Category: Tax Planning

A variety of numbers that are important for 2013 tax planning were recently released by the Internal Revenue Service and Social Security Administration.

First, let’s talk retirement accounts. In 2013, maximum 401(k) contributions from your own paycheck will be capped at $17,500 for the year, an increase of $500 over 2012. For folks 50 and older, the “catch-up” limit remains the same, at $5,500. Personal IRA contributions will be limited to $5,500 for those under 50, and $6,500 for those age 50 and older. For SIMPLE accounts, the maximum contribution increases to $12,000, with a $2,500 catch-up limit for those 50 and over.

While elimination of the Social Security taxable wage limit is one of the proposals on the table in Washington, D.C., the inflation adjusted cap for 2013 is currently slated to be $113,700, up from $110,100 for 2012. This is the maximum salary level per year per person on which Social Security taxes are charged. Your wages above that amount are not subject to that particular tax. Expect this to be a hotly debated item during the next Congressional session.

Also on the Social Security front, retirees that have not yet reached full retirement age for their birthdate can earn up to $15,120 in 2013 from employment without losing any Social Security benefits.

If you provide cash gifts to others, you’re in luck in 2013: The annual gift tax exclusion has increased to $14,000 for 2013. Do note, however, that this is als a hotly contested item, and may be on the retroactive chopping block for 2013.

Lastly, Health Savings Account (HSA) contribution limits will increase to $3,250 for individuals and $6,450 for families next year.… Continue reading

Republican presidential candidate Mitt Romney has been getting blasted for months about the fact this effective tax rate is so incredibly low. As an Enrolled Agent, I find the discussion surrounding Romney’s tax situation to be particularly interesting, because there isn’t a single taxpayer on the face of the Earth that personally wants to pay more taxes than they have to. If such a strange person does exist, there is no government that won’t happily cash your check (in fact, the U.S. government happily accepts credit cards for donations).

I’d really like to get on the phone with all these reporters and news anchors blasting Romney for his tax reduction strategies. I’d bet $100 that you can’t find one that would, themselves, personally agree to pay more taxes than they need to. Yet, they will happily ridicule somebody else for doing so.

Actually, I need to back up, because there is actually one person I know of that voluntarily pays more taxes than he’s required to. Guess who that is? Mitt Romney.

That’s right. In order to keep a campaign promise earlier this year stating that he has paid at least 13% in taxes each of the past 10 years, Mitt Romney voluntarily failed to claim $1.75 million in charitable contributions on his 2011 Form 1040. In other words, he only deducted $2.25 million of the total $4 million he actually donated to non-profits. If he had claimed the full deduction, his 2011 effective tax rate would only have been 12%.

Mitt Romney’s strategy for only paying an effective tax rate in the low teens is perfectly legal.

The Internal Revenue Code requires every American citizen, at home or abroad, to pay taxes on all income, from whatever source derived, whether that money is made in America, or overseas. The law requires everybody to pay their mandatory tax amount, and not a single penny more. The tax laws are the tax laws, and the law is the same for every citizen. Just because you are rich does not magically change the tax laws (just ask Wesley Snipes, serving three years for tax fraud).

Some people complain that the tax code favors the wealthy. This simply isn’t true. The tax code provides equal opportunity for all. Equal opportunity to minimize, but also equal opportunity to get screwed.

What does this mean, and and how can you take advantage of it?

First of all, realize … Continue reading

For the vast of taxpayers, both individuals and businesses alike, their very first tax bill stems from a series of events.

For individuals, it can be that you simply don’t pay attention to your tax situation throughout the year (hint: you should!). You think of your taxes as a once a year affair, rather than taking a proactive approach to regular tax planning. Perhaps you got a bonus, a raise, or a gambling win at some point in the year that boosted your overall income for the year into a higher tax bracket, and didn’t adjust your withholding at that time to compensate. Or perhaps you had a large debt forgiven or took money out of an IRA early, and didn’t plan for the tax consequences. Failing to take into consideration a significant life change, such as no longer being a homeowner or losing an exemption and tax credits because of a child growing too old to claim, can also have a major impact on your tax situation.

For businesses, it can start with a rough month, and simply not having the cash laying around on the 15th to make the payroll tax deposit for last month’s payroll. Essentially, it becomes a matter of convenience to skip that Federal Tax Deposit one time. Well, in my experience, that one time becomes an expedience for the entire quarter, then two quarters, with no warning or anything from the IRS. Then, suddenly 8 straight quarters have gone by and you get a tax lien notice and a call from IRS Collections, not to mention you are suddenly informed of the massive penalties, which can double the size of your initial tax debt.

Whenever you have a “life event”, be sure to take into consideration the potential tax consequences. What is a life event? Anything to do with large asset acquisition or disposal (such as a home), anything to do with children, marriage, divorce, bankruptcy, foreclosure, job change, moving, or anything that drastically changes your bank account balance. If you are self-employed, there are even more definitions for a “life event”.

For business owners, don’t fall into the “it’s easier not to pay this month” trap, especially with payroll taxes. The long term consequences simply aren’t worth it. In fact, it’s cheaper to raid your personal retirement plan and pay the 10% early withdrawal penalty than it is to pay the penalties that add up for not … Continue reading