Tuesday, December 11, 2012

Slow refunds

Tax refunds will be slower this year.  The IRS has had an epidemic of identity theft cases--people claiming refunds using stolen Social Security numbers and fictitious tax information.  They have put some measures in place to try to prevent some of it.  Those measures will make refunds slower.

Tuesday, November 20, 2012

Obamacare penalty/fee/tax

     The penalty for not having health insurance is not due to be put into effect till 2014.  People who do not have health insurance in 2013 will not have to worry about it.  (They may worry about the cost of medical care, but not about being penalized for not being insured.)
     Once the penalty goes into effect, it appears, from what I can see, that it will not actually be payable until the person files his or her 2014 tax return in 2015.
     At that point the IRS has been given limited powers to collect it.  Tax liens and seizing of property will not be allowed.  However, the IRS will have some powers and will probably find a way.
     For 2014 the minimum penalty will be $95 per person.  For a family of three, the minimum will be $95 X 3 = $285.  For families with more than three members, the minimum is frozen at $285.  (They stop counting after the third family member.)
     The maximum amount of the penalty will be determined by a percentage of taxable income.  For 2014 it will be 1%.  When it is fully phased in starting in 2016, it will be 2.5%.
     But that maximum will not be allowed to go higher than the national average of low-cost plans being offered through the insurance exchanges that will be set up by the law.

Friday, November 16, 2012

Fiscal Cliff, Tax Aspects

     Here are some notes on tax changes scheduled on Jan 1st, if Congress and the President can't get together:

1. Income tax rates will go up (for example, for a married couple):
     a) The 10% bracket will become part of the 15% bracket (i.e., there will no longer be a 10% bracket).
     b) The 15% bracket will go from taxable income of $0 to $60,550 instead of the current $17,001 to $69,000.
     c) The 25% bracket goes to a rate of 28%.
     d) The current 28% bracket goes to 31%.
     e) The 33% bracket becomes a 36% bracket.
     f)  The 35% bracket goes to 39.6%.

2. The tax on long term capital gains goes up as follows:
     a) For people in the current 10% and 15% bracket for regular income tax, the capital gains rate goes from zero (no tax at all) to 10%.
     b) For everyone else it will go from 15% to 20%
     c) For upper income people (in the $200,000-plus range), there will also be a 3.8% Medicare surtax.

3. The thresholds for Alternative Minimum Tax go back to where they were in the year 2000.  This would mean that probably millions more people would find their tax jacked up by the AMT, which was originally conceived to snag only the very wealthy.

4. Employees' FICA tax withholding would go from 4.2% to 6.2%.  (This does not include the Medicare tax withholding of 1.45%, which would not change--except for a .9% increase for the 'wealthy'.)

5. "Obamacare" changes and taxes kick in as follows:
     a) The medical deduction threshold for itemized deductions goes from 7.5% to 10%, except for people 65 or older.  This will mean that many people who deduct medical expenses will see their deduction shrink or disappear.
     b) Increased Medicare taxes for high-incomers
     c) Misc other taxes and fees.

6. Reduction of the Child Tax Credit

7. The ability of small and mid-sized businesses to write off (rather than depreciate) purchases of equipment and other assets will be cut from a limit of $125,000 to $25,000.  (In 2011 the limit was $500,000.)  This has been a very big tax break for small businesses, and having it reduced to $25,000 will make a huge difference to many of them.

8. Various deductions, credits, etc. will expire, such as teachers' deductions for teaching supplies, Qualified Charitable Distributions from IRA's, etc.

Saturday, November 10, 2012

Social Security increases

   Social Security benefits will increase by 1.7% in 2013.  Also, people aged at least 62 but less than 66 who have chosen to begin collecting Social Security before their full retirement age can make up to $15,120 in 2013 without having their benefits cut. This is up from $14,640 in 2012.  (People above the full retirement age can earn as much as they want without benefit cuts.)  People who reach retirement age during 2013 will be able to earn $40,080 before their birthday without losing benefits.

Monday, November 5, 2012

2013 Capital Gains Tax

     One of the changes scheduled to go into effect for 2013 is an increase in the capital gains tax rate to 20% for most taxpayers.  (For taxpayers in the 15% bracket, the rate will be 10%.)
     The prospect of this tax increase coupled with the addition of an Obamacare surtax of 3.8% for people in upper income brackets is prompting some people to accelerate asset sales so that they are completed in 2012 instead of 2013.
     This year the capital gains tax rate for people in the 25% bracket and above is 15%, and there is no Obamacare surtax.  People in brackets below 25% do not pay capital gains tax at all!
     It is widely hoped that the increase in the capital gains tax will be one of the things that will be changed by Congress before the end of the year, but no one knows if that change will actually be made.

Wednesday, October 31, 2012

Gift tax exclusion for 2013

     In 2013 the gift tax exclusion will rise from $13,000 to $14,000.  A person who makes a gift valued up to $14,000 will not have to report the gift in any way, nor does the person receiving the gift need to report it or pay any tax on it.  This exclusion applies to each person to whom one makes a gift.  For example, if a person has 10 grandchildren and wishes to give the maximum exempt gift to each, he or she can give each one $14,000 for a total of $140,000.  (The person who receives the gift does not have to be related to the giver.)
     A gift of more than $14,000 will require the filing of a gift tax return, but in many cases it will not require any tax to be paid with the return.  A lifetime tab is kept on taxable gifts.  If at any point the total exceeds the lifetime gift tax exemption (which, unfortunately, changes from time to time) then a tax will be paid.  If the total never reaches the gift tax exemption amount, it will be subtracted from the person's estate tax exemption when he or she dies.  (Complicated?  Yes!)
     Gifts of $14,000 or less ($13,000 in 2012) are as if they do not exist for the lifetime tab on taxable gifts.
     Such gifts are valuable tools in estate planning for people who expect to have taxable estates upon their deaths.
     Some gifts are unlimited, such as paying for someone's college tuition.  If paid directly to the school, they are not subject to the $14,000 limit.

Mass estate tax reminder

     In Massachusetts the estate tax is based on the Federal law that was in effect as of December 31, 2000.  It was updated in 2006 to increase the exemption amount from $700,000 to $1,000,000.  Thus many people whose estates do not require the filing of a Federal estate tax return will nevertheless require the filing of a Massachusetts estate tax return.

Thursday, October 25, 2012

Estate Tax Now

     The estate tax law currently in effect could expire at the end of the year if Congress does not extend it.  We have not talked about it much here since it went into effect at the beginning of 2011.
     The main thing that was new about it was that, for a married couple, if the first spouse to die does not use up the entire basic exemption of $5 million, he or she can pass the balance of the exemption on to the spouse.
     A person who dies with an estate of less than $5,120,000 is not required to file an estate tax return.  However, if the executor wishes to pass any remainder of the estate tax exemption on to the other spouse, he or she must file an estate tax return even if none would otherwise be required.  And it must be filed by the due date, which is generally nine months after the date of death.
     Some professionals who deal with estates and estate taxes are saying that even for a couple who apparently would never need to file an estate tax return, one should be filed when the first spouse dies just in case the remaining spouse unexpectedly wins the lottery or some such event.  Then the extra exemption would come in handy.
     As noted above, this estate tax law may not survive past the end of this year.  If Congress does not act to extend it, it is scheduled to revert back to an exemption of $1 million and a top tax rate of 55%.  (The top tax rate in is currently 35%.)
   

Monday, October 8, 2012

2013 IRA Contributions

The maximum contribution to an IRA for people under 50 will increase to $5,500  in 2013.  For people 50 to 70 and one-half the limit will be $6,500.  These are the basic limits, but caution:  There are many more rules about what you can actually deduct.

Friday, September 28, 2012

Municipal Bonds

For people who will be subject to the 3.8% Medicare surtax ("rich" people), tax exempt municipal bonds could be attractive. Interest rates are low, of course, but some people will choose them for safety and tax advantage.

Wednesday, September 26, 2012

New Year Plans

     People with incomes over $200,000 (single) or 250,000 (married)--after various adjustments of course--who are thinking of disposing of assets with potential capital gains will be considering whether to dump them before 2013 to avoid the new Medicare surtax that will go into effect then. The surtax is 3.8%, and it applies only to people in upper income brackets as mentioned above.
     There are always people selling businesses, real estate, etc., and it is certain that some people who have deals in the works are rushing to get them finalized before the stroke of midnight on December 31. Some people, too, who have stocks which they plan to sell are going to make sure they sell them before that witching hour. Also, accountants will be crunching numbers and potential sellers will be weighing circumstances to determine if avoiding the surtax will outweigh other potential costs or effects of accelerating the sale. Each case will be different; there may be many considerations involved. It is pretty sure, though, that it will mean extra work for some stock brokers, financial advisers, accountants and their clients. It could contribute to some extra volatility in the stock market at the end of the year.
     There is also a pending tax increase of 5% for the actual capital gains tax that is supposed to take effect in 2013.  There is a chance that it will be eliminated before it takes effect--at least many people are hoping so--but for now it is still scheduled.

Friday, September 21, 2012

Medicare and Self-Employment

Self-employed people who have reached age 65 and are paying Medicare premiums (usually deducted from Social Security benefits) can deduct them on page one of form 1040 as Self-Employed Health Insurance. (This was line 29 on the 2011 form 1040.) This had been a bit of a fuzzy area for taxpayers and tax professionals alike for the last few years, but the IRS recently confirmed that it is OK.

Tuesday, September 18, 2012

Inheriting an IRA

A person who inherits an IRA should be aware that there are a lot of complicated rules involved with such IRA's, and they should seek professional advice on how to handle them. For example, there are rules about how long you can keep the money in the IRA after inheriting it, depending on whether the beneficiaries are all individuals, or if some are non-profit organizations. Also, care should be taken if you are rolling over an inherited IRA. It must be rolled over directly into the recipient IRA, not paid to an individual first, as can be done with the usual IRA rollover. Professional help can sometimes steer you clear of an unnecessary tax hit.

Sunday, September 9, 2012

Medical expense threshold to rise in 2013

People who deduct medical expenses as part of their itemized deductions will have a higher bar to hurdle next year. Currently (including tax filing for the year 2012) taxpayers must deduct 7.5% of their Adjusted Gross Income (AGI) from their medical expenses before deducting them. For many, this means that their medical expense deduction is totally wiped out. For their 2013 taxes, they will have to deduct 10% of their AGI, probably wiping out even more people's medical deductions. Note: this change does not affect people over 65 years old, for now. People over 65 will be affected starting in 2017. This is a provision of the Affordable Care Act, AKA Obamacare.

Tuesday, July 17, 2012

ID Theft and taxes

Identity theft is a fast-growing problem for tax filing.  From time to time a taxpayer will attempt to file electronically, only to have the return rejected by the IRS.  The error message says that their Social Security number has already been used for a tax filing this year.  The only thing that can be done then is to mail in a paper return and let the IRS sort out which is correct.  The IRS says it will take some measures next year to prevent this from happening.  However, the likely result is that refunds will be slower next year.

Wednesday, June 27, 2012

Foreign accounts

Foreign banks will begin reporting to the IRS on US people with accounts containing more than $50,000. This will be phased in from 2014 to 2017.

Monday, June 25, 2012

And Remember!

You won't necessarily get a tax deduction if you donate a building to the local fire department so they can burn it down as a training exercise. If the purpose of your donation is to get free demolition services, you will get a deduction only to the extent that the value of the building is greater than the value of the demolition services you receive!

Saturday, May 26, 2012

Donation tip

When you make a donation of more than $250, and you do not receive goods or services in return (coffee mugs and such tokens do not count), make sure that the written acknowledgement that you receive specifically says that you did not receive goods or services.  Otherwise the deduction could be disallowed in an audit.  It has happened.  Churches and small charities sometimes forget the exact formulas they are supposed to follow in such matters, but the law is specific about what is required.  (See instructions for Schedule A, Itemized Deductions, for more specific information.)

Wednesday, May 23, 2012

Interesting Deduction History

The first income tax in 1913 had a deduction for interest expenses. It was for all types of interest, not just mortgage interest. In fact, hardly anyone had home mortgages in those days. Interest was mainly a business expense. Therefore it made some accounting sense in those days. The idea was to tax income after all costs of producing it. Interest was a cost of producing income. It was mainly after World War Two that it came to be seen as an instrument of social policy. It was thought of as a support for home ownership--part of the American Dream. All forms of interest, including credit card interest, continued to be deductible until 1986. Since then only mortgage interest has been deductible. In addition, some restrictions were put on people who have large mortgages or multiple properties. A lot of lip service was paid to the American Dream aspect of the mortgage deduction, but the main thing it did was support the housing industry, which has always been a major driver of the American economy. As goes the housing industry, so goes the American economy, to a significant extent. That is one reason for the continuing malaise in the economy: the housing industry is still ailing. It is certainly arguable that excessive pushing on the goal of home ownership, and providing tax and other incentives for it, was one of the things that led to the crash that is still affecting us all. One of the ideas for tax simplification that has been a subject for debate in the last several years is the elimination of the mortgage interest deduction. A bipartisan congressional panel assembled by President George W. Bush recommended replacing it with a tax credit. This suggestion produced an uproar from a number of directions, including from real estate agents and home builders. Tax reform remains an elusive dream, but if it does come about, a change in the mortgage interest deduction could be a part of it.

Tuesday, May 22, 2012

16th Amendment

There was a lengthly political debate in the 1800's about establishing an income tax in the US. There was an income tax during the Civil War, but it was repealed when the war was over. After much debate, an income tax law was passed in 1894, but it was declared unconstitutional by the Supreme Court. To remedy that, the 16th Amendment to the Constitution was ratified in 1913. It specifically authorizes Congress to tax income. It is only one sentence long: "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration." It is certainly amazing that one sentence could give birth to what must now be billions of words, millions of pages and trillions of dollars changing hands. You might say it was the Big Bang of taxes.

Monday, May 21, 2012

Dividends

Dividends were exempt from personal income tax until 1936. (See previous post for the reason why.) From 1936 through 1939 they were fully taxable. Then from 1940 through 1953 they were exempt again. From 1954 through 1984 they were mostly taxable, with small exempt amounts--$50 till 1964, going eventually up to $1500 for a married couple if the dividends were from utilities. They were fully taxable from 1985 through 2002. Since then they have been taxed at a top rate of 15%, but for people in the two lowest tax brackets, dividends are not taxed at all. They are scheduled to become fully taxable in 2013 unless Congress decides otherwise before then.

Sunday, May 20, 2012

1040 1913

The first tax form, the 1040 for 1913, already had some complexity to it, but most of the details were laid out right on the form. It was three pages long, plus another page for instructions. That's right, just one page of instructions. The 2011 1040 instructions are about 100 pages long, not including the instructions for the additional schedules such as Itemized Deductions. In 1913 there were no additional schedules. The General Deductions, forerunner of today's Itemized Deductions, took up about 1/3 of page 3. The instructions say that people who made less than $3,000 did not need to file at all. Since the average salary that year was about $750 per year, that meant that most people were not bothered by income tax. Another interesting side note is that dividends of corporations subject to income tax were subtracted from taxable income on this form 1040. Nowadays dividends are subject to what is famously called "double taxation." The dividends are paid from corporate profits that have already been taxed at the corporate level. Then when the dividends are received by individuals, they are taxed again. This was not the case in 1913.

Saturday, May 19, 2012

Average incomes

An interesting website at visualizingeconomics.com has lots of graphs of historical average incomes in the US, historical tax brackets, etc. Strangely, I don't see anywhere on it whether the historical incomes are adjusted for inflation, though it seems obvious they must be. Average income in 1913 was around $14,000 according to the graph. The top of the lowest tax bracket that year was an inflation-adjusted $453,292. That was the last time the gap was anywhere near that big. In 2006 the graph of income shows an average of about $50,000 per year. The top of the lowest tax bracket was an inflation adjusted $16,806 for a married couple and $8,403 for a single person. The tax rate for the lowest bracket in 1913 was 1% (one percent). In 2006 it was 10% and still is today, at least until the end of this year.

Wednesday, May 16, 2012

The way it was

The Tax Foundation (a nonpartisan tax research group based in Washington, DC) has posted a list of all income tax rates and brackets since the beginning of the modern income tax in 1913. The lowest tax bracket in 1913 covered taxable income from zero to $20,000. The top tax bracket of 7% covered all income above $500,000. Adjusted for inflation, that 1% bracket would cover taxable income from zero to $453,292 in 2012 dollars. The top tax bracket of 7% would cover all income above $11,332,304 (in 2012 dollars). There was no differentiation between married, single, head of household, etc. There was only one set of rates and brackets. By 1918 the top rate had skyrocketed to 77% for income above $1,000,000 ($14,859,578 adjusted for inflation). The lowest rate had jumped from 1% to 6%, and it was good only up to $4,000 of taxable income ($59,438 in 2012 dollars). Above $4,000 the rate doubled to 12%. No doubt World War One was to blame for the big jump in taxes. The rates went down in the 1920's, but back up beginning in 1932. (Higher taxes probably did not help the economy recover from the Depression.) By 1936 the top rate was up to 79%, but the lowest rate of 4% covered a bracket that, adjusted for inflation, went up to $64,570. Taxes went sky-high in World War Two, with a top bracket of 94% and a low bracket of 23% that went from zero to only $2,000 (which would be $24,931 today). Tax rates declined only slightly in the 1950s, and then a little more in the 1960s. However in 1964 the top of the bottom bracket went down to only $1,000 ($7,238 in 2012 dollars). The other brackets also became similarly squashed in ensuing years. The rates themselves stayed about the same through the 1970's. Tax rates began declining in the early 1980's.

Thursday, April 26, 2012

Phew

Tax season is over. Finally! I'm sure everyone missed me and has been wondering why I have not been blogging for a while. Hopefully in the coming weeks and months we will take a look at the tax picture for 2012 and maybe a little bit beyond that. We know pretty much what the tax picture is for 2012, because it has been officially established (for the most part). It will be basically the same as 2011. Beyond 2012, no one really knows. A lot will depend of the election in November. So... Vote! If popular demand demands it, we may take a look at some general theories of taxation. Like, what the heck is Congress thinking when it passes certain tax laws? And why? Also maybe some of the "intellectual foundations" if any such exist. Be sure to make known your comments, suggestions and questions. Thank you.

Monday, January 2, 2012

Gift tax crackdown, Part 2

As we posted on 5/31/11, the IRS wants to crack down on people who transfer assets to family members with little or no consideration without filing a gift tax return. At that time a court had decided that the state of California was not required to give the IRS the names of such people, because the records existed at the county, not the state level. Now the court has changed its mind and told California to give the information to the IRS. The IRS is seeking such information from several other states as well.