Jan 10

Tax Code May Be the Most Progressive Since 1979

With the recent increases in income tax rates, Medicare and Obamacare surtaxes, and the Alternative Minimum Tax, the New York Times has released a study that America’s highest earners are facing the largest tax burden since Jimmy Carter (the First) was President.

As most people chase after the American dream, the tax increases for those making the hottest pursuit will make it more likely that the dream will be unattainable. For the wealthiest Americans (e.g., Bill Gates and Warren Buffett), income taxation has no meaning. If they need money, they can take a tax-free loan against their holdings or sell a tax-neutral property. These tax rates will prevent “working generations” of people from increasing their standard of living from what their parents had.
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That all being said, most people do feel a sense of patriotic duty to contribute their tax dollars to the greater good. However, the “greater good” from Washington seems to be helping those who choose not to help themselves and want to rely on handouts.

Jan 07

Newest Tax Increases More Regressive

The results are finally coming out on the newest tax deal, the so-called fiscal cliff aversion, and although the promises were that only the richest Americans would see a rate hike, the true effect is actually showing much different.

Because the tax deal allowed the Payroll Tax Holiday to lapse, the average American is seeing a 2% decrease in his/her take-home pay. Most of the richest Americans, who will only be subject to taxation on higher earnings, have yet to pass the tax rate increases. So, as we approach the first pay day of the new year, working Americans will see less in their accounts.

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From a planning perspective, the tax that is affecting most Americans is supposedly going to fund Social Security and Medicare (although this “trust fund” is really just IOUs from the government), so true income taxes have only been raised on the “rich”. However, if you  hear someone from the government saying that they want to help, and you believe them, I have ocean front property in Arizona I would like to sell you.

Jan 02

Fiscal Cliff Deal

As of this posting, a deal has been reached on the fiscal cliff. From my cursory overview of the the plan, which was originally proposed by the Senate and then approved by the House, most of the tax rates will be very similar to the ones for the last two years. A few of the significant changes:

The Payroll Tax Holiday has finally lapsed. This was the provision enacted in 2011 that had employees’ contributions to their Social Security reduced. The cut resulted in contributions to the FICA taxes being dropped from 6.2% of earnings to only 4.2%. The Holiday lasted for two years and was mainly used as a spur to economic growth, but with the recent “recovery” is debateable whether it helped at all. You can expect less take-home pay as a result of this lapse.

Estate tax rates are increasing to 40% instead of the recent 35%. The exemption will return to $5,000,000 (it was $5,120,000 in 2012) and will be indexed for inflation. Portability remains in place and the gift tax and estate tax remain unified. All of these provisions are made permanent law.

Captial gain and dividend tax rates will stay the same for married couples earning less than $450,000 ($400,000 for single, $225,000 for married filing separately). For tax filers above the threshold, the rates will increase to 23.8%. The 23.8% will also apply to trusts and estates who have more than $7,500 in taxable income.
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The EITC and Child  Tax Credits will be extended for another five years. The Earned Income Tax Credit (EITC) is a refundable tax credit and applies to low-income workers who have wages and otherwise qualify. The Child Tax Credit is a $1,000 credit for each qualifying child.

Many of the business tax breaks have been extended (and some expanded) for two more years. These include the Section 179 expensing. The 179 rate will be allowed for up to $500,000 in new purchases. In addition, there is language for 50% accelerated depreciation on other qualifying purchases made and placed in service prior to the end of 2013.

As more information becomes available, I will try to keep everyone informed.

Dec 28

Without AMT patch, millions will be affected

Most of the discussion surrounding fiscal cliff negotiations has focused on tax rates.  However, there is another very large issue looming: the need for an Alternative Minimum Tax (AMT) patch.

Last year, approximately 4 million taxpayers paid the AMT.  Unless the fiscal cliff compromise includes a patch, adjusting AMT indexed levels, the number could jump to as many as 32 million taxpayers facing increased tax liability for tax year 2012.

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As tax season approaches, it will be important to not just look at your tax rate, but also consider the fact that under the AMT, certain deductions are disfavored and you may get hit by the flat 28% rate the AMT imposes.

Dec 22

Did we make it?

If you are able to read this post, then we made it through the supposed Mayan apocolypse prophecy. However, that date was set hundreds of years ago. You really need to look at two more important dates now and ensure that you have completely prepared for them.

The first is only three days away: Christmas. Have you purchased all your gifts for your loved ones yet? In addition, I hope you are able to take time and remember the reason for the season.
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The second date you need to plan for is nine days away: New Year’s Day or The passing of the fiscal cliff. On this date, several dozen tax laws are going to change and almost every American will be subject to higher taxes. Have you taken the steps to ensure you are prepared for the coming taxes?