Tax season 2013. 2012 seemed to have gone by so fast. Everything was on track to go as planned, and then... congress. Those people we voted into office, multiple times in some cases. These people who can't see beyond their need to dominate the other side, who often do more damage than good. And it's not isolated to one side over the other; both sides are equally guilty of putting politics and one-upmanship before the needs of the people. Anyway, taxes, right?
Taxes. No decisions were made by...congress... until after the beginning of the new year. The result? No one was truly able to plan for effective year-end tax moves, final forms for tax returns haven't even been finalized as of the date of this writing, January 22, so tax software has not really been fully programmed. Returns won't be accepted by IRS until January 31, at the earliest, and even then only limited forms will be able to go through. No one has thought about extending the April 15 final due date to accomodate this delay, so the crunch will really be on for those of us who prepare returns professionally. And what about FAFSA, for those of us who need to get our tax returns in to apply for college financial aid?
So they fought and they fought - which Bush tax cuts should we keep, which should we jettison? Should we soak the "rich" at 36%? 39%? 39.6%? And what is "rich" anyway? Obama said $250,000, Boehner said $1,000,000; in California, New York, Illinois, Massachusetts, D.C., $250,000 is comfortable upper middle class, not rich. In Nebraska, Kansas, Oklahoma, Tennessee, $250,000 is quite wealthy indeed. Whose version of "rich" is the one to use for the entire country? Should we let teachers write off $250 of expenses or not? And that infernal Healthcare Plan - what on earth do we do about that?
After all the fighting, all the name calling, all the delays, we ended up with most of the Bush tax cuts extended in one form or another, a higher tax rate of 39.6% for those "higher income" folks - income over $450k for joint filers, $400k for single filers, and other tax hikes on middle income people in the form of reduced availability of deductions rather than a straightforward, honest percentage increase. So, instead of putting $5000 into your FSA at work, you can only put $2500 and the 2% decrease in Social Security taxes withheld is back up to normal (mid-level employees should expect to end up with a tax increase of as much as $2000 for the year from this alone). Good things were accomplished too - common sense things like indexing the Alternative Minimum Tax for inflation once and for all, qualified dividends (dividend income taxed at reduced capital gains rates) have been made permanent, the deduction for sales taxes paid has been renewed.
Certain pieces of the Healthcare Plan fall into place in 2013, including the requirement for employers to report company-paid health care premiums on W-2 forms. No, this is not a back-door way to tax benefits; at least not yet. Right now it's to serve as a reference point to show just how much health insurance actually costs annually. Of the "non-tax" tax hikes falling into place this year, a 0.9% increase in Medicare withholdings will hit those taxpayers who earn over $250k for marrieds, $200k for singles, and a 3.8% additional tax on investment income for those same wage earners. In other words, the federal income tax on a married couple earning $250,000 could go as high as 44.3% (39.6 + 0.9 + 3.8).
That same couple, in California, could be subject to a rate of 12.3%. We're talking about forking over close to 57% of earnings to the government, not taking into account the additional taxes in the form of reduced deductions. On that level of income, that percentage of tax is usurious.
This tax season is starting too late for us to do anything about planning or acting to reduce the taxes we may be hit with, but it's the right time to start really looking at how to ensure that next year doesn't bleed us quite as dry. It's also time to reconsider the criteria we use to choose our elected officials. It seems the more things change, the more they stay the same. Time to break that pattern.
In the meantime, be good to your tax person; this year is truly going to be a challenge.
I welcome your comments and questions!
Cindy I. Szerlip, EA, CFP
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any US Federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.
Tuesday, January 22, 2013
Saturday, August 14, 2010
What did this have to do with Health Care, exactly?
Well, yes, indeed, that hugely bloated, overreaching, amazingly expensive Health Care bill (otherwise known as the Guaranteed Employment Act for Government Employees) is now winding its way through the halls of our government. Minions are scurrying around, trying to figure out just how to give this Frankenstein life.
Hidden among the various earmarks and other features of favoritism toward cronies is a paperwork nightmare for small business. What, you may ask, do 1099 forms have to do with health care? Nothing other than feeding the Congressional fantasy that issuing 1099's to anything that moves in the direction of a business will drum up enough previously unreported income to incur billions in new taxes to pay for this behemoth. So, deep in the folds of the Health Care bill is a proviso that, effective in 2012, all businesses must issue a 1099 form to anyone who sells them more than $600 a year in goods AND services. That quaint notion of small businesses issuing 1099's to unincorporated service businesses is gone like yesterday's news. Everyone, yes everyone, gets a 1099 if a business purchased more than $600 of anything from them. At the moment, that means your telephone company, your gas station, the office supply store, your landlord, corporations, partnerships, sole proprietorships - all are fair game. It is a horribly misguided attempt to uncover the "underground economy" and control business. Does Office Depot underreport income? Not likely - it's a public company and shareholders will want valid reporting and dividends. Are utility companies tax dodgers? Give me a break.
The main income this requirement will drum up will be for those businesses that pop up to prepare 1099 forms for other small businesses. The paperwork that a small mom and pop operation will have to cope with just to assemble the totals for this reporting requirement will be stunning. Imagine, you went out to pick up some envelopes, maybe some tape and a box of pens. Paid cash? Get a receipt and the tax ID number of the office supply store. Paid by credit card? Keep track of each vendor on that billing statement - oh and get the tax ID number. Those of us who use accounting software may in fact be in a better position to adapt to these requirements than others. The majority of small business clients I see in my office do not keep that level of detail and many are far from computerized.
What happens if you don't keep the paperwork? No tax deduction for you. And a possible penalty for not complying with the rules - presently, at minimum, a company that doesn't issue 1099 forms properly is subject to a penalty charge of $50 per unfiled/late form. There are also more draconian rules, such as holding the "employer" responsible for back-tax withholding on the contractors. Enforcement has been spotty over the years; lots of small businesses have been able to slide by. Then again, back then we weren't facing a $13 Trillion deficit. Good times, no?
There have been a couple of attempts by individual Congressmen to introduce legislation to tone down the 1099 nightmare; the latest was handily defeated just last week. No doubt some will continue to attempt to chip away at this rule; there is a legislative session scheduled to address this on September 14, but Congress moves at the pace of a slug. Unless the business community puts up a united front to challenge this craziness, it will go into effect as of 2012.
My suggestion? Something like this is distasteful but inevitable. 1099 reporting is nothing new. If you do not keep a comprehensive set of books, now's the time to learn how. It's a relatively small investment to put some type of accounting software to use, and it will pay real dividends further down the line. So many programs can help you aggregate the payments you've made from your business. Consider Quickbooks, AccountEdge (previously known as MYOB), Peachtree or any one of a number of other business-oriented applications. Yes, this is a time-sucker; if you have the means, hire a professional bookkeeper to do a monthly reconciliation of your books. If you don't have the means, find someone who will train someone in your office or a family member to do it for you. The program can't do it all for you - it only does what you tell it to do. Many reputable bookkeepers and accountants who are certified advisors provide training - and training is essential.
Oh, and don't forget their tax ID # ...
Hidden among the various earmarks and other features of favoritism toward cronies is a paperwork nightmare for small business. What, you may ask, do 1099 forms have to do with health care? Nothing other than feeding the Congressional fantasy that issuing 1099's to anything that moves in the direction of a business will drum up enough previously unreported income to incur billions in new taxes to pay for this behemoth. So, deep in the folds of the Health Care bill is a proviso that, effective in 2012, all businesses must issue a 1099 form to anyone who sells them more than $600 a year in goods AND services. That quaint notion of small businesses issuing 1099's to unincorporated service businesses is gone like yesterday's news. Everyone, yes everyone, gets a 1099 if a business purchased more than $600 of anything from them. At the moment, that means your telephone company, your gas station, the office supply store, your landlord, corporations, partnerships, sole proprietorships - all are fair game. It is a horribly misguided attempt to uncover the "underground economy" and control business. Does Office Depot underreport income? Not likely - it's a public company and shareholders will want valid reporting and dividends. Are utility companies tax dodgers? Give me a break.
The main income this requirement will drum up will be for those businesses that pop up to prepare 1099 forms for other small businesses. The paperwork that a small mom and pop operation will have to cope with just to assemble the totals for this reporting requirement will be stunning. Imagine, you went out to pick up some envelopes, maybe some tape and a box of pens. Paid cash? Get a receipt and the tax ID number of the office supply store. Paid by credit card? Keep track of each vendor on that billing statement - oh and get the tax ID number. Those of us who use accounting software may in fact be in a better position to adapt to these requirements than others. The majority of small business clients I see in my office do not keep that level of detail and many are far from computerized.
What happens if you don't keep the paperwork? No tax deduction for you. And a possible penalty for not complying with the rules - presently, at minimum, a company that doesn't issue 1099 forms properly is subject to a penalty charge of $50 per unfiled/late form. There are also more draconian rules, such as holding the "employer" responsible for back-tax withholding on the contractors. Enforcement has been spotty over the years; lots of small businesses have been able to slide by. Then again, back then we weren't facing a $13 Trillion deficit. Good times, no?
There have been a couple of attempts by individual Congressmen to introduce legislation to tone down the 1099 nightmare; the latest was handily defeated just last week. No doubt some will continue to attempt to chip away at this rule; there is a legislative session scheduled to address this on September 14, but Congress moves at the pace of a slug. Unless the business community puts up a united front to challenge this craziness, it will go into effect as of 2012.
My suggestion? Something like this is distasteful but inevitable. 1099 reporting is nothing new. If you do not keep a comprehensive set of books, now's the time to learn how. It's a relatively small investment to put some type of accounting software to use, and it will pay real dividends further down the line. So many programs can help you aggregate the payments you've made from your business. Consider Quickbooks, AccountEdge (previously known as MYOB), Peachtree or any one of a number of other business-oriented applications. Yes, this is a time-sucker; if you have the means, hire a professional bookkeeper to do a monthly reconciliation of your books. If you don't have the means, find someone who will train someone in your office or a family member to do it for you. The program can't do it all for you - it only does what you tell it to do. Many reputable bookkeepers and accountants who are certified advisors provide training - and training is essential.
Oh, and don't forget their tax ID # ...
Sunday, August 8, 2010
An unavoidable part of life
Hi! Welcome to "Taxes? Go Figure!" My plan is for this to be a weekly (or more) newsletter, giving an informative and casual view of the absurdity we have come to know and love (?) as our national tax system. In my practice as an Enrolled Agent and business manager, I deal with many small businesses and individuals whose financial future is largely dependent on how they are able to adapt to and make the most of the existing tax laws and the changes that come down the pike.
Taxes affect all of us. If we work, if we own a home, if we have a savings account, rich or poor, in business or not, much of our daily activity is influenced by the prevailing tax laws. The Internal Revenue Code is now over 120,000 pages long, full of contradictions, "special" allowances and mind-boggling circular references so complicated that a $120 billion industry has been built just to understand and interpret it.
Based on that, you should know not to believe anyone who tells you they understand every facet of the tax code. No matter how experienced, no matter how highly paid, there is no tax expert out there who can handle every situation that comes their way in every chapter of the code. There are specialists for every type of tax and generalists who can handle things globally and know where to get information for you when things go into the deeper intricacies. Would you trust your brain surgery to your podiatrist? Likely not. Both are competent in their specific fields, but not necessarily in both ends of the spectrum. Not much different in the world of tax. There are generalists akin to your primary care physician, and then there are specialists who do nothing but public corporations, nothing but estates and trusts, and on and on.
Where does this leave the small investor? Or the regular working guy who earns a W-2 and falls prey to some spectacularly ill-advised legislation? Or the small businesses struggling to survive? Well, contrary to the do-it-yourself questionnaires in that accountant-in-a-box Turbo Tax program you can buy at Office Depot, the complexity leaves you at a disadvantage if you don't take the time to understand the laws that affect you before you ever commit pencil to paper to do that annual tax return.
This newsletter is not intended to replace competent counsel - the expertise of an Enrolled Agent, a well-trained tax CPA or a tax attorney is invaluable. What I hope this little blog does is let you know what questions are out there for you to ask. If you don't even know what your options can be, how can you find out ways to use them to your best advantage?
I also will be advising you of changes in the code, and there are many every year. Most of them ride in secretly, unannounced, as additions to larger bills that otherwise have absolutely nothing to do with taxation. Some of my first posts will deal with the huge Health Care bill and some of the tax related items that have snuck in without prior notice. As Pelosi said, "We'll have to pass the bill so you can find out what's in it". Well, we can see some of it now and it ain't pretty.
I welcome your comments and questions. I will try to answer as many as I can.
Taxes affect all of us. If we work, if we own a home, if we have a savings account, rich or poor, in business or not, much of our daily activity is influenced by the prevailing tax laws. The Internal Revenue Code is now over 120,000 pages long, full of contradictions, "special" allowances and mind-boggling circular references so complicated that a $120 billion industry has been built just to understand and interpret it.
Based on that, you should know not to believe anyone who tells you they understand every facet of the tax code. No matter how experienced, no matter how highly paid, there is no tax expert out there who can handle every situation that comes their way in every chapter of the code. There are specialists for every type of tax and generalists who can handle things globally and know where to get information for you when things go into the deeper intricacies. Would you trust your brain surgery to your podiatrist? Likely not. Both are competent in their specific fields, but not necessarily in both ends of the spectrum. Not much different in the world of tax. There are generalists akin to your primary care physician, and then there are specialists who do nothing but public corporations, nothing but estates and trusts, and on and on.
Where does this leave the small investor? Or the regular working guy who earns a W-2 and falls prey to some spectacularly ill-advised legislation? Or the small businesses struggling to survive? Well, contrary to the do-it-yourself questionnaires in that accountant-in-a-box Turbo Tax program you can buy at Office Depot, the complexity leaves you at a disadvantage if you don't take the time to understand the laws that affect you before you ever commit pencil to paper to do that annual tax return.
This newsletter is not intended to replace competent counsel - the expertise of an Enrolled Agent, a well-trained tax CPA or a tax attorney is invaluable. What I hope this little blog does is let you know what questions are out there for you to ask. If you don't even know what your options can be, how can you find out ways to use them to your best advantage?
I also will be advising you of changes in the code, and there are many every year. Most of them ride in secretly, unannounced, as additions to larger bills that otherwise have absolutely nothing to do with taxation. Some of my first posts will deal with the huge Health Care bill and some of the tax related items that have snuck in without prior notice. As Pelosi said, "We'll have to pass the bill so you can find out what's in it". Well, we can see some of it now and it ain't pretty.
I welcome your comments and questions. I will try to answer as many as I can.
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