March 2013 Letter

hile much of the IRS tax-filing logjam caused by the late passage of tax laws on January 1st is now behind us, the bottleneck of tax return processing will be with us through April 15th. The last major filing delays relating to business credits and depreciation should be ready to go by mid-March. This month's letter focuses on tax increases for lower and upper income taxpayers and discusses the hot phenomenon known as Snapchat.

High Income Tax Increases? Done

Think our friends in Washington aren't accomplishing much? One of the tax policy objectives of the current Administration is to increase the income taxes received from upper income citizens. On this front, there is a high degree of success. The following tax increases have been put in place in 2013 for those with incomes over $200,000:

		Impacts Incomes Over:
		Single	Married
1	.9% Medicare surtax	$200,000	$250,000
2	3.8% Investment surtax	$200,000	$250,000
3	80% of itemized deduction elimination	$250,000	$300,000
4	Elimination of tax exemptions	$250,000	$300,000
5	5% dividend tax increase (15 to 20%)	$400,000	$450,000
6	5% capital gain tax increase (15 to 20%)	$400,000	$450,000
7	New 39.6% income tax rate (from 35%)	$400,000	$450,000

What you should know

	In 2009, (most recent data available) the top 10% of reported income paid 70.5% of personal income taxes. This equated to those with adjusted gross incomes (AGI) of $113,000 and greater. The top 1% reported AGI paid 37% of the personal income taxes and had adjusted gross income of $334,000 or more.
	If you have income above the levels noted above, your personal income taxes could be going up substantially. You will need to forecast this additional obligation early in the year to avoid any surprises in withholdings and year-end tax obligations.
	Approximately ½ of those impacted by these changes will be small businesses because many corporations are taxed at the individual level (partnerships and S-Corporations). Prior to making any new investments in your business (including new hires) you will want to ensure your change in tax obligation does not create a cash flow problem.
	Watch your state. Many states, like Minnesota, are also looking to increase tax revenues on this same segment. Be aware of this phenomenon in your state and plan accordingly.
	The impact will vary. The tax impact on your situation could vary dramatically depending on your filing status and the mix of your income and deductions. The only sure way to ensure there are no surprises is to conduct a full year tax forecast for 2013.

Secret Poor Tax: The Lottery

For every $10 of your earnings, as little as $2.00 to 2.50 might ever reach the pocket of a lottery winner

Often, only 60-65% of lottery ticket sales are paid out as winnings

States often receive money three ways when you buy lottery tickets

Most everyone enjoys dreaming of winning it big in the lottery. News media outlets publicize the large unclaimed pots of money on the evening news and they put a spotlight on the lucky multi-million dollar winners. Little do most people realize that the Federal and State Governments are quietly using this gambling device to double and triple tax those who can least afford it: the poor and lower middle class.

Why do we tolerate this?

A single lottery ticket does not cost a lot. The lucky winner is the one who pays the extra tax on everyone's behalf, but they don't care because the pot is so large. So by taxing us in small stages and by shifting who pays the tax on lottery winnings, a wonderful re-taxing formula has quietly emerged for state and federal taxing authorities. Put another way, if you were told to voluntarily pay 75% of your wages to government-sponsored programs for the rare chance of getting everyone else's remaining 25% would you do it?

What to do?

If you think the funds being scooped up by the government is ethically wrong what can you do about it?

	Stop buying tickets. If the lottery no longer generates sales, the programs would be discontinued.
	Pressure legislatures. Why aren't lottery winnings taxed at a lower rate? Shouldn't the government acknowledge they've already received tax on this income? We have lower tax rates on dividends and capital gains so why not on lottery winnings? If you agree, send a letter to your representative asking that lottery winnings be capped at the lowest income tax rate or a special rate for lottery winnings.
	Tell everyone you know. If you think the double and triple taxing of income through lotteries is not right, make everyone you know aware of this tax trick. The more that know, the more likely something will change.
	Tax planning. If you win the lottery, consider taking the annuity option and then move to a no income tax state. You won't save in Federal taxes, but it should save on some of the ongoing state tax obligation.

Playing the lottery is fun. Dreaming of being rich is nice. Having our government promote these things as an opportunity to re-tax its everyday citizens is at best a questionable practice.

The Snapchat Phenomenon

Temporary texting application is making a big splash

If you are under the age of 25, Snapchat and its little ghost logo are common everyday items in your life. If not, you might just be wondering what this social media application is all about.

Background

A couple of Stanford students developed an application a few years ago that allows users to take a photo or video, add a caption, and then text it to a group of friends. What makes the free application unique is that the text may only be viewed for up to ten seconds, after which the image/video is automatically deleted. This allows users to send spontaneous photos and videos to their friends without the virtual legacy sitting out there for all to see. This Apple and Android application is now so popular that the Snapchat folks are sending 50 million Snapchats per day!

What You Need to Know

	Cyber bullies? Because the image and video are automatically deleted, there is the chance that more revealing photos will be sent without them going global. So Snapchatting is opening the door to risky behavior not normally seen in other social media tools like Facebook.
	Is the visual REALLY temporary? One of the popular aspects of Snapchat is the auto delete of that embarrassing text image. But they can be captured. Many have found a way to make a screen shot of the Snapchat and then have a permanent record of your embarrassing moment. While the application supposedly notifies you when a screen shot happens, all that does is tell you who distributed your image. It does not stop it from happening.
	There are no guarantees. Snapchat is very clear that it takes no responsibility for the distribution of your image/video. Bad stuff happens and they want you to clearly understand that it can.
	Parental controls? If you cannot see what your child is Snapchatting do you know how your child is using the free application? You really don't. And since Snapchat allows users age 13 and older to use their application it can create an unmanageable environment for young users. At minimum, if you allow your child to use the application, you should require your child to copy you on all their outgoing Snapchats. Also consider the promise of random checking your child's phone for Snapchat content. Your child will let friends know this is a possibility and this may limit how friends use the application with your child.
	The illusion of security. Perhaps the most dangerous aspect of Snapchats is the illusion of security on a social network. There is none. The best lesson for your kids is if you send something digitially you MUST assume anyone can see it. At minimum they do not know who else might be watching when the Snapchat is opened....perhaps by a teacher or by a whole group of unwanted "friends" at a party.

The bottom line on Snapchatting? Cool, but dangerous.

Where's My Refund? 2013 Edition "Where's my Refund?" This popular feature on the IRS web site (www.irs.gov) allows you to see the status of your refund after filing your income tax return. Since the IRS only started processing tax returns after January 30th and did not start accepting tax returns with educational credits or adoption credits until late in February, when can you expect to see your refund? Per the IRS, 9 out of 10 refunds are being processed within 21 days. If you wish to check on the status of your refund this is what you should know: When to check: 72 hours after an e-filed tax return confirmation 4 weeks after a mailed tax return is sent What you need to provide: Social Security number Filing Status EXACT refund amount How often to check? Once a day. The IRS only updates the status of your return once a day, usually overnight. This is important because too many refund status requests can limit your ability to access this feature on the IRS web site. Some returns will be delayed. If your tax return has errors in it, it will be delayed. In addition, your tax return could be delayed if it has items on it that are not ready to be processed due to late tax law changes. This includes tax returns with the following information: Depreciation Energy Credits General Business Credits But perhaps most importantly, the IRS may delay processing your refund if it has questions, often to ensure you are not being subject to identity fraud. To check on your status simply logon to www.irs.gov and click on the link on the top center portion of the IRS home page.

As always, should you have any questions or concerns regarding your situation please feel free to call.

February 2013 Letter

hile last year was a leap year, this year marks a leap into tax law changes with the passage of "fiscal cliff" legislation during the first week of January. This legislation, which effectively pushes a higher cliff down the road, has tax law changes that impact most of us. Included here is a recap of some of the major changes to last year's taxes and those in the future. Should you know of someone who may benefit from this information please feel free to forward this newsletter to them.

Final Touches on 2012 Taxes

In a last minute gesture, the tax laws that apply to 2012 were made final on January 1st, 2013. Whether you consider this incompetence or just simple lack of respect for the general population, one thing is clear. These late changes gave no time to plan your 2012 tax situation. Here are the major tax changes that were made retroactive to the beginning of 2012. $250 above the line out-of-pocket expense deduction for teacher's classroom expenses The ability to deduct either general sales tax or state income tax as an itemized deduction.

	The ability to treat mortgage insurance premiums the same as interest expense on your itemized deductions.
	Cancellation of income for certain home indebtedness forgiveness.
	The ability for those 70½ or older to make up to $100,000 in charitable contributions directly from qualified individual retirement accounts and exclude the contribution from income.
	Extension of Section 179 business expensing of up to $500,000 in qualified capital purchases
	Alternative Minimum Tax "patch"

What you need to know

	Expect delays. Because of these late changes the IRS did not begin processing 2012 tax returns until January 30th. This delay has created a logjam for those who wish early refunds.
	Expect more delays. If your tax return includes adoption expenses, depreciation, energy credits or any small business credits your return cannot be processed until late February or early March, 2013.
	Don't delay. Since the processing of tax returns may be delayed it is more important than ever to have your materials ready to go as soon as possible. Waiting until a tax return can be processed will make it difficult to prepare and process all the tax returns on time. It is best to have your tax return ready to go when processing windows are opened.

The Dust Settles on 2013 Taxes

With the passage of the American Taxpayer Relief Act of 2012 the proverbial "fiscal cliff" was officially moved down the road. While annual deficits still loom large and a higher "cliff" will need to be navigated in the future, at least there is now some clarity for each of us in 2013. Here are some  of the major provisions:

	You're now living with less take-home pay. Your social security tax rate went back to 6.2% in 2013. An extension of the lower 4.2% rate in 2011 and 2012 was not added to the recently passed legislation. So if you have not done so, please review your household budget to adjust for the lower take-home pay.
	Income tax rates now have certainty. The tax rates will remain unchanged for 2013 if your taxable income is below $400,000 unmarried, $425,000 head of household and $450,000 married filing joint. Taxable income above these levels will have their income taxed at 39.6% versus 35% (a 13.1% tax increase). Approximately ½ of the impacted tax returns will be small businesses. If this could impact you, now is the time to plan accordingly.
	Maximum Dividend and Long-term Capital Gain tax rate goes to 20%. The tax rates on ordinary dividends and long-term capital gains remain unchanged for 2013 (0% if you are in the 10 or 15% income tax bracket; 15% for everyone else) if your income is below $400,000 single, $450,000 married filing joint. For those with incomes above these amounts, the rate goes to 20% (a 33.3% increase). Tax planning to match investment losses against gains will become more important in 2013.
	Itemizing Medical Deductions is now harder to do. Unless you are 65 or older, you may not itemize your out-of-pocket medical expenses until they exceed 10% of your adjusted gross income. This is an increase from 7.5% in 2012. Consider loading appropriate medical, dental and eye care expenses into one year if it will help you pass the threshold.
	Phase-outs are back! Your personal exemptions and your itemized deductions can once again be phased out in 2013. This tax increase will impact you if your income exceeds $250,000 single or $300,000 married filing joint. You could lose all your personal exemptions and up to 80% of your itemized deductions. Please recall a form of these phase-outs was common practice in 2009.
	More upper income tax increases. In addition to the tax increases for upper-income taxpayers on income tax rates (35% to 39.6%), capital gains/dividend tax rates (15% to 20%), itemized deduction phase-out, and personal exemption phase-out there are new Medicare surtaxes in 2013. If your income is $200,000 single or $250,000 married, any additional income will be subject to an additional .9% Medicare surtax. If your income exceeds these levels you could be subject to a 3.8% Medicare surtax on your investment earnings.

While a major piece of tax legislation was passed on the first day of January 2013, don't expect it will be the last. Congress and the President will be continuing the debate over our massive annual spending deficit and the national debt. Because of this, more tax changes could occur in the near future.

Estate & Gift Tax Update As part of the legislation passed in the wee hours of January 1st, 2013 is some permanency to the Estate and Gift Tax laws. Effective in 2013 and beyond: Maximum Estate and Gift Tax rate: 40% (up from 35%) Inflation adjusted estate exclusion: $5,250,000  in 2013 Other Observations: Portability of an unused estate exclusion to a spouse is made permanent. There is an allowed deduction to account for estate taxes paid to a state. If this law was not passed; estates over $1 million were subject to an estate tax with a maximum tax rate of 55%. So while you still can't take it with you, at least the federal government will let your survivors take more of it with them.

Key 2013 Tax Information

Item	2013	2012	Change
Maximum income tax rate	39.6%	35.0%	+4.5%
Maximum Medicare tax rate	2.35%	1.45%	+0.9%
Social Security employee rate	6.2%	4.2%	+2.0%
Max Dividend/Capital Gain rate	20%	15%	+5.0%
Personal Exemption	$3,900	$3,800	+$100
Standard Deductions
Single	$6,100	$5,950	+$150
Joint or Qualifying Widow	12,200	11,900	+$300
Head of Household	8,950	8,700	+$250
Married Filing Separate	6,100	5,950	+$150
Elderly/Blind: Married	Add $1,200	Add $1,150	+$50
Elderly/Blind: Unmarried	Add $1,500	Add $1,450	+$50
Key Credits
Child Tax Credit	$1,000	$1,000	-
Adoption Credit	$12,970	$12,650	+$320
Lifetime Learning Credit	$2,000	$2,000	-
American Opportunity Credit	$2,500	$2,500	-
Savers Credit	$1,000	$1,000	-
Retirement Plan Contributions
Traditional IRA	$5,500	$5,000	+$500
(age 50+ catchup)	Add $1,000	Add $1,000	-
Roth IRA	$5,500	$5,000	+$500
(age 50+ catchup)	Add $1,000	Add $1,000	-
401(k), 403(b), 457 & SARSEP	17,500	17,000	+$500
(age 50+ catchup)	Add $5,500	Add $5,500	-
SIMPLE IRA	$12,000	$11,500	+$500
(age 50+ catchup)	Add $2,500	Add $2,500	-
Mileage Rates
Business	56.5¢/mile	55.5¢/mile	+1¢
Medical/Moving	24.0¢/mile	23.0¢/mile	+1¢
Charitable	14.0¢/mile	14.0¢/mile	-
Section 179	$500,000	$500,000	-
Property limit	$2 million	$2 million	-
Other Information
Tuition and Fees Deduction	$2,000	$2,000	-
Medical Itemized Deduction AGI Threshold (7.5% in 2013 for 65 and older)	10.0%	7.5%	+2.5%

As always, should you have any questions or concerns regarding your situation please feel free to call.

 

January 2013 Letter

Last year's intense last minute debate out of Washington focused on an extension of the Social Security tax cut into 2012. Would this year be any more calm? Would 2012 tax laws be locked in place before the end of the tax year? What is going to happen to tax laws in 2013?
Long gone are the days when taxes were a simple calculation to ensure there was enough revenue to cover the desired federal programs. Now it seems each section of the code is a political and/or social statement. While our leaders continue to grapple with answers, here are some things to consider to make your situation a little better.

Check Your 2013 Pay Stub

As you buckle down and try to make plans to accomplish your 2013 resolutions, don't forget to conduct an annual review of your paycheck. Given the uncertainty of 2013 tax laws, you may need to prepare yourself to conduct this review on numerous occasions throughout the year. Here are some items to review: Conduct a Social Security tax calculation. It should return to 6.2% of your pay. This is an increase of 2% from 2012. Review insurance withholdings.Many employers adjust the amount you pay for your benefits at the start of each year. Check to make sure the proper amount is being withheld. Is anything missing?If you signed up for a Health Care Savings account, Dependent Care, or other elective benefits please make sure they are noted on your pay stub.

	Retirement Plans. Also check to ensure contributions for any employer provided retirement plans are properly noted. If there is an employer contribution to your plan, make sure this is noted as well.
	Update your withholdings. Make sure you have enough being withheld for Federal and State tax purposes. File a new W-4 with your employer if you have not already done so.

The biggest change beginning in 2013 may be the 2% reduction in your take-home pay because of the reset in Social Security taxes. Adjust your spending to ensure you cover this drop in available income. But please remember when Congress reconvenes in early 2013, they are sure to continue discussing extending tax benefits throughout calendar year 2013.

Breaking News: The AMT Patch Gets Permanently Mended

The Alternative Minimum Tax (AMT) is a classic example of the problem we face when Washington D.C. passes temporary tax legislation. For the past ten plus years, our legislators have passed bills that extend a patch to this parallel income tax calculation within our tax code. In the wee hours of January 1st, 2013 a permanent fix to the AMT was passed by Congress. This change impacts 2012 tax returns.

Background of AMT

The AMT is a separate income tax calculation that adds back several common deductions to your taxable income AND then applies a separate tax rate to this adjusted income. You must pay either your normal income tax OR the AMT tax, whichever is higher. The AMT calculation was originally intended to ensure the wealthiest Americans pay a minimum percent of income in federal taxes. But over time, because it is not adjusted for inflation, the AMT has come to snare middle-income taxpayers. Ironically, the wealthiest are no longer impacted by AMT as normal income tax rates are higher than the AMT rates of 26% or 28%. Without the Congressional action on January 1st it was estimated that over 20 million more people would be subject to the AMT in 2012.

What is happening now?

Rather than overhaul the Alternative Minimum Tax, Congress typically elects to raise the exemption level each year to keep the vast middle class from being impacted. The bill being signed into law does two things:

1. It raises the AMT exemption amounts retroactively for 2012. This effectively patches the tax code and keeps the tax surprise from hitting the 20+ million additional taxpayers.
2. It makes the patch permanent and the exemption thresholds are automatically adjusted for inflation.

NEW 2012 Law

Filing Status	Single/HOH	Married/Joint	Married Separate
AMT exemption	$50,600	$78,750	$39,375
Income phase-out	112,500 - 314,900	150,000 - 465,000	75,000 - 232,500

Old Law (2011-2012)

	2011			2012
Filing status	Single/HOH	Married/Joint	Married/Sep.	Single/HOH	Married/Joint	Married/Sep.
Exemption	$48,450	$74,450	$37,225	$33,750	$45,000	$22,500
Income phase-out	112,500 - 306,300	150,000 - 447,800	75,000 - 223,900	112,500 - 247,500	150,000 - 330,000	75,000 - 165,000

	The Exemption amounts are a level of income that is excluded from the AMT calculation. Amounts above the exemption are subject to a static 26% AMT tax rate. AMT adjusted income in excess of $175,000 is subject to a flat 28%.
	Notice there is a significant Marriage penalty in the AMT calculation.
	The top marginal income tax rate in 2012 is 35%. This rate is going to 39.6% in 2013. That is why the AMT no longer impacts most wealthy taxpayers.
	Some of the main add-backs to your regular income for the separate AMT calculation are: state & local taxes paid, mortgage interest on home equity debt, miscellaneous expenses, medical expenses, net operating loses and investment expenses.

What does this mean?

Millions of Americans can breathe a collective sigh of relief that the AMT tax surprise will not be a surprise to them when filing their taxes this year.

Do You Have Your Health Insurance?

Time to be thinking about health insurance

The health care legislation commonly known as Obama Care has many provisions that are being implemented over a number of years. As we start 2013, it is wise to once again review the major changes impacting individuals for this year and next.
2013

• Income for those earning more than $200,000 unmarried or $250,000 married filing joint will be subject to a .9% additional Medicare tax. The normal 1.45% employee Medicare tax will increase to 2.35%.
• In addition, if you have unearned income above the $200,000 single ($250,000 married filing joint) it could be subject to a 3.8% Medicare tax. Unearned income includes dividends, annuities, rent, royalties, interest and many capital gains.

2014
Everyone will be required to have health insurance. If you do not, you will be subject to a tax penalty. The penalty will commence on January 1, 2014. The initial penalty will be $95 per individual, $285 per family or 1% of your income whichever is greater. There is also a potential penalty to employers who fail to offer employees health care insurance.

Here is what you should know.

Additional Medicare Taxes

	How does your employer know?It is very possible that neither you nor your spouse will individually surpass the payroll threshold of $250,000 to have your employer pull out the additional tax for Medicare. But added together you may need to pay this new tax. If this happens to you, be prepared to pay additional Mediare tax on next year's 1040.
	Late payment penalties? In all likelihood there will not be penalties for under withholding to account for this additional Medicare tax. If you are concerned, consider adjusting your payroll withholdings to account for this tax change.

Health Care Requirement

	Every state is required to have an insurance exchange.This exchange is to be a place where everyone can view health insurance options. It will allow individuals and small businesses a place to compare and shop for qualified insurance programs.
	No pre-existing condition limitation.You can no longer be refused insurance coverage because of a pre-existing condition or be charged an incremental premium based on health or gender.
	Buy or pay the penalty? Hopefully, not many will be faced with this dilemma. Why? Part of the health insurance bill is the requirement for most small businesses to offer a qualified health insurance plan. There are other exceptions to the penalty. If you have to spend more than 8% of your household income on the cheapest health care insurance premiums there is no penalty. There will be subsidies if you cannot afford health care insurance. This will be in the form of an advance tax credit if your household income is between 100 and 400 percent of the federal poverty level.
	Start looking now. If you will need to get health care insurance or face a fine, shop for alternatives as soon as possible. With proper planning you should be able to avoid the unpleasant task of facing a tax penalty in 2014.

As always, should you have any questions or concerns regarding your situation please feel free to call.