their proper work status.
2. Summer workers, students may be exempt from tax withholding. If you got a refund of all withheld income taxes for 2009 and you expect the same for 2010, you may claim “exempt” on your Form W-4 when you’re hired. That can increase your paycheck and possibly let you avoid having to file a 2010 federal tax return. If you claim exempt status, your employer should withhold Social Security and Medicare taxes from your wages but no federal income tax.
3. Getting married? Newlyweds can help make the wedded bliss last longer by doing a few things now to avoid problems at tax time. First, report any name change to the Social Security Administration before you file your next tax return. Next, report any address change to the Postal Service, your employer and the IRS to make sure you get tax-related items. Finally, use the Withholding Calculator at IRS.gov to make sure your withholding is correct now that there are two of you to consider.
4. Clean out, donate, deduct. Those long-unused items you find during spring or summer cleaning can probably be donated to a qualified charity and may garner you a tax deduction as long as they’re in good condition. You must itemize deductions to qualify to deduct charitable contributions and you must have proof of all donations.
5. Help with service project, deduct mileage. While there’s no tax deduction for time donated toward a charitable cause, driving your personal vehicle while donating your services on a trip sponsored by a qualified charity could get you a tax break. Itemizers can deduct 14 cents per mile for charitable mileage driven in 2010. Keep good records of your mileage.
6. Get tax credit for summer day camp expenses. Many working parents must arrange for care of their younger children under 13 years of age during the school vacation period. A popular solution – with favorable tax consequences – is a day camp program. Unlike overnight camps, the cost of day camp may count as an expense towards the Child and Dependent Care Credit.
7. Owner of vacation home may get two tax breaks. First, mortgage interest and real estate taxes paid on a second home are usually deductible if you itemize. Second, if you rent your vacation home out fewer than 15 days per year, that rental income is typically not taxable.
8. Report winnings, possibly deduct losses. If Lady Luck smiles on you during your vacation, remember that gambling winnings must be reported on your tax return. Losses are deductible only if you itemize and have winnings that equal or exceed your losses. Good records are a must.
9. Deduct job-related moving expenses. Relocating due to a job? A tax break may be coming your way and you won’t have to itemize deductions to get this one. If you can satisfy the distance and time tests, job-related moving expenses are deductible. Other requirements apply if you are self-employed. Members of the armed forces do not have to meet these tests if the move was due to a permanent change of station.
10. Deduct storm damage losses. You may be able to claim a casualty loss for the reduction in value of property damaged by floods, storms, fire or other disasters. And if your county was declared a federal disaster area, you may be able to file a tax return immediately to claim that loss. And if you’re repairing storm damage, remember the energy tax credit is available when you purchase things like insulation or certain heating and cooling systems, water heaters, windows or doors.
This information courtesy of David L. Moore CPA, LLC, at 351 S. Cypress Road, Suite 404 C, Pompano Beach, Florida 33060. For more info, give their office a call at (954) 933-7314 or visit their website at www.davidmoorecpa.com.