2013 Year In Review

Buck, CPA LLC 2013 Year End Tax Newsletter

This year the two tax biggies for most people making modified adjusted gross income (MAGI) of $250,000 married, $200,000 single are:

  • 3.8% Medicare surtax levied on the lesser of 1) investment income or 2) the amount of income exceeding the $200K and $250K. (If you have no investment income, there would be no surtax.)
  • 0.9% Medicare payroll tax applied against earned income. Once and individual reaches w-2 earnings of more than $200,000, the employer must begin to withhold the additional 0.9% from the paycheck. TRAP FOR THE UNWARY: Taxpayer has two jobs, OR both spouses work and therefore the family breaches the magic thresholds of $200K and $250K, the 0.9% will apply to the excess over the threshold. (Example – Husband earns $190K from w-2 job Wife also earns $190K from a w-2 job. Neither one earns more than $200K so neither one is subject to the 0.9% tax. However, as a family they earn $380K or $130K more than their $250K threshold. Therefore, the 0.9% Medicare tax on earned income applies to the excess $130K. If you are doing good tax planning, you should provide for this eventuality by having more taken from your paycheck(s) to cover the short-fall.
  • This one is just a freebie – if you earn over these new magic numbers of $250K single and $300K joint filers – you begin to lose a portion of your itemized deductions and exemptions – at a rate of 1% per every $1,500 you are over these new thresholds, but limited to you losing no more than 80% of these tax benefits. The effect of losing these benefits adds about 1% to your tax rate.

Some relatively good news is that qualified dividends and long-term capital gains still receive beneficial tax treatment. The bad news is that the rates have changed, for some taxpayers. As before, if you are in the 10% or 15% bracket, your tax rates here will remain at zero. For tax rates from 25% to 35% the same rate as last year applies, 15%. For taxpayers in the 39.6% bracket, the rate on long-term capital gains and qualified dividends rises to 20% from 15% last year.

Are you beginning to discern a trend here? Every one of these tax increases is aimed at so-called “high earners”. This is what the administration has been promising – here is proof that they are keeping at least some of their promises. The really unfortunate fact is that the thresholds for these new “high earners” certainly do not put one in the wealthy class. A family trying to live in some of the larger cities around the country is often barley scraping by, at $250K when you figure high rents, transportation and other higher costs of living.

Some other items that might be of interest:

  • The annual gift tax exclusion has risen from $13K to $14K for 2013 and beyond.
  • “Nanny” tax exemption stays at $1,800 per year. If you hire someone to provide domestic services in your home and pay that person more than $1,800, you have now, magically, become an employer with all the attendant payroll tax requirements. This doesn’t have to be a burden, just engage the services of a bookkeeper to handle the forms requirements and make sure you pay taxes in full and on time.
  • If you happen to have large medical expenses to take as itemized deductions, be aware that your haircut rose from 7.5% of AGI up to 10% of AGI. Us older folks get a break and don’t have to experience this 33.3% increase until 2017.
  • Until recent years the IRS has paid little attention to “pass-through” entities – partnerships, S-corporations and some trusts and estates. Then a few years ago they actually started to check to see if the owners had properly reported their share of the income or losses experienced by these entities. More recently the IRS has begun to audit the actual operating entities to see if they are properly reporting all their income and not taking unfair advantage on the expense side. Now we hear that IRS will begin to do the same types of audits on partnerships. It appears there will eventually be NO place to run to and NO place to hide.
  • There is a relatively new way to get the IRS to abate certain tax penalties – it is based on the concept that the taxpayer has been in compliance for at least the past three years – no returns filed late, no late payments, etc. IRS will almost blanket abate late filing and late payment penalties under these circumstances. Essentially, all you have to do is ask.
  • In 2014 there will be a new, “simplified” method as taking a deduction if you use part of your house in your home business. In as few words as possible, don’t fall for this. If you are serious enough about your home business to establish a home office, then you owe it to yourself to maximize the tax benefits, not minimize them as this new rule will do.
  • I don’t know how many of my readers are even aware that IRS debt IS subject to discharge in bankruptcy IN SOME CASES. Over the years I have spoken with numerous attorneys who did not believe you could bankrupt IRS debt. However, here is one thing to know about being eligible to file against IRS debt. If the IRS files a substitute for return on your behalf (meaning it asked you several times to file a return and when you didn’t they filed one for you), based on information provided by others. Any return filed in this fashion is no longer capable of being bankrupted. The moral of this story – file your blasted tax returns on time if you hope to prevail against the IRS.
  • While we are on the subject of mail – PLEASE make sure that you OPEN your mail from the IRS. I occasionally run into taxpayers who seem to think that sticking their heads in the sand and ignoring mail from the IRS will make the bad stuff go away. This never works and only makes the IRS more likely to treat you mean by putting liens on your property and even taking money from your bank accounts or pay checks.
  • As always, there are the scammers out there, trying to get enough personal information on you to make it worth their while. Be aware that the IRS NEVER communicates by email. You should also be wary of anyone who calls you and begins to ask for personal information. Don’t become a victim of identity theft.
  • You still have time, until year end, to make charitable contributions (based on your required distribution) directly to the charity. This way you don’t have to report the distribution as income and then, perhaps, lose a considerable portion of the charitable contribution’s tax benefit because you couldn’t itemize deductions.

We close this year-end tax letter by wishing you all the best for the New Year!! Come back and visit our web site regularly because we will be writing position papers on many subjects that will be of interest to you as a business operator during the next several months.