| | Published March 27th, 2013
| Lynn's Top Five All About the New Tax Law Provisions
| | By Lynn Ballou, CERTIFIED FINANCIAL PLANNER(tm) |  | | Lynn Ballou is a CERTIFIED FINANCIAL PLANNER(tm) professional and co-owner of Ballou Plum Wealth Advisors, LLC, a Registered Investment Advisory (RIA) firm in Lafayette. Lynn is also a Registered Principal and Branch Manager with LPL Financial (LPL). The opinions voiced in this material are for general information only and not intended to provide specific advice or recommendation for any individual. Financial Planning offered through Ballou Plum Wealth Advisors, A Registered Investment Advisor and a separate entity. Securities offered through LPL Financial, member FINRA/SIPC.
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If you are like me, every day you come across something about the newest tax laws. Between our federal and state governments, on one level or another, most of us got hit with a few whammies. One or two alone may not feel like such a big deal, but when you add them all up, it can be a bit overwhelming!
As you work with your tax advisors this year, a big part of your work together won't be "just" preparing your 2012 tax returns, but also thinking through how your 2013 tax return might look very different and what you need to do about changing your withholding or estimated taxes so you aren't caught short next year. Here are five points that deserve your attention now:
1) It's back to the future with payroll taxes: say good-bye to the 2 percent relief you saw for FICA reductions. For employees, welcome back to the full 6.2 percent FICA cost. You know because you've already seen the haircut hit your paycheck. If you are self employed, be prepared to pony up the extra when your first estimated taxes are due on April 15.
2) Whether you are an employee or self-employed, your wages are also going to be hit with an extra 0.09 percent Medicare tax if you earn more than $200,000 (single) and $250,000 (married filing jointly). IMPORTANT: Be particularly alert if you work two or more jobs because your employers might not withhold enough and you'll need to pay the extra when you file your return next year. And if you are married, this is really going to sneak up on you because as a married couple who may individually not hit the threshold, filing jointly you easily can. Local well-known CPA, Linda LaHonta, points out, "There are two issues to note on this tax. One, the tax applies to all wages subject to the Medicare tax so this is gross compensation before 401(k) contributions or other pre-tax deductions. Two, for self-employed people that normally get a deduction for one-half of their self-employment tax, they will not be allowed a deduction for any of this additional Medicare tax."
3) More tax fun comes at us with the 3.8 percent investment income surtax. Not a simple calculation --- the IRS rules on how to calculate this tax are already 159 pages long! Grossly simplified, you need to know that if your income is greater than $200,000 if you are single and $250,000 if you are married, and some of that is from investments, you will most likely be subject to the surtax. Collaborate with your tax accountant and your CFP(r) professional to figure out steps you might be able to take to help minimize your exposure.
4) For Californians, Proposition 30 just passed in November and was retroactive to January 2012 (I bet a lot of voters missed that!) and increases tax rates dramatically. The top rate used to be 9.3 percent and now has increased to 12.3 percent. If you are making over one million per year, then you get to pay another surtax of 1 percent, called the mental health surcharge, making the top rate in California 13.3 percent. I guess that's both the good and the bad news, right?
5) Any good news? If you own a business, your firm can write off up to $500,000 of depreciable assets in one year under section 179 for 2012 and 2013 (the max was $125,000 in 2011). Congress's intent? Stimulate the economy by encouraging business spending. And along similar lines, The Research Tax Credit and Work Opportunities Tax Credit were both resurrected. The Work Opportunities Tax Credit provides helpful tax credits to those businesses who hire veterans and those coming off government assistance.
6) Okay, I'm cheating and tossing in an extra bonus point! Phase outs! I cannot skip this because it's like a sneaker wave and will affect many of you because it's not a surtax or outright rate increase--- instead it's a potential and possibly significant reduction to your personal exemptions and your itemized deductions. Personal exemption phase outs and itemized deduction phase outs start at $250,000 for singles and $300,000 for married couples. A few itemized deduction categories are exempt, but you could lose as much as 80 percent of those that aren't. Yikes! Linda, whose practice is in Lafayette says, "Be careful if you are asked what your marginal tax rate is. The phase outs of the personal exemptions and itemized deductions can increase the actual tax rate that you are paying along with all the new taxes. Your tax bracket could be much higher than you think."
I can only sympathize with how super busy you are. But I encourage you to take the time to really familiarize yourselves with these new laws and discuss with your tax advisors how they will affect you in your unique individual situation, as this is just a very tiny peek at a few provisions. In future columns I'll cover more about the new tax laws and also the new medical insurance exchange in California and what it means to us individually and as business owners. Are we having fun yet?
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Lamorinda Weekly, Moraga CA