Archive for the ‘Tax Rates’ Category

Retroactive Tax Increase on Highest Taxed State

Originally published in the Cedar Street Times

November 30, 2012

Depending on how you look at it, Californians could now consider themselves the highest taxed state in the U.S. after our recent passage of Proposition 30 on our November ballots.  Proposition 30 increased income tax rates by one to two percent on people earning over $250,000.  It also made these increase retroactive as of 1/1/2012.  If you are subject to these higher tax rates, be aware that your state withholdings are likely inadequate and you should talk to your tax professional about making an additional payment by April.  No penalties will be assessed for under withholding to the extent that it is attributable to the tax hike, and you pay it by April 15, 2013.

Our top rate on our highest earners is now 13.3%, commanding an impressive 2.3% margin over second place Hawaii (11%), and 3.4% over third place Oregon (8.9%).  Other states in the high eights include Iowa, New Jersey, Washington D.C., Vermont, and New York.

You do have to keep in mind that some places have city taxes also.  But even a penthouse occupant in New York City that has a state tax of 8.82% and a city tax of 3.876% (combined 12.696%) would not have to muster up the cash of a wealthy dessert dweller in California.

Of course, there are many ways that states bring in revenue, such as sales tax, property tax, inheritance tax, auto taxes, etc.  So you cannot really base overall tax burden on income taxes alone. If you are looking for overall low tax burden states you may wish to consider Wyoming, Alaska, Florida, the Dakotas, Montana, Texas, Tennessee, Mississippi, South Carolina, Louisiana, or Alabama.  Different states also have distinct advantages for people earning different types of income or have different types of deductions.  The more you have at stake, the more tax planning may become a factor in where you choose to reside.

If you want to know more specifically how California’s new increases may affect you, here are the details:  California taxable income over $250,000 for single filers, $500,000 for married filers, and $340,000 for Head of Household filers will be taxed at 10.3%. Taxable income over $300,000 single, $600,000 married, and $408,000 HOH will be taxed at 11.3%.  Taxable income over $500,000 single, $1,000,000 married, and $680,000 HOH will be taxed at 12.3%.  And anyone with over $1,000,000 taxable income will also be assessed an additional 1% mental health tax.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

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Your Future Tax Return: Romney Versus Obama

Originally published in the Cedar Street Times

November 2, 2012

If tax positions would sway your Tuesday vote, here is what Obama and Romney would like to see.  Keep in mind, however, you don’t always get what you want!

Tax brackets: Romney reduce to 80% of current levels. Obama keep the same as 2012 except allow top bracket to split into two higher brackets like pre-2001. (Romney, Current 2012 Rates, Obama, 2013 rates if no congressional action ) (8%, 10%, 10%, 15%), (12%, 15%, 15%, 15%), (20%, 25%, 25%, 28%), (22.4%, 28%, 28%, 31%), (26.4%, 33%, 33%, 36%), (28%, 35%, 36% and 39.6%, 39.6%)

Capital gains, interest, dividends: Romney reduce tax rate to zero for AGI below $200K.  15% max if AGI above $200K. Obama increase long-term capital gains rate to 20% max and up to 39.6% on dividends – leave interest taxed at ordinary bracket rates.

2013 3.8% Medicare surtax on net investment income and existing 0.9% medicare surtax for married filers over $250K AGI and others over $200K: Romney repeal.  Obama keep.

Itemized deductions: Romney cap itemized deductions (maybe $17,000-$50,000 cap) and maybe eliminate completely for high income.  Obama reduce your itemized deductions by 3% of your AGI in excess of $250K married, $225K HOH, $200K single, and $125K MFS (up to 80% reduction of itemized deductions) and limit the effective tax savings to 28% even if you are in a higher bracket.

Income exclusions: Romney keep as is. Obama cap the effective tax savings to 28% on exclusions from income for contributions to retirement plans,  health insurance premiums paid by employers, employees, or self-employed taxpayers, moving expenses, student loan interest and certain education expenses, contributions to HSAs and Archer MSAs, tax-exempt state and local bond interest, certain business deductions for employees, and domestic production activities deduction.

AMT: Romney repeal. Obama keep but set exclusion to current levels and index for inflation.

2009 expanded Child Tax Credit, increased Earned Income Credit, and American Opportunity Credit: Romney – Allow to expire as scheduled 12/31/12.  Obama – Make permanent.

Buffett Rule: Romney “Not gonna do it.” Obama households making over $1 million should not pay a smaller percentage of tax than middle income families.  This is accomplished by raising the rates on capital gains and dividends as discussed earlier.

Temporary two percent FICA cut you have been enjoying in 2011 and 2012: Both candidates favor allowing to expire at 12/31/12.

Estate tax: Romney repeal.  Obama set at $3.5 million and index for inflation with top rate of 45% on excess.

Top corporate tax rates: Romney 25%. Obama – keep at 35% for 2013 but maybe reduce to 28% in the future.

Corporate international tax: Romney don’t tax U.S. companies on income earned in foreign countries. Obama discourage income shifting to foreign countries.

Corporate tax preferences: Romney extend section 179 expensing another year, create temporary tax credit, expand research and experimentation credit. Obama increase domestic manufacturing incentives, impose additional fees on insurance and financial industries, reduce fossil fuel preferences.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Tax Changes on the Horizon?

Originally published in the Cedar Street Times

October 19, 2012

Unless you have been hiding under a rock, you are sure to have heard the hubbub surrounding potential tax increases in 2013.  These tax increases do not require Congress to take action, but to gridlock and do nothing, which is why they stand a much better chance of actually occurring than a concerted effort to raise taxes. Most of the increases are the result of the expiration of the temporary tax decreases dubbed “The Bush Tax Cuts,” passed in 2001 and 2003 while George W. Bush was in office.  There was also a two percent reduction in payroll taxes a few years ago that was meant to be a temporary stimulus for the economy.  The Tax Policy Center estimates that nearly 90% of American households will face an average tax increase of $3,500 if the tax cuts expire.

If current legislation stays in place, ordinary income tax brackets will jump 3-5%, depending on your bracket.  Capital gains tax will increase 5-15%, depending on your bracket, and there will be a new Medicare surtax, generally for people making over $200,000, of another 3.8% on net investment income.

Alternative Minimum Tax (AMT) is another big issue that could affect most Americans.  AMT is a parallel tax calculation that runs alongside the normal system, cutting out common deductions, and if it results in a higher overall tax liability, you pay the incremental difference as additional tax.

Estate and lifetime gift tax will also get hit hard.  Currently, there is a $5,120,000 exemption for the combined estate and gift tax.  If you have a taxable estate above that and you pass away by December 31, the excess will be taxed at a top rate of 35%. Next year, this exemption reverts to $1,000,000 with a maximum tax rate of 55% on your taxable estate above that figure.

This certainly presents questions for you, your tax professional, and your estate planner to analyze.  If you knew ordinary tax rates, capital gains, and estate tax rates were going to rise next year, you would likely try to push expected income from next year to this year, sell your stocks now that could result in a gain in the future, and gift money from your estate to your heirs.  It is not quite this simple, and you should get professional assistance, but it is something to think about now rather than December 31st.

Related to the estate and gift tax issue, on Saturday morning, October 27th, I will be presenting with local attorney, Kyle A. Krasa, and local investment advisor, Henry Nigos, in a free seminar titled “Opportunities and Clawbacks – Taking Advantage of the Once-in-a-Lifetime 2012 Estate/Gift Tax Rules” from 10:00 am to 11:30 am at 700 Jewell Avenue, Pacific Grove.  The seminar is sponsored by Krasa Law – please RSVP at 831-920-0205.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Are Tax Rates on the Rise?

Originally published in the Pacific Grove Hometown Bulletin

May 18, 2011

Earlier this week, I pulled out my crystal ball and posed a few questions about future personal federal income tax rates – strangely, it became suddenly murky.  So I pulled out my history books instead and drew some conclusions.  Let me set the stage and give you some history.  Keep in mind since 2003 our bottom tax bracket has been 10 percent and our top tax bracket has been 35 percent.

Wars have historically been fantastic reasons to raise taxes.  In fact, our first national income tax was created to raise money for the Civil War.  After the Civil War the tax was abolished.  Although income taxes were permanently revived in 1913 (some people still questioning its legitimacy from their prison cells) a logical pattern seemed to develop– when our country needed money, tax rates went up; when it did not need money, tax rates went down.

In 1913 the bottom bracket was at 1 percent and the top bracket was at 7 percent – perhaps a special introductory rate. During World War I the bottom bracket moved as high as 6 percent and the top bracket shot up to 77 percent!  Then brackets fell dramatically until the depression in the 1930s.  The government needed money so brackets shot back up flowing right into World War II where they peaked in 1944 and 1945 with the bottom bracket at 23 percent and the top bracket (income over $200K) at 94 percent!  Rates dropped after World War II, but stayed relatively high with the bottom bracket not dipping below 14 percent and the top bracket not dipping below 70 percent until after 1980.

During the Reagan and H. W. Bush years dramatic changes took place (Reaganomics).  The bottom bracket dropped as low as 11 percent and the top bracket dropped as low as 28 percent.  The brackets rose a little during the Clinton years and then dropped again when W. Bush took the reigns.

Tax brackets are not everything, but to the extent they are an indicator, it is difficult to say we are overtaxed.  With the exception of a three year period in the late 1980s, the tax rates on our bottom and top tax brackets are both at their lowest levels since before World War II.  We have maintained this course during our worst economic decline since the 1930s while simultaneously fighting a war and spending at all-time highs.  Our logical pattern seems to have been broken.  Our national debt has been rising substantially to pay for our record-low tax brackets and our loose wallet.  The longer we as Americans continue to cast our vote beyond our means the more painful it will be.

So from my perspective, tax rates only have one direction to go – up.  Next issue, I will discuss the national debt.

Travis H. Long, CPA is located at 706-B Forest Avenue, Pacific Grove, CA, 93950.  He can be reached at 831-333-1041.