Gary Boatman: Tax code just got even more complicated
Many people are in the process of completing their 2012 tax forms.
At this stage, about the only thing you can do to reduce last year's taxes is to make a contribution to an IRA if you can and have not yet filed your return. If you want to save on next year's taxes, you must plan now. The Internal Revenue Service is running way behind, because it did not know which tax rates or laws Congress would change. Because of this, the IRS waited to update its systems and publish forms.
The IRS has also slowed down the process because there were hundreds of millions dollars of fraud last year from people filing fake returns. Some people will have to deal with new Medicare taxes starting this year. They were part of Obamacare that narrowly survived a 5-4 Supreme Court decision last year.
There is Net Income surtax for single tax filers earning $125,000 and joint filers earning $250,000. This surcharge is on top of regular tax rates. It is an additional 3.8 percent. This tax is assessed on taxable interest, dividends, rent, taxable annuities, royalties and net capital gain, includes a gain passive income and a business trading in financial instruments. Homes sold for more than specific limits and most trust and estates. If you take a withdrawal from your IRA or 401K, you could be subject to these taxes.
An additional 0.9 percent Medicare tax could be added to these same people. Medicare taxes normally stopped when you reached a certain income. This is no longer true for these tax payers. It is important to remember individuals earning more than $85,000 per year already had to pay more for their Medicare even though they contributed more. There have been phasing out of deductions and credits for higher income people. Plus the fiscal cliff settlement raised tax rates again. The only way to get enough dollars to support the runaway spending is to raise the middle class like you and me.
There is something that you can do to try to avoid the 3.8 percent surcharge. Tax exempt interest is not subject to this tax. You must be careful of locking in low interest rate debt if we have a bond bubble. Credit worthiness of the issuer must also be considered. Many people have been buying dividend-paying stocks to try and survive the low interest rate. These dividends might make you go over the threshold. If you are still working, maybe you can contribute more to your qualified plan at work. This could reduce your gross income.
You may be able to defer income by putting investments that generate unearned income into tax deferred accounts. Roth withdrawals do not count toward these limits. Sometimes, you can time your income through something such as deferred compensation. Be sure of the credit worthiness of the debtor. You may be able to covert passive income to earned income. Some business owners might be able to take additional salary instead of profit distributions. This could make the payments possibly subject to FICA tax.
If you are selling an asset, maybe you can use an installment sale. If you spread the income over several years, you may be able to stay below the limit. Section 529 plans and Coverdell Education Accounts are exempt. These are ways to save for college expenses. Charitable Trust might work as well as planned distributions from trust. The already complicated tax code has gotten harder. Start planning now for next year to save on taxes.
Gary Boatman is a certified financial planner and local businessman who serves as president of the Monessen Chamber of Commerce.