Election, Tax Time, Uncertainty!
I sent this issue out to be printed and folded a couple of days before the elections. By now, we know who was elected. Coming months will show us what our new leaders can accomplish.
But - - - "Tax Time" is near, and I can't delay any longer. I know the tax laws as they exist at this point in time. In 2010 Congress passed a big "extenders" bill in mid-December. Something similar could happen this year. Watch the news.
For now, we need to start getting ready for our annual chore. I'm forced to look at the laws on the books today.
Looking at 2012
A number of helpful rules expired with 2011. Congress insists they'll extend several. We could see some extensions late in 2012, or even early in 2013. However, IRS needs to design new tax forms and prepare to accept returns. They told Congress any changes after December 1 will mean delays in processing tax forms.
For now, I want to help you get ready for your 2012 tax returns. I'll list important tax savers for 2012. Then I'll mention the expired items.
2012 Tax Savers
College Education. We have 3 different tax benefits here. Undergraduate work, graduate courses, and work-related study each have different rules. One benefit can knock a full $2,500 off your tax bill for each student! If you can provide complete information, I'll see to it that you get the largest possible tax savings.
Please give details on the school, the student, level of study, and costs for the courses themselves, as well as for all books and supplies. I need to know how costs were paid, and whether there was any form of grant or aid. If use of a computer is required for the course work, we can consider the computer's cost, as well as on-line fees and special software. For job-related courses I even need to know about driving to classes.
Home Energy Credits. For a few years we had two different kinds of credits - one for conserving energy, and another for generating energy. Only the second one still applies.
Generating Energy. Big help if you install solar heating or power generating equipment. 30% of your total cost turns into a tax reduction. No limit on costs. The credit can be claimed for any home you personally occupy, even for a vacation property. Rentals don't qualify. This one won't expire until after 2016.
Other Helpers. A couple of reminders for your job, rental, or business:
- Mileage Deductions are worth 55.5¢ for each business mile. Don't miss any!
- Businesses. Consider placing new equipment in service prior to Dec. 31. Depreciation rules allow a "bonus" deduction in 2012, but not in 2013.
Here are some expired items we both got used to. Since they could be revived, I'll ask you to collect the information. Neither of us should get our hopes up, though.
- Teacher Expenses on up to $250 of classroom materials.
- Mortgage Insurance costs are no longer deductible.
- Charity From Your IRA. Folks over 7012 who had their trustee make direct gifts to a charity got a special deduction.
- Sales Tax vs. State Tax. State income tax is always deductible. For the past few years we've been deducting the higher of sales taxes or income taxes. Buying a new car added to sales taxes. This year - state income taxes only!
- Adoption Credit Is still here, but is smaller, and no longer can be larger than your tax bill.
- Conserving Energy. As mentioned, the credit expired.
- Business Provisions. Credits for Research and Hiring for the smaller businesses are gone.
So are short depreciation lives for certain restaurant and retail spaces.
Gone For Good?
These all expired at the end of 2011. We heard the campaign promises of possible extension. Considering the date, however, we should prepare for the worst. Watch the news, and cross your fingers!
On Tap For 2013
If Congress does not act, several helpful tax laws are set to run out at year's end. If this happens, many ordinary families could see $1,000 - $5,000 of extra tax in 2013.
Important scheduled changes:
10% Tax Bracket is set to become 15%. Most single filers lose about $435, most couples $870.
Top four brackets are now 25%, 28%, 33% and 35%. These are set to be 28%, 31%, 36%, and 39.6%.
Child Credits. Each child under age 17 knocks $1,000 off your tax bill. This is a big help to families, but is set to be cut to $500.
Capital Gain Rates are now at 0% for low or moderate incomes, and 15% for higher incomes. These are set to become 10% and 20%.
Dividend Income is taxed at the same rates as capital gain. In 2013 it will be "ordinary" income. Normal rates apply, starting at 15%.
Couples lose big. Their 25% bracket starts at $70,700 of taxable income. The start point is set to drop more than $10,000 in 2013. Cost- over $1,000! Add to this a reduced Standard Deduction. Couples now subtract $11,900 of income before figuring tax. This drops to $10,150 or so. Another $260 tax increase!
Several Other Items are set to change. Student loan interest may be deducted only for the first 5 years of a loan. Coverdell education savings programs will be far less liberal. Tax credits for child care expense are set to decline. Folks with high income will lose some of their deductions as well as some of the value of their dependents. Fewer employers can provide tax-free assistance for a worker's education. Estate tax rules for deaths in 2013 are not yet settled.
Alternative Minimum Tax is a complex monster. At present only 4%-5% of all taxpayers face it. If it's not repaired, nearly 30% of us will pay extra tax. Congress has been saying they want to revamp the tax. Sadly, they've sung this song for over 10 years now!
Add These to the expired provisions mentioned on the previous page, and many of us face serious tax increases. Will it really happen? As of Election Day, it's the LAW!
Expect Higher Withholding in 2013
Withholding taxes will increase in 2013. As of early November, figures are uncertain. IRS says not to expect new tables until mid-December. Expect a mad rush for employers to prepare January payrolls. Two laws are involved.
1) Social Security Withholding Increase. In 2011 and 2012 workers got a special tax reduction. Social Security taxes have two parts:
First is OASDI (the "retirement" part). This is normally 6.4%. For 2011 and 2012 the rate has been 4.4%. This ends on December 31. For a worker earning $52,000 that's a $20 weekly decline in take-home pay!
Medicare tax is the second part. This remains at 1.45%.
The OASDI portion has a “cap” - tax stops when wages pass $110,100. The 2013 “cap” will be $113,700. The Medicare portion has no "cap".
2) “Bush Tax Cuts” - Will They Expire? Tax rates are set to go up in 2013. The 10% bracket will become a 15% bracket. If this comes to pass, you can expect another increase in withholding.
Withholding varies with earnings and the “status” claimed on Form W-4.
Someone making $40,000 might see little change if several allowances are claimed. But, most such workers will see increases of $500-$900.
Both Changes! - Look Out! If both measures are reflected in the new tables, you can expect a noticeable drop in take-home pay. Single workers earning up to about $40,000 can expect a little more than $1,200 additional withholding. That's about $100 monthly! Married workers would see their annual withholding go up nearly $1,500, or a full $125 monthly! Married workers earning over $65,000 or so will see even bigger increases because of the lower starting point of their 25% tax bracket.
Watch January's Checks! Pay careful attention to changes in your first couple of paychecks. You likely need this to cover your increased tax bill!
Maybe I Can Help - Maybe I Can't! I always try to help you foresee changes in your taxes. If we see late changes, it will be my busiest time of the year. Extending a familiar rule is one thing - I already understand it. When we see brand new laws, it often takes weeks to learn how the rules work. During my busy “tax season” I don't have the extra time. We may have to simply "pick up the pieces" later on.
FED/CA Update for 2012 Taxes
January 1, 2013, Congress passed the American Taxpayer Relief Act of 2012 (the “Act”) which the President signed into law on January 2. This Act prevents the nation from going off the "fiscal cliff" and extends the Bush tax cuts.
The standard deduction for single or filing separately is $3841; for married filing jointly, qualifying widow(er) or head of household it is $7682. The exemption for single, married separately or head of household is $104; for married, filing jointly or qualifying widow(er) it is $208. For dependents it is $321; for blind or age 65 or older it is an additional exemption.
The renters' credit is still available who have CA AGI of $36,337 or less for single filers and $72,674 or less for joint filers.
Previous tax rates of 2%, 4%, 6%, 8% and 9.3% still apply but 3 new brackets have been added by Proposition 30 which was passed in November, 2012 to apply retroactively to 1/1/12. They are: 10.3%, 11.3% and 12.3%. These are for taxpayers making $250,000 (S) or $500,000 (M/J).
Net Operating losses are still available for CA taxpayers who have businesses.
E-filing is still available. If you are expected a refund, you can get your refund in about 7 days. If you owe, you can pay by credit card, EFW or voucher by April 15th.
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