hile much of the IRS tax-filing logjam caused by the late passage of tax laws on January 1st is now behind us, the bottleneck of tax return processing will be with us through April 15th. The last major filing delays relating to business credits and depreciation should be ready to go by mid-March. This month’s letter focuses on tax increases for lower and upper income taxpayers and discusses the hot phenomenon known as Snapchat.
High Income Tax Increases? Done
Think our friends in Washington aren’t accomplishing much? One of the tax policy objectives of the current Administration is to increase the income taxes received from upper income citizens. On this front, there is a high degree of success. The following tax increases have been put in place in 2013 for those with incomes over $200,000:
|Impacts Incomes Over:|
|1||.9% Medicare surtax||$200,000||$250,000|
|2||3.8% Investment surtax||$200,000||$250,000|
|3||80% of itemized deduction elimination||$250,000||$300,000|
|4||Elimination of tax exemptions||$250,000||$300,000|
|5||5% dividend tax increase (15 to 20%)||$400,000||$450,000|
|6||5% capital gain tax increase (15 to 20%)||$400,000||$450,000|
|7||New 39.6% income tax rate (from 35%)||$400,000||$450,000|
What you should know
|In 2009, (most recent data available) the top 10% of reported income paid 70.5% of personal income taxes. This equated to those with adjusted gross incomes (AGI) of $113,000 and greater. The top 1% reported AGI paid 37% of the personal income taxes and had adjusted gross income of $334,000 or more.|
|If you have income above the levels noted above, your personal income taxes could be going up substantially. You will need to forecast this additional obligation early in the year to avoid any surprises in withholdings and year-end tax obligations.|
|Approximately ½ of those impacted by these changes will be small businesses because many corporations are taxed at the individual level (partnerships and S-Corporations). Prior to making any new investments in your business (including new hires) you will want to ensure your change in tax obligation does not create a cash flow problem.|
|Watch your state. Many states, like Minnesota, are also looking to increase tax revenues on this same segment. Be aware of this phenomenon in your state and plan accordingly.|
|The impact will vary. The tax impact on your situation could vary dramatically depending on your filing status and the mix of your income and deductions. The only sure way to ensure there are no surprises is to conduct a full year tax forecast for 2013.|
Secret Poor Tax: The Lottery
For every $10 of your earnings, as little as $2.00 to 2.50 might ever reach the pocket of a lottery winner
Often, only 60-65% of lottery ticket sales are paid out as winnings
States often receive money three ways when you buy lottery tickets
Most everyone enjoys dreaming of winning it big in the lottery. News media outlets publicize the large unclaimed pots of money on the evening news and they put a spotlight on the lucky multi-million dollar winners. Little do most people realize that the Federal and State Governments are quietly using this gambling device to double and triple tax those who can least afford it: the poor and lower middle class.
Why do we tolerate this?
A single lottery ticket does not cost a lot. The lucky winner is the one who pays the extra tax on everyone’s behalf, but they don’t care because the pot is so large. So by taxing us in small stages and by shifting who pays the tax on lottery winnings, a wonderful re-taxing formula has quietly emerged for state and federal taxing authorities. Put another way, if you were told to voluntarily pay 75% of your wages to government-sponsored programs for the rare chance of getting everyone else’s remaining 25% would you do it?
What to do?
If you think the funds being scooped up by the government is ethically wrong what can you do about it?
|Stop buying tickets. If the lottery no longer generates sales, the programs would be discontinued.|
|Pressure legislatures. Why aren’t lottery winnings taxed at a lower rate? Shouldn’t the government acknowledge they’ve already received tax on this income? We have lower tax rates on dividends and capital gains so why not on lottery winnings? If you agree, send a letter to your representative asking that lottery winnings be capped at the lowest income tax rate or a special rate for lottery winnings.|
|Tell everyone you know. If you think the double and triple taxing of income through lotteries is not right, make everyone you know aware of this tax trick. The more that know, the more likely something will change.|
|Tax planning. If you win the lottery, consider taking the annuity option and then move to a no income tax state. You won’t save in Federal taxes, but it should save on some of the ongoing state tax obligation.|
Playing the lottery is fun. Dreaming of being rich is nice. Having our government promote these things as an opportunity to re-tax its everyday citizens is at best a questionable practice.
The Snapchat Phenomenon
Temporary texting application is making a big splash
If you are under the age of 25, Snapchat and its little ghost logo are common everyday items in your life. If not, you might just be wondering what this social media application is all about.
A couple of Stanford students developed an application a few years ago that allows users to take a photo or video, add a caption, and then text it to a group of friends. What makes the free application unique is that the text may only be viewed for up to ten seconds, after which the image/video is automatically deleted. This allows users to send spontaneous photos and videos to their friends without the virtual legacy sitting out there for all to see. This Apple and Android application is now so popular that the Snapchat folks are sending 50 million Snapchats per day!
What You Need to Know
|Cyber bullies? Because the image and video are automatically deleted, there is the chance that more revealing photos will be sent without them going global. So Snapchatting is opening the door to risky behavior not normally seen in other social media tools like Facebook.|
|Is the visual REALLY temporary? One of the popular aspects of Snapchat is the auto delete of that embarrassing text image. But they can be captured. Many have found a way to make a screen shot of the Snapchat and then have a permanent record of your embarrassing moment. While the application supposedly notifies you when a screen shot happens, all that does is tell you who distributed your image. It does not stop it from happening.|
|There are no guarantees. Snapchat is very clear that it takes no responsibility for the distribution of your image/video. Bad stuff happens and they want you to clearly understand that it can.|
|Parental controls? If you cannot see what your child is Snapchatting do you know how your child is using the free application? You really don’t. And since Snapchat allows users age 13 and older to use their application it can create an unmanageable environment for young users. At minimum, if you allow your child to use the application, you should require your child to copy you on all their outgoing Snapchats. Also consider the promise of random checking your child’s phone for Snapchat content. Your child will let friends know this is a possibility and this may limit how friends use the application with your child.|
|The illusion of security. Perhaps the most dangerous aspect of Snapchats is the illusion of security on a social network. There is none. The best lesson for your kids is if you send something digitially you MUST assume anyone can see it. At minimum they do not know who else might be watching when the Snapchat is opened….perhaps by a teacher or by a whole group of unwanted “friends” at a party.|
The bottom line on Snapchatting? Cool, but dangerous.
Where’s My Refund? 2013 Edition
“Where’s my Refund?” This popular feature on the IRS web site (www.irs.gov) allows you to see the status of your refund after filing your income tax return.
Since the IRS only started processing tax returns after January 30th and did not start accepting tax returns with educational credits or adoption credits until late in February, when can you expect to see your refund? Per the IRS, 9 out of 10 refunds are being processed within 21 days.
If you wish to check on the status of your refund this is what you should know:
How often to check?
Some returns will be delayed.
If your tax return has errors in it, it will be delayed. In addition, your tax return could be delayed if it has items on it that are not ready to be processed due to late tax law changes. This includes tax returns with the following information:
But perhaps most importantly, the IRS may delay processing your refund if it has questions, often to ensure you are not being subject to identity fraud.
To check on your status simply logon to www.irs.gov and click on the link on the top center portion of the IRS home page.
As always, should you have any questions or concerns regarding your situation please feel free to call.