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Tax Season 2014 - Get Ready for the Ouch! by Guest Blogger Sherri Mahoney-Battles

Tax season 2014 is right around the corner, and a host of tax changes that become effective this year will be particularly painful for taxpayers in a higher tax bracket. A former 39.6 percent bracket has been reinstated for taxpayers with higher taxable incomes. For 2013, the 39.6 percent bracket starts at taxable income levels of $400,000 for single and $450,000 for married couples. This newly reinstated tax rate is now permanent until Congress changes it.

Capital gains rates of 0 and 15 percent are now permanent, but a new 20 percent rate applies for taxpayers with higher taxable income. This 20 percent rate applies to taxpayers with long-term capital gains that fall into the above-mentioned 39.6 percent tax bracket.

Beginning in 2013, medical expenses will need to exceed 10 percent of the taxpayer’s adjusted gross income (previously 7.5 percent) in order to be deductible. Taxpayers over sixty five, however, will be able to deduct medical expenses that exceed 7.5 percent of adjusted gross income for taxable years 2013-2016. An additional 2013 change to itemized deductions is a phase-out of itemized deductions for higher income taxpayers. The phase-out level is $250,000 for single and $300,000 for joint filers.

Two new and potentially painful taxes will also rear their heads this year. The 3.8% Net Investment Income Tax (NIIT) tax went into effect January 1, 2013. Taxpayers with incomes over $200,000 for individuals or $250,000 for married couples will be paying an additional 3.8% tax on income from interest, dividends, annuities, royalties and rents. Capital gains on a primary home sale that exceed $250,000 for individuals or $500,000 for a married couple, meeting the income threshold, will face the 3.8% tax realized on the excess gain. Although this tax is aimed towards higher income taxpayers, it can include anyone who has a big one-time shot of investment income or gain. Also, beginning in 2013 is an additional .9 percent Medicare Tax assessed on individuals with wages or self-employment earnings that exceed $200,000.

All of these changes are part of the American Taxpayers Relief Act of 2012 and the Affordable Care Act and are geared towards generating additional tax from higher income taxpayers. Some taxpayers will be surprised to find themselves in this situation and many will feel the impact of not just one hit but multiple hits coming from different areas. For example, taxpayers in the higher 39.6 percent tax bracket will have additional federal income tax, a higher capital gains rate, lower itemized deductions, an additional .9 percent Medicare Tax and an additional 3.8% investment tax. Unfortunately, many of these people will also be paying tax on 85 percent of their social security benefits as well. Just a few weeks ago I did a tax planner for a couple and these tax hikes added a whopping $18,000 to an already steep tax bill.

Now more than ever, a proactive approach to tax planning and strategizing is necessary. Armed with the above information taxpayers have the ability and should strategically plan asset sales and expenses like medical payments so that they can take advantage of tax bracket changes and phase outs. Higher taxes for taxpayers with income in these ranges may be inevitable, but taxpayers who plan strategically can act accordingly and potentially reduce their tax liability.

Sherri Mahoney-Battles, Enrolled Agent

For more information about how Sherri can help you to navigate these taxing matters visit her website at www.taxingmatters.com

A Taxing Season! by CWO Guest Blogger Sherri Mahoney-Battles

So, the 2014 tax filing season has started, and everyone is scrambling around collecting forms getting ready in anticipation of either a large refund or the possibility of writing checks.

What is it about these forms that make most people squirm in discomfort?

My own father told me just a few weeks ago that he’s decided to stop filing tax returns! He finds it entirely unjust that someone his age should be expected to pay taxes. Benjamin Franklin uttered these words: "'In this world nothing can be said to be certain, except death and taxes." The good news is that if you are thinking of filing a tax return you must be alive.

Here are some tips to make the process a little less painful:

Faster Refunds.

People who file earlier in the filing season will receive their refunds faster than those who wait until later in the season. If you want your money even faster, opt for direct deposit.

Over the last few years we’ve seen refunds issued in as little as three to seven days for some of the earlier filers that utilized direct deposit. Hint: Do not change bank accounts before receiving your refunds if you use the direct deposit option. This might seem like a no-brainer, but every year we chase refunds for people that move bank accounts before their refunds come in.

Be sure to also check your direct deposit information if you’ve changed banks within the last year. This information carries forward from the previous year and outdated direct deposit information may be on file from a previous year. The IRS is not liable for refunds sent to incorrect accounts so it may take a while to trace a refund that went to the wrong account number.

Owe Money.

If you owe money on your tax return, don’t wait until the last minute to do your return or file an extension. Start the return early so you know the amount of your liability and have time to search for extra deductions.

You can still file your return electronically when it’s completed, but you have until April 15^th to pay the tax. When your return is filed electronically you will be provided with vouchers to pay the tax that you can mail on or before April 15^th. Also, an extension is an extension of time to prepare the taxes not to pay the taxes. So, any tax due is still due on April 15^th even if you file an extension.

The IRS will charge interest from April 15^th until the date you pay the tax, and they may disallow your extension and charge you with a failure to file penalty if you don’t pay enough tax with your extension.

If you don’t have the funds to pay the tax liability, you can set up an installment agreement. The IRS and most states offer new streamlined installment agreements that can be set up fairly easily.

Watch Your Dependents.

Every year we correct a large number of returns for clients who have working teenagers that file their own returns and claim themselves as dependents on their own returns. If the teenager files their return claiming themselves as a dependent the parents cannot file their own return electronically and will need to file paper returns, greatly delaying their refunds.

The dependent will also need to file an amended return to correct the filing.

In most situations it is more beneficial for the parent to claim the child until the age of 24 providing they are a full-time student.

Education Credits.

Currently, these are some of the best tax credits available and you can receive a maximum credit of up to $2,500 with only $4,000 in tuition and related costs. This includes tuition costs paid for with student loans.

Unfortunately, you need a Form 1098-T and most schools send these forms addressed to the student. Be sure to watch for mail addressed to your college-aged dependent that will be needed to complete your tax return.

Know your Basis.

Every year a large number of our client’s returns are not able to be completed because we are waiting for clients to collect basis information. If you sell investment property or stocks, you will need to know what you originally paid for the asset/stocks and the date of purchase so that we can calculate any gain or loss on the property.

Fortunately, most brokerage companies now include this information on their tax statements in regards to stock sales, however, if the funds did not originate with the brokerage firm this information may not be able. For investment property you will need to know the original cost plus any improvements done to the property.

Lastly, use your tax appointment as an opportunity to plan effectively for the current tax year. Discuss any potential income changes with your tax preparer and make adjustments to tax withholdings or estimated payments so that you can be prepared for the next filing season.

Over the years, clients that have taken advantage of this opportunity to plan ahead tell me that they have less anxiety at tax time. As a tax preparer, I have found that I love how the tax season matches the season outside my windows. The cold and snow seems to align with the intensity of the work that we do during the winter months, and the end of the season in April coincides with the new growth of spring that starts to appear outside my windows.

The end of this cold harsh tax season brings with it warmth and new growth; watch for it! 

Sherri Mahoney-Battles, Enrolled Agent 

For more information about how Sherri can help you to navigate these taxing matters visit her website at www.taxingmatters.com