2013 Taxes and the Fiscal Cliff

Posted on by

In the United States, the “fiscal cliff” refers to the economic effects that will result from tax increases, spending cuts, and a corresponding reduction in the US budget deficit, potentially beginning in 2013. The deficit—the difference between what the government takes in and what it spends—is projected to be reduced by roughly half in 2013. The Congressional Budget Office estimates that this sharp decrease in the deficit (the fiscal cliff) will likely lead to a mild recession in early 2013 with the unemployment rate rising to roughly 9 percent in the second half of the year.

The laws leading to the fiscal cliff include the expiration of the 2010 Tax Relief Act and planned spend¬¬ing cuts under the Budget Control Act of 2011. Nearly all proposals to avoid the fiscal cliff involve extending certain parts of the Bush tax cuts or changing the 2011 Budget Control Act or both, thus making the deficit larger by reducing taxes or increasing spending. Because of the short-term adverse impact on the economy, the fiscal cliff has stirred intense commentary both inside and outside of Congress.

The Budget Control Act was a compromise intended to resolve a dispute concerning the public debt ceiling. Some major programs, like Social Security, Medicaid, federal pay (including military pay and pensions), and veterans’ benefits, are exempted from the spending cuts.[note 1] Spending for defense, federal agencies and cabinet departments will be reduced through broad, shallow cuts referred to as budget sequestration.

At around 2 a.m. on January 1, 2013, the Senate passed a compromise bill, the proposed American Taxpayer Relief Act of 2012, by a margin of 89–8. The bill would delay the budget sequestration by two months, and includes $600 billion over ten years in new tax revenue relative to extending 2012 levels, which is about one-fifth of the revenue that would have been raised had no legislation been passed. The revenue would come from increased marginal income and capital gains tax rates relative to their 2012 levels for annual income over $400,000 for individuals and $450,000 for couples; a phase-out of certain tax deductions and credits for those with incomes over $250,000 for individuals and $300,000 for couples, an increase in estate taxes relative to 2012 levels on estates over $5 million, and expiration of the two-year-old cut to payroll taxes, which is applied to income under the Social Security Wage Base, which was $110,100 in 2012. These changes would all be made permanent.[1][2] The House passed the bill without amendments by a margin of 257–167 around 11 p.m. EST on January 1, 2013.[3]

http://en.wikipedia.org/wiki/United_States_fiscal_cliff

 

Why Your Tax Bill Might Surge Next Year

Posted on by

In a recent tax planning meeting with one of our clients, we shocked them with what their income tax future looked like for 2013 if Congress continues to do nothing to provide a long-term permanent set of tax laws. They had no idea what tax breaks were expiring this year and next year, and how much it would cost them personally in extra income tax. But they aren’t alone, many Americans and even tax professionals aren’t aware that their tax bill could rise dramatically next year.

These clients are your average American family and their situation is a good example of the law changes that will affect all of us. Here’s their tax situation with a table summarizing the expiring tax laws that are scheduled to occur in 2011 and 2012.

Meet the Smiths: 26-year-olds Bill and Joan have been married for five years and have two young children. Bill earns about $65,000 a year in sales and Joan has gone back to work and earns about $35,000 annually. Bill owes quite a bit on his college student loans and will pay about $3,000 in interest on them in 2013. With Joan working again, they are paying $3,000 for year-round child care. Joan inherited some AT&T (T) stock from her grandmother, which pays her $1,000 in dividends every year. Finally, counting home mortgage interest, they have about $20,000 in itemized deductions.

The first big change affecting the Smiths will be a combined increase in income tax rates, and a tightening of tax brackets as a result of the expiration of the Bush tax cuts. We estimate this will cost them $960 in 2013.

Bill will lose the complete deduction of his student loan interest in 2013, costing about $840. The pair’s allowable deduction for child care will drop to $2,400 from $3,000, and they will also see their credit for children drop in half, costing another $1,000.

The marriage tax penalty will come roaring back to hit the Smiths in 2013, costing an estimated $500. The tax on their dividend income will go increase to $280 from $150, adding another $130. Finally, although we did not calculate the effect, without Congressional action to once again “fix” the alternative minimum tax, the Smiths could owe this ugly tax as well!

Luckily for the Smiths–but not for many Americans–other major changes for 2013, which do not personally affect them, include a phase out of itemized deductions and personal exemptions if their income starts to climb.

In summary, because of tax laws expiring this year and next, we estimate that the Smiths will owe $3,598 more in income tax in 2013 than in 2011 with no change in their income.

Major Individual Income Tax Benefits Expiring 12/31/2011:

•Personal tax credits applied against income tax no longer apply

Higher alternative minimum tax exemptions revert back to extraordinarily-low thresholds

•$250 school teacher expense deduction ends

•Mortgage insurance premium deduction expires

•State and local sales tax deductions expire

•Tuition and related fees deduction end

•IRA to charity tax-free transfers stop

•2% Social Security tax reduction ends

Major Individual Income Tax Benefits Expiring 12/31/2012:

•Marriage penalty equalization ends

•Dividends taxed at capital gains rates removed, taxed at regular rates now

•Capital gains low tax rates expires

•Removal of itemized deduction phase out for higher income Americans

•Removal of personal exemption phase out for higher income Americans

•Child care deduction limit of $3,000 reverts to $2,400

•Child credit reduces from $1,000 per child to $500 per child

•Low 10% tax bracket for low income Americans is eliminated

•Lower income tax rates and smaller brackets expires

•Refundable adoption credit and reduced deduction

•American Opportunity college education credit expires

•Major reduction in earned income credits and refunds

•Income tax exemption for debt forgiven on home foreclosures and repossessions

•Deduction for student loan interest ends

•Education IRA limit drops from $2,000 to $500

http://www.foxbusiness.com/personal-finance/2011/11/07/why-your-tax-bill-might-surge-next-year/

Obama’s good and bad proposals to increase taxes

Posted on by

Taxes are the price we pay to live in a free society. Someone has to pay for the police and fire departments, the courts and judges, the highways and stop lights, the Army and Air Force, and of course our elected representatives who write our laws.

The professor who taught me tax law, Stanley H. Surrey, said that whether or not you believe in a progressive income tax, under which higher income taxpayers are taxed at a higher rate, is like religion. You will never be able to convince someone who believes differently that you are right and that he or she is wrong.

President Obama is a believer in the progressive income tax and believes that our current tax rates are not progressive enough. He wants to raise revenue for the government by raising tax rates on higher income taxpayers, or as he calls them, the rich.

I’m old enough to remember when President Kennedy, who Professor Surrey served as Assistant Secretary of the Treasury for Tax Policy, reduced the top tax rate on income from 90% to 70%. I actually practiced law in the 1970′s when the top rate on the federal income, estate and gift taxes was 70%. And I remember well President Reagan’s revolutionary 1981 idea that no American should have to pay more than 50% of his or her income, or estate at death, in taxes.

Currently the top rate on earned income is only 35%, and the top rate on capital gains and dividends, the preferred forms of income for the rich, is generally only 15%, which is why hedge fund managers can pay tax at lower effective rates than their secretaries.

President Obama wants to raise the top rate to 39.6%, which is where it was under President Clinton, before the so-called Bush tax cuts. The president wants to repeal the Bush tax cuts and increase tax rates for upper-income households earning over $250,000. But if no agreement can be reached before the end of 2012, the Bush tax cuts will expire for everyone in 2013, and tax rates will be restored at all income levels to where they were under President Clinton.

If we’re going to raise taxes, that’s a pretty good and simple way to do it. Just increase the tax rates. An even better way to raise taxes is to eliminate or reduce deductions, like that allowed for interest paid on home mortgages. Eliminating deductions both simplifies the tax code and raises revenue at the same time. If Congress can’t bring itself to eliminate the deduction entirely, if could reduce and limit it to interest on the first, say, $300,000 of debt incurred to purchase a primary residence. Current law has higher limits, is not limited to acquisition indebtedness, and is not limited to the primary residence.

But President Obama is also proposing two unattractive ways to increase tax revenue. First he’s proposing to phase-out otherwise allowable itemized deductions for upper-income taxpayers, depending on their level of income. The problem with this proposal is that it makes the tax code even more complicated than it already is. And we’ve tried it before, to our regret. If you want to see how complicated the phase-out of itemized deductions was before 2010, google “Section 68 Internal Revenue Code”.

The second bad tax increase President Obama is proposing is a new minimum tax to insure that all high-income taxpayers at least pay some minimum level of tax regardless of how many deductions from income and tax credits they have. Again, the problem is complexity.  Any minimum tax proposal like the president’s actually creates an alternative tax system, and requires the targeted taxpayers to compute their taxes both ways. Google the “alternative minimum tax” to see how much complexity this concept introduces into the tax code.

So if the President and his supporters want to increase tax revenues, I recommend keeping the changes simple. Just increase tax rates and/or eliminate or restrict existing deductions and credits. Don’t make an already complicated tax code and system even more complicated!

http://www.newsworks.org/index.php/local//item/27084-obamas-good-and-bad-proposals-to-increase-taxes/

 

 

Offer in Compromise

Posted on by

An Offer in Compromise, also known as an OIC, is not the only solution to solve your challenges, it certainly is the most common approach. An offer in compromise is a negotiated settlement the tax payer and the IRS that settles the tax payers’ debt for less than the amount owed.  The amount of the reduction depends on the financial circumstances for the individual. The key element to understand is that negotiation is everything and who you hire to represent you in your dealings with the IRS debt will directly affect the settlement .It is not recommended for a business who is in debt to attempt to address an offer in compromise by themselves; there are many legal terms thrown around that are intentionally designed to intimidate the consumer.

Many companies claim they can settle your IRS debt to a certain amount.  Be wary of any company that claims to settle your debt for (X) amount of dollars before obtaining the specifics of your situation. As stated above, any offer in compromise negotiation is done on a case by case basis. There are many factors that come into play when negotiating your debt such as your income, assets, and basically what your ability is to pay back the debt.  This is why, no company can reasonably promise you anything without first reviewing your unique case. When choosing a firm to help alleviate your IRS debt, it is important not to only shop based on the lowest price; the money you will save by picking the right firm will usually more than pay for itself. Your experience in other areas of your life will likely confirm this.

We suggest check its credentials and make sure it is qualified to accomplish the task at hand. This will enhance the degree of success and result in a positive outcome. As state laws are always changing and being revised, it is a good idea to be represented by someone who has extensive knowledge of the laws where you live.

If you would like to discuss you situation with a professional today, Call Bill Posner, CPA. He has over 16 years’ experience helping individuals and business address tax issues. He can assist with Tax Preparation and accounting as well Call today 301-740-6036.

 

Finding a qualified Tax Preparer

Posted on by

People pay someone to do their taxes for the same reason they take their car to the garage for an oil change. It’s messy and time-consuming, and a mistake could cost you a lot of money. But finding a good tax preparer, like finding a good mechanic, isn’t easy.

Tax preparers don’t need a license to practice in most states. Anyone can print out business cards and call himself a tax preparer. Sometimes, the shady operators are easy to spot: A used car dealership that also offers tax preparation is probably not a good place to drop off your W-2s. But in other cases, the warning signs aren’t so obvious..

Start by checking out a preparer’s professional credentials. Tax preparers have a variety of designations, including:

• Certified public accountants. CPAs are required to have a college degree and to pass a rigorous certification exam.  Many CPAs go beyond tax preparation, providing ongoing business and professional advice. They’re authorized to represent you if you’re audited by the IRS.

• Enrolled agents. Enrolled agents must have at least five years of work experience at the IRS or pass an IRS-administered two-day exam. They’re also authorized to represent you if you’re audited.

• Unlicensed tax preparers. Many of these preparers are reputable and have prepared taxes for years, but it’s important to ask a lot of questions before hiring one. Find out how long the person has been preparing tax returns, what kind of returns she’s done and what type of support the preparer’s company will provide if you’re audited.

If you owe the IRS money, or are a procrastinator by nature, you may be tempted to wait until April to file. But that’s not a good time to start looking for a tax preparer. Though most national tax-preparation companies offer extended hours right up to the filing deadline.  Filing at the last minute increases the risk of mistakes.

Need accounting or tax help? Call Bill Posner CPA today  Phone  301-740-6036.