Monthly Archives: January 2013

2013 January Tax Information Update

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January 21, 2013

Dear Client:

Below I have outlined a summary of recent tax legislation. Feel free to bring any questions with you when you have an appointment, or email the office! I also hope everyone has had the opportunity to register and look at our new online portal system. Just a reminder that this system does not mean that you will be preparing your own tax return online via the portal. It is only a delivery method used in place of us mailing you a paper organizer booklet as in prior years. We can also deliver electronic copies of tax returns and source documents (like W2) and you are now able to upload documents and files for us to use in preparing your personal or business tax return via the “file exchange” feature.

TAX LAW RECENT CHANGES

FAFSA: The IRS is now in control of student loans, FAFSA, and of course all student/education tax credits and deductions. Most schools now require your federal tax return to be filed first, prior to completing your “already filed” final version of your FAFSA. Schools are then expecting individuals to use the “Let IRS” complete your income tax details prior to submission in order to get any type of financial aid.
FILING DELAY: Due to the “fiscal cliff” being resolved after January 1, 2013, the IRS has been forced to re-program all of its computers resulting in the inability to file simple returns until January 30 or later; other tax returns may not be filed until late February or early March. Appointments and preparations will continue as scheduled. We have the law, forms, and software. We are only delayed (like everyone else) on the E-File part.
IRS: I know everyone will find this disturbing, but IRS is running on “low power” with most computers down until about January 31. In addition, IRS is down at least 6% staffing of revenue/audit agents. 2012 audit rates are only 1.03% for individuals, down from 2011. If your AGI exceeds $1 Million, however they are watching those returns closely: 1 out of 8 tax returns go under audit. S Corporate tax return and Partnership audit rates are down to .48% and .47% respectively. Those returns require better record keeping, books & records, and are more likely to be professionally prepared.
FLEX SPENDING: Reduced to $2,500 from $6,000. (2013 vs 2012)
ESTATE TAX CHANGES: For federal purposes, you must file an estate tax return if your gross estate exceeds $5,250,000 (includes life insurance, etc) and pay a tax rate of 40% for passing away after 12/31/12. MA remains a lower threshold at $1,000,000 filing requirement as in most states.

I NEW TAXES ON ALL TAXPAYERS

All taxpayers in 2013 will pay 2% higher social security tax through 2013 on income up to $113,700 per taxpayer. This results in a tax increase on a dual income household up to $4,548.

Affordable Care Act (Obamacare) assesses a 2.3% tax on all medical devices including braces, medicine pumps, and other medical items. Although the tax is imposed on the selling price (Gross revenue) to the manufacturer, the new tax is expected to be passed right through to the buyer/consumer. This tax is imposed regardless if the manufacturer made a profit or loss for the year.

II NEW TAXES ON MODIFIED AGI OF $125,000 AND UP

The Affordable Care Act has created new taxes that were unrelated to “fiscal cliff” agreements. These taxes kick in at the following Modified Adjusted Gross Income (MAGI) levels: Married Filing Separate – $125,000 Single – $200,000 Married Filing Jointly – $250,000

Tax #1 Earned income surtax – Charges an extra .9% tax on all earned ordinary income above the levels above. However, any W2 that hits $200,000 must have the new tax withheld by the employer, regardless of family income. The tax includes the self-employed. There is no limit on this tax. Higher income=higher tax!

Tax #2 Investment income surtax– Charges an extra 3.8% on the tax return on any interest, dividends, capital gains, rental income, and any other passive activities including “profits” from K-1/partnership investments, and sale of business assets. Capital gains also include any taxable gains on sale of personal residences. (Must have profit exceeding $250,000 (single) or $500,000 (married/joint). NOTE: These taxes hit trusts quickly – everything after $11,650 in gross income!

The below new taxes affect taxpayers with the following Modified Adjusted Gross Income (MAGI) levels:
Married Filing Separate – $150,000 Single – $250,000 Married Filing Jointly – $300,000

Tax #3 Phase outs of itemized deductions and exemptions- Starts to reduce all itemized deductions at the levels noted above. But the most IRS regs will remove is 80% of those, allowing not less than 20% of your itemized deductions.

Tax #4 Phase outs of personal exemptions including kids/dependents – Starts to reduce all of these at the levels noted above. Example: A husband/wife/2 kids would get 4 x $3,900 exemptions or $15,600 tax exemption. This gets reduced by 2% for each $2,500 of income that exceeds the amounts above. Therefore, once income reaches $125,000 above the amount, exemptions are $0. That means they are completely phased out at $275,000 MFS, $375,000 Single, $425,000 MFJ

Tax #5 Income tax rates – The Bush tax cuts have been made “permanent” until your taxable income hits $225,000 Married Filing Separate, $400,000 single, $450,000 Married Filing Joint. The regular (ordinary) income tax rates increases to 39.6% from 35%. This rate affects all income (to infinity) above the applicable amount above. Of course at that level you can easily add the .9% earned income surtax, 3.8% investment income surtax, and complete phase-out of exemptions and losing a big chunk of your itemized deductions (a loss of the first $17,000 or so minimum). Some consider those last two stealth tax increases of about 5% (depending on individual circumstances). When you add the surtaxes you can see a top rate of just about 50% plus any AMT and state taxes. Please make sure your withholding and quarterly estimates are accurate to avoid additional penalties on tax day!

Tax #6 Dividend and Capital Gains – This is a little more complicated. The rate you pay on these income items is determined by your regular/ordinary tax rate.
If your income tax rate is 10% – 15% your capital gain rate is 0% (Bush tax cuts)
If your income tax rate is 25% – 35% your capital gain rate is 15%; 18.8% if surtax applies
If your income tax rate is 39.6% your capital gain rate is 20%; 23.8% if surtax applies

III TAX CREDIT PHASEOUTS

1. $5000/$5,500 IRA Deduction phases out at: AGI $10,000 $92,000 2. $1,000 Child tax credit phases out at: AGI $55,000 – $110,000
3. $1,500 Lifetime Learning credit of $1,500 phases out at: AGI $53,000 – $107,000
4. $2,500 Student loan interest deduction phases out at: AGI $60,000 – $125,000
5. $4,000 Education deduction phases out at: AGI $65,000 – $130,000
6. $2,500 American Opportunity credit phases out at: AGI $80,000 – $160,000
Note- most of the above credits do not apply ($0 credit) to Married Filing Separate status

IV WHAT’S NEXT?

The current administration and Washington insiders are already looking for more tax increases, including “closing loopholes” on possible middle income to higher income taxpayers. Nothing specific yet- we’ll have to see. In Massachusetts, the Governor last week announced that he is looking for a 20% income tax increase (to 6.25% from 5.25%) and the elimination of 23 deductions including all education and business deductions for individuals. Higher tolls on more turnpike-controlled roadways, gasoline tax increases, higher MBTA fares, higher registry fees (drivers license, plate fees, etc), but lower sales tax and greater exemptions. This would result in everyone earning about $35,000 or greater to expect a tax increase!

Since the last “fiscal cliff” deal was only recently enacted, no-one knows what kinds of new federal taxes are on the way or when they will be effective. In Massachusetts, something will happen but we don’t know what or when until the final analysis. We will keep you posted.

I look forward to seeing and/or speaking to everyone in the near future.

Warm regards,

 

Henry C Kulik, Jr CPA
CERTIFIED PUBLIC ACCOUNTANT,LLC
114 Merriam Ave; Suite 201
Leominster, MA 01453
Tel (978) 514-8829
Fax (978) 514-8820 

www.henrykulik.com