2013 Tax Changes – The Fiscal Cliff Fallout
On January 1st, 2013, HR 8, the American Taxpayer Relief Act of 2012, passed the Senate and the House of Representatives. Below is a summary of the tax impact from what was changed and maintained by the bill.
TAX RATES
Income tax rates made permanent. For 2013 and beyond, the top individual income tax bracket will increase from 35% to 39.6% for taxpayers with taxable income of $400,000 or more ($450,000 or more Married Filing Jointly). Taxpayers with income below the thresholds will not see an increase in tax rates.
Capital gain rates. Beginning in 2013, the maximum capital gains tax will increase from 15% to 20% for taxpayers with taxable income of $400,000 or more ($450,000 or more Married Filing Jointly).
Payroll tax holiday. The 2% reduction in Social Security tax for employees and self-employed individuals expired at the end of 2012 and will not be extended for 2013. An employee’s Social Security portion of FICA will increase from 4.2% to 6.2%, with a corresponding increase in self-employment tax. Result? A little less take home pay each pay check.
Employer withholding. On December 31, 2012, the IRS issued guidance on withholding, assuming expiration of the 2001 and 2003 tax rates and subsequent tax rate increases at all income levels. The IRS instructed employers to begin using the new withholding rates as soon as possible, but no later than February 15, 2013. As this guidance was issued before the new law, the IRS is expected to release new withholding tables to reflect the changes in tax rates shortly.
Alternative Minimum Tax (AMT). The AMT “patch” is applied retroactively to January 1, 2012, and made permanent. For 2012, the AMT exemption amounts will be $50,600 for individuals and $78,750 for married couples.
Estate Tax. Beginning in 2013, the estate tax rate will increase from 35% to 40% for estates that exceed $5 million in value.
EXTENDERS
Earned Income Credit. The enhanced Earned Income Credit amounts have been extended for five years.
Child Tax Credit. The $1,000 amount for each child for the Child Tax Credit has been extended Permanently.
American Opportunity Credit. The partially-refundable American Opportunity Credit has been extended for five years.
Tuition and fees. The adjustment to income for tuition and fees has been extended through 2013.
Educator expenses. The adjustment to income for educator expenses for primary and secondary teachers has been extended through 2013.
State and local general sales taxes. The deduction on Schedule A, Form 1040, for state and local general sales taxes has been extended through 2013.
Qualified principal residence indebtedness. The exclusion from income for qualified principal residence indebtedness has been extended through 2013. This is good news for those who were in the process of foreclosure proceedings at the end of 2012 that had not yet been finalized.
Mortgage insurance premiums. The deduction for mortgage insurance premiums as mortgage interest on Schedule A, Form 1040, has been extended through 2013.
Charitable distribution of IRAs. The provision allowing tax-free distributions from IRAs for charitable purposes has been extended through 2013.
Energy Tax Extenders A variety of energy tax credits have been extended for energy-efficient homes, alternative fuel vehicle refueling property, and energy-efficient appliances.
AGI PHASEOUTS
Phaseout on itemized deductions. Beginning in 2013, itemized deductions will begin to phase out for taxpayers with AGI of $250,000 or more Single, $275,000 or more Head of Household, or $300,000 or more Married Filing Jointly.
Phaseout of personal exemptions. Beginning in 2013, personal exemptions will begin to phase out for taxpayers with AGI of $250,000 or more Single, $275,000 or more Head of Household, or $300,000 or more Married Filing Jointly.
OTHER ITEMS
Unemployment Compensation. The temporary extension for unemployment benefits has been extended for one year.
Sequestration. The mandated sequestration spending cuts that were scheduled to take effect at the end of 2012 were delayed for two months by the new legislation.
Marriage Penalty. In 2001, legislation enacted marriage penalty relief to avoid a higher tax bill for a married couple as compared to two single individuals. As evidenced by the $400,000/$450,000 income thresholds for increased tax rates and standard deduction, the provisions for marriage penalty relief expired beginning in 2013.
Our Revised 2013 Referral Program
As many of you know, last year was our first year with our retail office. Things went well for the most part and we grew our client base pretty substantially from the days of when were just a “part time” virtual practice. But where did all that growth come from? Most of it was from our network of friends, family and clients graciously referring their colleagues to us.
While we had a pretty decent referral program in the past, this year we’ve decided to up the ante so to speak. This year we’re offering a program where the referrer can earn up to $200 an unlimited number of times. This is open to existing clients, new clients, friends and family of the practice – essentially anyone who respects us enough to send business our way.
So why are we doing this? Well, all of the details are outlined here, but the short answer is to reward those who think highly of us. If you’re willing put your reputation on the line by recommending our services, we’re willing to earn it, in more ways than one! But seriously, we want to give a little something back to those who continue to help us grow and move this practice forward. Besides, who couldn’t use more cash these days? Oh yeah, the Capital One baby…
Marketing Your Tax or Accounting Business
The main issue that all tax professionals face, is how to grow and promote their practice. In talking with many professionals over the years, their questions always seem to be the same:
- How do I build up my clientele?
- What is the best way to market my services?
- How do I encourage more client referrals?
- How much should I charge for services?
Recently, a question was posed in a forum we participate in regarding affordable ways to market a tax and accounting business. With that being said, we figured that we’d offer up our two cents on what we and others have had success with.
The first thing to keep in mind is that tax and accounting services typically have to be marketed in a manner different than consumable goods. We often tell people that if they were unexpectedly dropped off in a foreign country, they probably wouldn’t go to the phone book to look for their doctor, dentist or barber/hairstylist. Why? Because each of these services involves a “relationship component” so to speak. To find these providers, you will more than likely turn to a colleague and ask them for a recommendation or referral. This tends to be the same for a majority of consumers when they are searching for a new tax or accounting professional. With that being said, marketing for tax and accounting services needs to address two areas: relationship management and search optimization.
Relationship Management Unless you are starting from scratch, a good place to begin your marketing efforts is with your existing client base (no matter how large or small). Here are some ideas on how you can leverage your relationship with these individuals and hopefully yield an instant sales force.
- Have a referral program. Everyone likes to be able to tell their friends that they have a “guy/girl” who can take care of them. If you do a good job, your clients will be more than willing to tell others about the wonderful service you offer. So make it easy for them. Develop a one page sell sheet, similar to this one, that gives them all of the information they need to refer you properly. Having a written description of who makes an ideal prospect and how your referral system works is a powerful way to get more qualified leads.
- Reward those who make referrals. Mother always reminded you to say please and thank you. It’s good advice to follow this mantra when dealing with your referrals. Your reward doesn’t have to be expensive; it can be as simple as a thank you card or a $20 gift card. The key is to acknowledge that you appreciate the trust your referrer placed in you by giving someone their recommendation.
- Routinely “touch” your clients and network. Many marketers will tell you that it often takes 7-9 “touches” before a prospective client will engage you for services. It’s also recommended that you communicate with your existing clients this frequently or even more so. Many of the “touches” used in our practice are not sales oriented at all. For instance, we send birthday/holiday cards to our clients and their spouses just to show we value our relationship. Additionally, we use a monthly newsletter to interact with our clients and remind them that we are there to serve them and their friends should the need arise. All in all, you just want to make sure that you are top of mind when someone asks anyone in your network for a tax/accounting service provider.
Search Optimization In this day and age, the web (not the yellow pages) is where people often turn if they don’t have a person who can offer them a recommendation (think a person who just moved to a new town). With that being said, you need to make sure that your marketing is “search optimized” to help drive traffic to a place where they can locate or interact with you. If you think of the web as a barrel where people bob for apples (and you/your competition are the apples) you want to make sure that you have as many apples in play as you can. Listed below are some ways that you can increase your apples so to speak.
- Web page. With more people conducting web searches on the fly while they are out and about, make sure you web page works well with mobile devices such as smart phones and tablets. We’ve found that our site looks fine on a computer, but when it’s on a mobile device there are some issues (yeah, we’re working on it). Like they say, first impressions count and you want to make sure you are putting your best foot forward.
- Google/Bing. These two sites offer services that will visibly highlight the location of your office on their page if you take the effort to set it up. Google Places and Bing Local will allow you to create a free listing complete with description, services, hours and a map of where you are located. True, you do need to wait for them to verify that you are the owner of the business (either by mail or phone) but it’s well worth the time to make it easier for prospects and clients to find you.
- Blog. This is just another way for people to “stumble” across your existence. Mr. Rogers likes to write so it’s not too hard for him to come up with ideas or content for us to post on our blog. Plus, because the blog is search engine optimized, it often drives traffic to us and our website when people search for key words that are in some of our post. Do a Google search for “2013 tax season delay” and for some reason one of our posts is the first item you will see. Free publicity? We’ll take it any day.
- Service provider sites. In addition to Google/Bing, there are some accounting specific sites that will let you set up a profile free of charge. One of our favorites is Teaspiller. There are also sites where you can pay for a listing; our favorite in this category is Bookkeepinghelp. Even if you only get one new client from each site, it’s pretty much 100% profit as you didn’t have to pay for the ad (outside of a little time to set it up) or very little in the case where you did have to pay.
- Free media press. If you like to write articles or do interviews, you could get some free web and physical traffic by reaching out to your local media contacts. If you make yourself available as the “local expert” in taxes (particularly during tax season) you might get some news coverage. Media professionals always need someone whom that can turn to when there is a particular tax topic they need a comment or perspective on. Why not make that person yourself or your practice?
While each of the above individually will not send droves of clients to your door, when implemented as a comprehensive strategy, they will yield a constant stream of prospects. We’ve often said to other professionals, we don’t know ONE way to generate a hundred clients, but we do know HUNDREDS of ways to get one client. Hopefully the above has gotten your own marketing juices flowing. Until next time!
Tax Impact of being 1099 vs. a W2 Employee
So back in this post we reviewed how an employer goes about classifying a worker as either an employee or an independent contractor. However, what if you are on the receiving end of that classification? What is the financial and tax impact of receiving your pay either via W2 or 1099? In this post will follow the exploits of two workers, Suzy Salary and Contractor Chuck. To keep this example simple and straightforward, we’ll assume the following about both Suzy and Chuck:
- Work similar jobs (with different companies)
- Don’t have any pretax contributions coming out of their checks
- Each make $100,000 per year
- Are both single without any dependents and take the standard deduction
- Didn’t have any Federal income taxes withheld from their checks (i.e. Suzy didn’t have these deducted from her check, but we’ll assume Social Security and Medicare were withheld)
- IRS penalties don’t apply
- We’ll ignore the whole 2% payroll holiday that has been in effect the past few years
Amount Earned The easiest difference to spot will be in the amount of their checks. Suzy will take home about $93,800 (due to combined 7.65% withholding of Social Security and Medicare) while Chuck will take home the full $100,000. However, it gets interesting when the two actually go to file their tax returns.
Self Employment Taxes The basic concept to remember with this is that when you work for someone, you and they split the Social Security and Medicare taxes equally (i.e. 7.65% for each of you). However, when you are self employed, you have to foot the whole bill or 13.3% up to income of $106,800. True you will see an adjustment on the 1st page of your tax return (it’s labeled “Deductible part of self-employment tax”), however due to the nature of the calculations, it doesn’t yield you a true 50% benefit.
Bottom Line Tax Impact At the end of it all, Suzy will wind up paying about $18,957 in income taxes and $6,200 in Social Security and Medicare for a total of $25,157. Chuck on the other hand will pay $16,979 in income taxes and $12,283 in self employment for a total of $29,262. Total tax bill difference winds up costing about $4,105.
Why Bother Being 1099? If your employer gives you the option between the two, the W2 option will more than likely put you at ease. You won’t have to worry about setting cash aside for your taxes bills as your boss will simply withhold them. However, the truth of the matter is that most individuals who are “truly” considered contractors actually may pay a lower tax bill due to having expenses associated with earning their income. For example, a cable installer will typically have the cost of keeping up their vehicle, supplies necessary to perform the work as well possible office related expenses. In the end, they can deduct these allowable expenses on their return whereas an employee cannot.
So if faced with a choice of which type of way you would like to be paid, take the time to consult with your tax practitioner as they can advise you on the possible ramifications of your particular situation.
The Unavoidable 2013 Tax Season Delay
Back in 2010, the IRS was forced to delay when it began processing tax returns due to late passing legislation made by Congress. In a recent letter from Acting Commissioner Steven Miller, who wrote to Representative Sander Levin, who sits on the House Ways and Means Committee, the IRS warned that this could be the case in early 2013. Why? Well, as Congress works on the Fiscal Cliff, there are two other pieces of legislation that must also be voted upon. As noted in Commissioner Miller’s letter, these are:
- Whether the parameters of the alternative minimum tax are revised (referred to as “the AMT patch”)
- Whether any already expired tax deductions are revived and made effective for 2012 (the “tax extenders”).
AMT Patch Of the two items, this one poses the more significant challenge for the IRS. AMT applies to individual taxpayers with incomes above specific thresholds set by law. For many years, Congress has been “indexing” these amounts for inflation to prevent taxpayers from being subject to AMT. If this is not done, or Congress delays doing it, under current law the thresholds revert to much lower levels for 2012 – $33,750 for individuals and $45,000 for married taxpayers filing jointly. At these levels, approximately 33 million taxpayers would pay AMT for tax year 2012 (with returns filed in the spring of 2013). This is about 28 million more taxpayers who would pay the AMT than if the exemption amounts were increased as in the past.
Tax Extenders At the end of 2011, a number of other tax provisions affecting individuals expired. These include tax deductions for educators’ out-of-pocket classroom expenses, tuition and related fees for higher education, and state and local sales taxes. The challenge for the IRS on these items is whether or not legislation will be passed to extend these provisions again.
So just how delayed could the filing season be? According to Commissioner Miller if the AMT patch is enacted before the end of 2012, there would be minimal delays to opening the 2013 tax filing season for most taxpayers. This is because the IRS has already programmed it’s systems as if the patch will be enacted. However, if the AMT patch is allowed to expire, the magnitude and complexity of the changes necessary to get the system ready could delay the filing season for impacted taxpayers until late March 2013, if not even later. Conversely, processing would only be delayed by about four weeks if Congress decides to revive and extend already expired tax provisions.
What This Means For You
- Tell people to spread the word. For some taxpayers, the timing of when they file and receive their refunds is critical to their financial situations. Being informed that there could be delays regarding the above could impact items such as how Christmas spending is arranged for.
- Be prepared for the possibility that tax return processing and the issuance of refunds may be delayed this upcoming 2013. While you may be able to file starting in January, the IRS may hold these returns in a queue, which could create a processing backlog. Depending on the size of this queue, returns that are filed in January may not be processed until a few weeks later, if not several.
- Start to get your documents ready and file as soon as you have your information. Firstly, you want to get your information in early so that if a queue does manifest, you are on the top of it and not the bottom. Secondly, make your tax preparers life a little easier. While the start of the filing season may move, the April 15th deadline will be the same as it is enacted by law. With that being said, it will be a stressful time for most preparers and many will be thankful if you “help them help you” so to speak.
Be patient throughout the process. A lot of what may happen is largely out of the control of your preparer, the tax software companies and even the IRS. So while it may be a little frustrating, realize that we will all get through it if we just take the advice of our friends Telepopmusik and just breathe.
01/03/13 Update: So on January 1st 2013 HR 8, the American Taxpayer Relief Act of 2012, was passed by the Senate and the House of Representatives. This bill makes the AMT issue noted above mute as they have permanently patched AMT so it doesn’t have to be done every year. They also passed some of the extenders as well.
Everyone is still awaiting definitive guidance from the IRS, but at this point in looks like filing may open late January or early February.
01/08/13 Update: So the IRS has issued IR-2013-2 and announced today it plans to open the 2013 filing season and begin processing individual income tax returns on Jan. 30.
The IRS will begin accepting tax returns on that date after updating forms and completing programming and testing of its processing systems. This will reflect the bulk of the late tax law changes enacted Jan. 2. The announcement means that the vast majority of tax filers — more than 120 million households — should be able to start filing tax returns starting Jan 30.
The IRS estimates that remaining households will be able to start filing in late February or into March because of the need for more extensive form and processing systems changes.
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