|By PAUL SULLIVAN|
Less than a year ago, people were worried about a variety of tax increases in 2013, from income and investment taxes going up to the exemption on estate and gift taxes going down. This year, without any last-minute negotiation around major tax policy, people are far less focused on taxes, and that has accountants and tax lawyers worried.
“A lot of individual taxpayers are in for a huge shock when they file their taxes,” said
She noted that income and capital gains tax rates had risen, a new
“People will focus on the percentages until they see what that dollar amount is and then they’re going to be shocked,”
While most of these clients have been paying estimated taxes throughout the year, most have been paying the minimum to avoid incurring a penalty, he said. Like other accountants, he is concerned that come tax day these people are going to have a bill that will not just shock them but may cause some to scramble to come up with the money.
In other words, 2013 should be a more stressful time for tax planning than it has been.
There are several planning considerations for people, particularly those on the cusp of various tax increases and deduction limitations.
The biggest is to understand how the new
First things first: People need to understand what their tax risks are as they move up the income ladder. Individuals earning more than
Itemized deductions will be reduced for individuals earning more than
“The calculations are getting more complicated,” said
For example, losing the personal exemption for a family of four means
The first thing people need to do is assess where they are on the ladder of tax increases. In figuring this out, the traditional planning techniques of accelerating or delaying income, deductions and state taxes can keep your income from cracking one of the income levels that will increase your tax bill.
But there are several things people can’t control. Ms. Rebella pointed out that take-home pay has already gone down for people who have earned
This should be straightforward, but it has at least two complications. If those people are married and their spouse’s income does not put them over the
The second issue is if the other spouse earned, say,
Beneficiaries of a trust could also find themselves unexpectedly thrust over one of the income thresholds. The reason is that trust earnings are taxed higher at lower amounts:
Her advice is simple: Contact the trustee, so you can plan accordingly.
Where planning is not so easy is for people who receive passive income – say distributions from a family company or rental income on properties that someone else maintains. This income is subject to the 3.8 percent surtax, unless people can show they are actively involved in the business.
This is even trickier with a family business, where, say, the daughter is running the company and her brother is not involved. Her distribution of profits would not be subject to the 3.8 percent surtax, but his would be, Ms. Foss said.
With real estate, there may be more wiggle room, despite clear requirements on what counts as involvement. “If you have a full-time job and are renting these properties out, you probably can’t claim them,”
Internal Revenue Service has not offered guidance beyond saying the deductions need to be reasonable – wording that will no doubt encourage some to push the boundaries of reason.
One bright spot on income taxes: Unlike past years, the alternative minimum tax is not in flux, so calculating it is, at least, easier. The downside is that the calculation is always to determine which tax is higher.
Another bright spot is that even though 57 provisions are set to expire this year if they are not extended before year-end, the expiration of only a few of them will have a broad impact on individuals.
One is the ability to give a required distribution from a retirement account directly to charity — saving the donor from having to declare it as income, which could put him in a higher tax bracket. Accountants were divided between assuming the provision will be reinstated and believing it won’t matter if it isn’t.
“I’ve advised my clients to ignore that expiration date,” Ms. Foss said. “They’re not going to be that bad off if it does expire, and they’re going to give that much to charity anyway.”
Another is the ability of taxpayers filing in a state without an income tax, like
People could do additional estate planning this year and possibly save a lot in future taxes. With the exemption indexed to inflation, a couple can now give as a gift
“There’s a little fatigue over planning and giving things away and filing tax returns,” said
The same could be said for a lot of this year’s tax planning — until the higher bill arrives.
|Copyright:||Copyright 2013 The New York Times Company|
|Source:||New York Times Digital|