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A s the year winds down, will you be ready for the application of all the new tax laws incorporated into 2013? Please take a moment to review your situation while there is still time to act prior to year-end.
- Tax Change is Coming
- 2013 Filing Status Change for Married Same-sex Couples
- Avoid These Common Financial Mistakes
- State Business Tax Burdens Announced
Tax Change is Coming
While a distant memory, in January of 2013 Congress passed sweeping tax legislation. Many of these tax law changes will now be felt as you file this year's tax return. Here are five worth noting.
|Self-employed FICA. Wage earners have already felt the impact of the social security tax rate reset to the traditional 6.2% (temporary rate in 2012: 4.2%). However, self-employed workers may feel this impact when filing their annual tax return.|
action: If receiving self-employed income, review your quarterly filings to ensure you have accounted for this incremental tax hike.
|Higher Taxes. If your income is above $200,000 single or $250,000 married filing jointly, your taxes will be going up. In some cases it may be up dramatically. Why? Your tax return may be subject to the following increases; a new 39.6% tax rate, itemized deduction phase-out, personal exemption phase-out, increase in long-term capital gains taxes, and more.|
action: Conduct an income tax forecast to review the potential impact on your situation. This is especially true for small business owners in sole proprietorships, Sub Chapter S Corporations, and partnerships as your business profits will be taxed on your individual tax return.
|Medicare Surtax. To help pay for the health care initiatives, 2013 marks the first year of new Medicare surtaxes for those whose incomes surpass $200,000 single or $250,000 joint. The extra tax may have been applied to your paycheck, but because of the marriage penalty in this part of the code, you may be subject to the additional tax when your income is combined with your spouse''s income at tax filing time.|
action: Conduct a 2013 tax forecast. This is especially important for married couples whose individual incomes do not pass the threshold, but when combined with a spouse do.
|Dividends and Long-term Capital Gains. While qualified dividends will not be taxed as ordinary income, the maximum tax rate goes up 33% (from 15 to 20%). The maximum tax rate on qualified capital gains also goes from 15 to 20%.|
action: Year-end planning is now more important to determine whether to sell investments. Try to offset gains with losses wherever possible.
|Medical Expense Threshold Moves to 10%. For those under the age of 65, the medical expense threshold is now 10% of your Adjusted Gross Income (AGI). You may only deduct qualified medical expenses that exceed this percentage of your AGI. The threshold remains 7.5% if you are 65 years old or older.|
action: Avoid the tendency to stop tracking medical expenses because you think you will never hit the threshold. Remember it often only takes one major medical emergency to make all other medical, dental, and vision care expenses deductible.
While the impact of these changes will not be felt until you file your 2013 tax return, it may make sense to review your situation and be prepared for these upcoming changes.
2013 Filing Status Change for Married Same-sex Couples
|The U.S. Treasury Department and the IRS issued new regulations as a direct result of the recent Supreme Court ruling regarding same-sex couples. Under the ruling any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, or a U.S. territory that recognizes same-sex marriage will be treated as married for all federal tax purposes. This includes:|
More importantly, this ruling applies regardless of where the same-sex couple currently lives. In other words, if the same-sex couple is legally married in one state, but then moves to another state that does not recognize the marriage, they are still married for Federal Income Tax purposes.
Things to note
More information will be forthcoming on this subject from the IRS and other government agencies.
Avoid These Common Financial Mistakes
Throughout life there are many ways to achieve financial success. Some of that success can be achieved by avoiding these common financial mistakes.
|Under-insuring your property. Often policy owners hold an insurance policy for 10 years or more and never conduct a review to ensure their coverage is still adequate. This is made more complicated each year as insurance companies change the details of coverage within legal documents. Your best defense is to review homeowner, life, and auto insurance with your agent one month prior to your renewal dates.|
|Paying too much interest. If you carry a balance on a credit card you are probably paying some of the highest interest rates in the country. Try to get in the habit of paying enough to cover your current monthly purchases, PLUS the minimum monthly payment, PLUS a little extra. You''d be surprised how much money you can save in credit card interest expense.|
|A costly divorce. A divorce that goes to trial can easily cost thousands of dollars. Using a lower cost mediation option or settling amicably can be a financially wiser way to go. During this emotional time, financial analysis often takes a back seat. Conducting a tax review of the proposed divorce settlement prior to signing could also save you thousands.|
|Unhealthy living costs. Bad health habits can not only hamper and shorten your life, but they can also cost you plenty in the form of higher life-insurance premiums and higher out-of-pocket medical expense. This can be especially expensive with higher insurance policy deductibles and the new 10% medical expense itemized deduction threshold. Consider slight health changes now to pay you dividends in the future.|
|Insufficient emergency savings. If you lost your job or became unable to work, how many months of bills could you pay? Often one major accident is all that is between you and financial hardship. Try to accumulate between six months and one year of financial resources to keep on hand in case this happens to you. Review and consider appropriate short-term and long-term disability insurance.|
|Purchasing with credit. Consider saving enough money to purchase bigger items versus buying on credit. Do you remember saving money as a child to buy a bike or a favorite toy? For some reason, we have now decided we should buy it first and then pay the bill. Why not return to the old way of purchasing? It might just keep you out of a financial hole.|
|Protecting against fraud. With advances in technology have come more devious ways to steal your identity. This includes theft of tax information, social security numbers and credit cards. Conduct a regular review of your online profile and credit reports to identify suspicious activity before it gets out of hand.|
While it is hard to account for every possible financial pothole in the drive-through of life, by paying attention to the obvious ones, the risk of a large financial surprise can be reduced.
State Business Tax Burdens Announced
Where does your state rank?
The tax climate for businesses varies dramatically depending on the state in which the business resides. State business environments are constantly shifting as some states readily enact changes made at the federal level, while others do not.
Each year the non-profit Tax Foundation organization announces a ranking of tax burdens for businesses. The results of their 2014 ranking are noted here.
The 10 best states in this year''s Index are:
The 10 worst business tax burden states are:
Most of the above states are favorable for businesses because they lack one of the common tax revenue types. Some states lack corporate taxes while others have no sales tax or individual income taxes. Indiana is unique in that is has all the major tax classifications but they are just lower rates than most other states.
The common themes within these non-friendly business states are high tax rates with complex tax code. Minnesota stands out here as recently enacted tax changes will impact the cost of doing business within the confines of this state.
Want to learn more? The full study is available at www.taxfoundation.org
Please contact us with any questions.
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