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.
