Monthly Archives: April 2013

Apr 03

ATRA Income Tax Planning

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I received this from the OSU Tax Newsletter and thought I would share.

ATRA Income Tax Planning

    In the American Taxpayers Relief Act of 2012, there was very little “relief” for upper income taxpayers.  Many of those individuals with larger resources feel that they were a target of that tax act.  The Joint Committee on Taxation estimates that these upper-income taxpayers will pay approximately $620 billion of increased taxes over the next decade.
The tax amounts that are raised are the result of increasing the top income tax rate to 39.6% and the top capital gains rate to 23.8%.  There also are phase-outs of personal exemptions and a 3% floor on itemized deductions.  With the major changes in ATRA that increased taxes on taxpayers with higher incomes, there are compelling reasons for these individuals to reduce their adjusted gross income (AGI).

Single Persons

There are multiple levels of income that will lead to potential tax increases.  The 2013 alternative minimum tax exemption of $51,900 is gradually phased out for incomes over $115,400.  A single person with AGI over $200,000 is subject to the 3.8% Medicare tax on passive income.
With AGI over $250,000, the 3% floor on itemized deductions is applicable.  Excess income over that amount is multiplied by 3% and up to 80% of itemized deductions may be lost due to that floor.
Finally, single persons with taxable incomes over $400,000 are subject to the top 39.6% income tax rate and 23.8% capital gains tax rate.  These individuals who have passive income will also be subject to the Medicare tax for a total tax on passive income of 43.4%.

Married Persons

Married persons will also be subject to higher taxes as income increases.  The alternative minimum tax exemption of $80,800 for 2013 is phased out starting at incomes of $153,900 and above.  At $250,000 in AGI, the 3.8% Medicare tax applies to passive income.  Over $300,000 in AGI, the 3% floor on itemized deductions applies and the personal exemption is phased out.
Finally, with $450,000 of taxable income, a married couple pays 39.6% income tax and 23.8% capital gains tax.  In addition, a high income person with passive income will also pay the Medicare tax for a total 43.4% tax rate.

General Income Tax Planning

Upper-income persons will be discussing various planning strategies with their CPAs and other advisors.  First, the recommended strategy will be to fund retirement plans to the maximum levels.  Second, the capital gains tax rates are still much lower than ordinary income rates and therefore it is preferable if possible to receive income taxable as capital gain.
Finally, tax-free income through municipal bonds will continue to be an option.  However, with the current very low interest rates on bonds and the potential for inflation over the next decade to reduce bond principal values, this is not a highly attractive investment.

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Apr 02

Five Tax Credits to Lower Your Taxes

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As we have just reached April and taxes are due in less than two weeks, it is important to review a few items that could help you lower the amount you have to pay to the government. A tax credit reduces the amount of tax you must pay. A refundable tax credit not only reduces the federal tax you owe, but also could result in a refund.

Here are five credits the IRS wants you to consider before filing your 2012 federal income tax return:

1. The Earned Income Tax Credit is a refundable credit for people who work and don’t earn a lot of money. The maximum credit for 2012 returns is $5,891 for workers with three or more children. Eligibility is determined based on earnings, filing status and eligible children. Workers without children may be eligible for a smaller credit. If you worked and earned less than $50,270, use the EITC Assistant tool on IRS.gov to see if you qualify. For more information, see Publication 596, Earned Income Credit.

2. The Child and Dependent Care Credit is for expenses you paid for the care of your qualifying children under age 13, or for a disabled spouse or dependent. The care must enable you to work or look for work. For more information, see Publication 503, Child and Dependent Care Expenses.
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3. The Child Tax Credit may apply to you if you have a qualifying child under age 17. The credit may help reduce your federal income tax by up to $1,000 for each qualifying child you claim on your return. You may be required to file the new Schedule 8812, Child Tax Credit, with your tax return to claim the credit. See Publication 972, Child Tax Credit, for more information.

4. The Retirement Savings Contributions Credit (Saver’s Credit) helps low-to-moderate income workers save for retirement. You may qualify if your income is below a certain limit and you contribute to an IRA or a retirement plan at work. The credit is in addition to any other tax savings that apply to retirement plans. For more information, see Publication 590, Individual Retirement Arrangements (IRAs).

5. The American Opportunity Tax Credit helps offset some of the costs that you pay for higher education. The AOTC applies to the first four years of post-secondary education. The maximum credit is $2,500 per eligible student. Forty percent of the credit, up to $1,000, is refundable. You must file Form 8863, Education Credits, to claim it if you qualify. For more information, see Publication 970, Tax Benefits for Education.