Why You Need Tax Planning This Year

If you are in a same-sex relationship you want to look at your tax situation.

Married gay coupleIf you’re legally married, you will have to use a “married” filing status for 2013 when you file your Federal return.  Find out how this will affect your tax bill and see if there are actions you can take before December 31st to save money.

Many same-sex couples are about to discover first-hand the “marriage penalty” written into the tax code. You may find that you’re no longer able to make a tax-deductible IRA contribution because your combined household income is over the limit.  Or, you may discover that your deductions for active rental losses are significantly less than what they were last year.  In past years, some couples were able to take losses of  $25,000 on each partners return for a grand total of $50,000 of losses.  This year under the best circumstances, they will only be able to take $25,000 and in some cases due to income limitations they may not be able to take any of these losses on the current year return and instead the losses will add to their passive loss carryovers.  These are only a few examples of how marriage impacts a tax return.

There are many phase out limits you may bump up against with in your combined return that one of you, or both of you, didn’t encounter before.

On the other hand, if your income levels are different — maybe one of you has no income at all — then you may benefit by paying a lower tax rate on more of your joint income than the single wage earner could in 2012.  Other married rates and limits can help a couple if they have unequal incomes.

For some couples filing as married will be a big deal.  Find out now.  Contact a CPA to see if you’d benefit from a tax projection.  Or, if you do your own taxes, recalculate your 2012 return as “married” for a rough idea of the changes you’ll see in 2013.

Finally, if you’re a same-sex couple considering marriage, do the same review. If you’re envisioning only a small, simple wedding to secure your legal rights, you may decide to get married sooner, in 2013, to receive a break on your taxes. Or, if you discover that you’ll be paying more in taxes after you’re married, you may decide to postpone the nuptials until at least January 1st so you can enjoy the filing single status one more time.

Like so many issues in the complex tax situation we have, there is no universal answer to whether you’ll pay more or less as a married couple.  But, a Fall examination of your taxes could make a big difference next Spring.

Why You Might Need to Do Tax Planning Now

The last deadline for 2011 income taxes just passed on October 15th, and the last thing that most of us want to do is to spend more time thinking about taxes.  Unfortunately, this year, we should.

Why 2012 is Special

Woman Doing Her TaxesMost years most people don’t need to do special tax planning or have a tax projection created for them.  If their circumstances haven’t changed too much from the past year, they can pretty much estimate what they will owe next April.

However, in 2013 there is one major change for high-income earners, one change for all wage earners, and another group of potential changes for all taxpayers that might make a 2012 trip to see your CPA cost effective.

  • For high earners: Healthcare reform is being financed in part by the extension of the Medicare tax on incomes over $200,000 (filing singly or $250,000 (filing jointly), and an excise tax on “Cadillac” insurance policies. (See Wikipedia for more details)
  • For wage earners: A temporary 2% reduction in the payroll taxes up to $110,000 in wages will expire January 1st.  This will result in an increased tax bill of $2,002 at the high end. Neither party seems inclined to extend this temporary reduction. (See CNN story)
  • Potential Changes for Everyone: 
    • The parties in Congress have not agreed on any extension of the “Bush Era tax cuts”.  Republicans refuse to vote for extensions that don’t include all people. Democrats insist that the cuts be eliminated for the well off, a term which is defined as people making more than $200,000 or up to $1 million, depending on the proposal.   If this impasse holds, then everyone’s tax rate will go up January 1st.  Without Congressional action, the lowest tax bracket will revert to 15% from 10% and the highest will be 39.6% instead of today’s 35%. (More details)
    • The parties in Congress failed to agree on deficit reduction measures.  As a result, the bipartisanly-passed Sword of Damocles will fall on the Federal budget, slashing spending.  These cuts, called sequestration, will stop $1.2 Trillion dollars in planned spending in unpredictable ways.  If a compromise is not reached and the automatic cuts avoided, businesses may suddenly find long-time orders and business relationships disrupted as across-the-board cuts hit Federal programs.  (See more)

Most years people try to put off realizing income past December 31st so that they can put off paying taxes for another 12 months.  But, this year is different.  If you are a high earner, you may want to take advantage of the 2012 rates that include the Bush Era reductions for all income levels.  If you earn less than $110,000, you may want to earn  as much as possible in 2012 when the 2% payroll tax cut is still in force.

In addition, you may want to put in place tax-minimizing retirement plans or take other actions so that you are ready on January 1st if rates do rise.

If Sterck Kulik O’Neill  can help with your tax strategy, please phone us at 415.433.4500. (More on CPA’s and income tax preparation.)