Fiscal Cliff Highlights

Payroll taxes increased for wage earners

There’s no tax relief for anybody in the fiscal cliff tax deal. For wage earners, your Social Security (FICA) tax withholdings will be deducted at 6.2 percent for the first $113,700 of earnings. This is a 2 percent increase from the 4.2 percent deduction that has been the withholding rate for the past two years. Unlike some of the other changes that won’t be felt until the 2013 tax season, this change will have an immediate impact on your next paycheck.

Income taxes increased only for the wealthy

Income tax rates will remain the same for individuals with annual income of less than $400,000, or $450,000 for those filing married joint returns. The income tax rate for those wealthy taxpayers will increase from 35 percent to 39.6 percent.

Investment taxes increased only for the wealthy

Capital gains and dividend tax rates will remain the same for those individuals earning less than $400,000, or $450,000 for married joint filers. The capital gains and dividend tax rates for the wealthy will increase from 15 percent to 20 percent.

Income tax deductions and exemptions limited for the wealthy

Individuals with annual income of at least $250,000, and those married filing jointly earning at least $300,000, will be limited on the personal exemptions and itemized deductions they can claim. Taxpayers with incomes above $422,500 will not qualify for a personal exemption. This is a throw-back to the limits on deductions and credits for the wealthy that were in force prior to the Bush era tax cuts, and that were eliminated in 2010.

Important tax credits extended

Tax credits created by American Recovery and Reinvestment Act of 2009 are extended for five years. These include the Earned Income Tax Credit, Child Tax Credit, and the American Opportunity Tax Credit.

Debt Forgiveness Extended

Homeowners that weren’t able to complete their debt negotiations or procedures before December 31, 2012, were granted a reprieve. Forgiven mortgage debt will continue to not be treated as taxable income for an additional year.

End of Year Tax Tips – Part 2

If you itemize your medical deductions, your qualified medical expenses in tax year 2012 are more valuable and deductible than those incurred in tax year 2013. Medical deductions will be more difficult to claim as itemized medical deductions in tax year 2013.

Specifically, for medical expenses to be claimed for tax year 2012, your qualified medical expenses must exceed 7.5% of your adjusted gross income before they can be claimed as an itemized deduction. In tax year 2013, your qualified medical expenses must be more than 10% of your adjusted gross income. Therefore, accelerating your out of pocket qualified medical expenses before December 31, 2012, may ensure that you meet the criteria for this year’s itemized deduction that you may otherwise be ineligible for in tax year 2013.

You want all the deductions you can get because that translates in to lower taxes and helps you to avoid tax problems.  If you’ve done all you can to minimize your tax bill and you still can’t pay it, call Montgomery & Wetenkamp at (800) 454-7043 to get help from an experienced tax attorney.

Special Tax Benefits for Military Families

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In the good ol’ United States of America, we love our servicemen and women and we try to treat them right.  One way we honor them is by making sure that the Tax Code is chock-full of tax benefits especially for the military.  And it’s not just fluff; these are good, practical benefits that are routinely acknowledged by the IRS.

Here are some popular tax benefits available to active members of the US Armed Forces:

  1. Some unreimbursed moving expenses are deductible in connection with a permanent change of station
  2. Military pay while serving in a combat zone is not taxable
  3. Military personnel get automatic extensions on many IRS deadlines, including the filing of a personal income tax returns, which could also delay collection of back tax debt
  4. The cost and upkeep of uniforms is deductible under certain circumstances
  5. Joint returns don’t need to be filed by both spouses when one is deployed (kind of a lame benefit, but a benefit nonetheless)
  6. Certain unreimbursed travel expenses available to reservists traveling away from home
  7. Subsistence allowances paid to ROTC students participating in advanced training are not taxable
  8. Certain expenses associated with transitioning back to civilian life (i.e., job search) are deductible

See IRS Pub 3 (Armed Forces’ Tax Guide) for more information.

Weed Wars in Oakland, CA

Oakland’s Harborside pot dispensary has a nifty slogan: “Out of the Shadows, Into the Light.” It’s actually a pretty good description of what the Internal Revenue Service has done with their tax returns recently.

Ever since California legalized marijuana for medical purposes, pot shops here are thriving . . . but not if the IRS can help it. The IRS recently audited the 2007 and 2008 returns of Oakland’s Harborside Health Center and hit them with a $2.4 million tax bill. It sounds like a lot of money, but Harborside’s is a huge dispensary with 84 full-time employees and gross revenues of $22 million a year. And what really inflated the tax bill is the IRS’s disallowance of their business expenses. Well, the IRS did allow them to deduct the cost of “medicine” purchased (that’s what Harborside calls it on their website), but nothing more. The IRS’s position is based on an old rule forbidding business expense deductions for operations that traffic in illegal drugs.

I have no idea why the IRS would question the legitimacy of this joint knowing they are the official 1st place winner of the coveted 2011 High Times Medical Cannabis Cup.

Harborside is fighting the audit and publicizing their good deeds, like the fact that they are pumping all kinds of money into the local economy. On Friday, September 30th, Harborside made a ceremony out of its $360,000 city tax payment as if it were some kind of voluntary contribution.

** I can’t take credit for the clever title of this blog post. The Discovery Channel will be airing a reality show based on the Harborside drama called “Weed Wars.”

Reporting Gambling Winnings

Joe goes to Las Vegas for the weekend with $1,000 to spend.  On Saturday he wins $9,000 playing blackjack.  Then on Sunday he loses $8,950 playing blackjack.  He comes home with  $1,050.  Joe knows that he must report his gambling winnings because the tax code defines gross income as “all income from whatever source derived.”  Assuming this was the only time he gambled all year, he can report $50 in gambling winnings as income on his tax return, right?

Wrong.  Taxpayers must include the full amount of gambling winnings in gross income.  They may not reduce gambling winnings by gambling losses with only the net difference included, otherwise it ceases to be gross income.  Instead, taxpayers can deduct gambling losses (up to the amount of gambling winnings) as an itemized deduction [see Internal Revenue Code section 165(d)].

So Joe needs to report his $9,000 in winnings and then claim his $8,950 in losses as an itemized deduction.

Bad Deductions in Iowa

Who: Tax preparers, Howard & Jill Musin

What: Judge ruled in favor of government, stating that the Musins (on their clients’ behalf) “took numerous, unrealistic positions as to business deductions for … quintessentially personal expenses.”

How Much: $21 million in bad deductions

More Info: The couple has already been prohibited from practicing before the IRS; they now face further sanctions.