IRS Updates Withholding Guidance for 2013

The IRS has updated income-tax withholding tables for 2013, reflecting this week’s changes by Congress. The tables, issued after President Obama signed the changes into law, show the new rates in effect for 2013 and supersede the tables issued on Dec. 31, 2012.

The newly revised version of Notice 1036 also contains the percentage method income-tax withholding tables and related information that employers need to implement these changes. Employers should also begin withholding Social Security tax at the rate of 6.2 percent of wages paid following the expiration of the temporary two-percentage-point payroll tax cut in effect for 2011 and 2012. The payroll tax rates were not affected by this week’s legislation.

Employers should start using the revised withholding tables and correct the amount of Social Security tax withheld as soon as possible in 2013, but not later than Feb. 15, 2013. For any Social Security tax under-withheld before that date, employers should make the appropriate adjustment in workers’ pay as soon as possible, but not later than March 31, 2013.

Employers and payroll companies will handle the withholding changes, so workers typically won’t need to take any additional action, such as filling out a new W-4 withholding form.

For more information: www.onts9.com

 

8 Top Tips for Financial Planning in 2013

With markets looking wobbly in the face of continuing uncertainty in Washington over the fiscal cliff, many investors and financial planning clients find themselves either paralyzed, or tempted to rash action that may endanger their financial plans. To help them stay on track, Jeremy Welther, a principal and senior financial advisor at Madison, N.J.-based wealth management firm Brinton Eaton, offers these eight tips.

1. Stay diversified. While the bond market has “been on a tear” recently, investors shouldn’t over-concentrate in any sector, even if its performing particularly well at the moment. A well-diversified portfolio should invest across a variety of industry sectors, and should include equities, fixed income, and alternative investments to balance risk.

2. Manage risks in a portfolio by rebalancing rigorously. As some sectors do better than others, regularly revisiting investments to make sure a portfolio keeps the intended balance is important. “It’s counterintuitive, but it works,” said Welther. “Systematically buying low and selling high allows you to reduce your overall risk and can actually help improve your returns over time.”

3. Take the financial news with a grain of salt. “Many headlines contribute to negative investors behaviors,” said Welther. “Don’t let your emotions get the best of you. If you fall prey to the crisis du jour, you could enter and exit the markets at exactly the wrong times.”

4. Review and update your financial plan periodically. Tax law changes, fluctuating markets, major life events and many other factors can require changes or adjustments, which the investor should discuss with their financial advisor.

5. Review beneficiaries. Investors should review their beneficiary designations to make sure the arrangements continue to reflect their wishes, and make sense in their overall estate plan. All beneficiary designations should also be outlined in their will.

6. Remember retirement. Savings and investments look likely to play an increasingly important role in ensuring a comfortable retirement, which means it’s never too early to start planning, and every bit saved ahead of time is helpful.

7. Asset insurance coverage. It’s important to review coverage in property and casualty, disability, liability, and long-term care to make sure the individual isn’t overinsured (and paying to much) or underinsured.

8. Get a second opinion. If a financial plan isn’t serving the individual’s needs, or if the planner isn’t offering the explanations and education the client needs, it may be time to consider a new advisor.

For more information: www.onts9.com

 

 

IRS Changes Income Tax Withholding Tables for 2013 to Reflect Expired Tax Cuts

The Internal Revenue Service released new income tax withholding tables for 2013 late Monday to reflect the expiration of the 2001 and 2003 Bush tax cuts and the more recent payroll tax cuts of 2011 and 2012, but noted that the guidance would be modified if Congress acts.

The Senate passed legislation in the early hours of Tuesday morning on New Year’s Day to extend income tax cuts for single taxpayers earning under $400,000 a year and married couples under $450,000 a year (see Senate Approves Post-Midnight Fiscal Cliff Deal, Shifting Pressure to Boehner). Under the deal approved by the Senate, the top rate for income above those levels would rise to 39.6 percent, up from 35 percent.

However, the temporary payroll tax cut on Social Security withholding taxes of 2 percentage points was not part of the deal. The House is expected to take up the bill on Tuesday.

In issuing the guidance, the IRS said it takes note of the fact that Congress is currently considering legislation that could affect these rates. If the legislation is enacted, IRS will issue new, corresponding tables at that time.

The updated tables issued late Monday show the new rates for 2013, which reflect the expiration of the 2001 and 2003 tax cuts. In addition, employers should also begin withholding Social Security tax at the rate of 6.2 percent of wages paid following the expiration of the temporary two-percentage-point payroll tax cut in effect for 2011 and 2012.

Notice 1036, released Monday, contains the percentage method income-tax withholding tables and related information that employers need to implement these changes.

Employers should start using the new withholding tables and correct the amount of Social Security tax withheld as soon as possible in 2013, but not later than Feb. 15, 2013, the IRS advised. For any Social Security tax under-withheld before that date, employers should make the appropriate adjustment in workers’ pay as soon as possible, but not later than March 31, 2013.

Employers and payroll companies will handle the withholding changes, so workers typically won’t need to take any additional action, such as filling out a new W-4 withholding form.

However, the IRS is urging workers to review their withholding every year and, if necessary, fill out a new W-4 and give it to their employer. For example, individuals and couples with multiple jobs, people who are having children, getting married, getting divorced or buying a home, and those who typically wind up with a balance due or large refund at the end of the year may want to consider submitting revised W-4 forms.

With the new guidance, the employee tax rate for Social Security reverts to its 2010 level of 6.2 percent. In 2011 and 2012, as a result of the payroll tax cuts, the employee tax rate for Social Security was 4.2 percent. The employer tax rate for Social Security remains unchanged at 6.2 percent. The Social Security wage base limit is $113,700. The Medicare tax rate is 1.45 percent each for the employee and employer, unchanged from 2012. There is no wage base limit for Medicare tax.

Employers should implement the 6.2 percent employee Social Security tax rate as soon as possible, the IRS advised, but not later than Feb. 15, 2013. After implementing the new 6.2 percent rate, employers should make an adjustment in a subsequent pay period to correct any underwithholding of Social Security tax as soon as possible, but not later than March 31, 2013.

For more information: www.onts9.com

 

Tax Changes for 2013: A Checklist

Welcome 2013! As the new year rolls around, it’s always a sure bet that there will be changes to the current tax law and 2013 is no different. From health savings accounts to retirement contributions here’s a checklist of tax changes to help you plan the year ahead.

Individuals

For 2013, standard deductions and the personal exemption, as well as most retirement contribution limits have been adjusted upward to reflect inflation. However, the current tax rate structure and many other tax provisions revert to pre-Bush era tax cuts.

Alternate Minimum Tax (AMT)
Alternate Minimum Tax (AMT) limits decrease for all taxpayers at $33,750 for singles, $45,000 for married filing jointly, and $22,500 for married filing separately.

“Kiddie Tax”
For taxable years beginning in 2013, the amount that can be used to reduce the net unearned income reported on the child’s return that is subject to the “kiddie tax,” is $1,000 (up from $950 in 2012). The same $1,000 amount is used to determine whether a parent may elect to include a child’s gross income in the parent’s gross income and to calculate the “kiddie tax”. For example, one of the requirements for the parental election is that a child’s gross income for 2013 must be more than $1,000 but less than $10,000.

For 2013, the net unearned income for a child under the age of 19 (or a full-time student under the age of 24) that is not subject to “kiddie tax” is $2,000.

Health Savings Accounts (HSAs)
Contributions to a Health Savings Account (HSA) are used to pay current or future medical expenses of the account owner, his or her spouse, and any qualified dependent. Medical expenses must not be reimbursable by insurance or other sources and do not qualify for the medical expense deduction on a federal income tax return.

A qualified individual must be covered by a High Deductible Health Plan (HDHP) and not be covered by other health insurance with the exception of insurance for accidents, disability, dental care, vision care, or long-term care.

For calendar year 2013, a qualifying HDHP must have a deductible of at least $1,250 (up $50 from 2012) for self-only coverage or $2,500 (up $100 from 2012) for family coverage (unchanged from 2011) and must limit annual out-of-pocket expenses of the beneficiary to $6,250 for self-only coverage (up $200 from 2012) and $12,500 for family coverage (up $400 from 2012).

Medical Savings Accounts (MSAs)
There are two types of Medical Savings Accounts (MSAs): the Archer MSA created to help self-employed individuals and employees of certain small employers, and the Medicare Advantage MSA, which is also an Archer MSA, and is designated by Medicare to be used solely to pay the qualified medical expenses of the account holder. To be eligible for a Medicare Advantage MSA, you must be enrolled in Medicare. Both MSAs require that you are enrolled in a high deductible health plan (HDHP).

Self-only coverage. For taxable years beginning in 2013, the term “high deductible health plan” means, for self-only coverage, a health plan that has an annual deductible that is not less than $2,150 (up $50 from 2012) and not more than $3,200 (up $50 from 2012), and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $4,300 (up $100 from 2012).

Family coverage. For taxable years beginning in 2013, the term “high deductible health plan” means, for family coverage, a health plan that has an annual deductible that is not less than $4,300 (up $100 from 2012) and not more than $6,450 (up $150 from 2012), and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $7,850 (up $200 from 2012).

Eligible Long-Term Care Premiums
Premiums for long-term care are treated the same as health care premiums and are deductible on your taxes subject to certain limitations. For individuals age 40 or less at the end of 2013, the limitation is $360. Persons over 40 but less than 50 can deduct $680. Those over age 50 but not more than 60 can deduct $1,360, while individuals over age 60 but younger than 70 can deduct $3,640. The maximum deduction $4,550 and applies to anyone over the age of 70.

Foreign Earned Income Exclusion
For taxable years beginning in 2012, the foreign earned income exclusion amount is $97,600, up from $95,100 in 2012.

Estate Tax
For an estate of any decedent during calendar year 2013, the basic exclusion amount is $1,000,000 (down from $5,120,000 in 2012). Also, if the executor chooses to use the special use valuation method for qualified real property, the aggregate decrease in the value of the property resulting from the choice cannot exceed $1,070,000, up from $1,040,000 for 2012. The maximum tax rate rises to 55% (up from 35% in 2012).

Individuals – Tax Credits

Adoption Credit
For taxable years beginning in 2013, there is a maximum (non-refundable) credit of $6,000, which is limited to domestic adoption of a child with special needs. The phase-out range (modified adjusted gross income) for the credit is $75,000 to $115,000.

Earned Income Tax Credit
For tax year 2013, the maximum earned income tax credit (EITC) for low and moderate income workers and working families rises to $5,981, up from $5,891 in 2012.

Child Tax Credit
For tax year 2013, the child tax credit is $500 per child.

Individuals – Education

Hope Scholarship (American Opportunity Tax Credit) and Lifetime Learning Credits
The American Opportunity Tax Credit expired on December 31, 2012 at which time it reverted to the Hope Scholarship Credit, a non-refundable $1,500 credit per student. The Lifetime Learning Credit remains at $2,000.

Interest on Educational Loans
In 2013, the deduction for student loan interest on qualified education loans can only be claimed for the first 60 months (5 years) of interest payments. Income phase-out levels for single filers are $40,000 to $55,000 and for married filers are $60,000 to $75,000.

Individuals – Retirement

Contribution Limits
The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $17,000 to $17,500. Contribution limits for SIMPLE plans increase from $11,500 to $12,000. The maximum compensation used to determine contributions increases to $255,000 (up $5,000 from 2012 levels).

Income Phase-out Ranges
The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by an employer-sponsored retirement plan and have modified adjusted gross income (AGI) between $59,000 and $69,000, up from $58,000 and $68,000 in 2012.

For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by an employer-sponsored retirement plan, the phase-out range is $95,000 to $115,000, up from $92,000 to $112,000. For an IRA contributor who is not covered by an employer-sponsored retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s modified AGI is between $178,000 and $188,000, up from $173,000 and $183,000.

The modified AGI phase-out range for taxpayers making contributions to a Roth IRA is $178,000 to $188,000 for married couples filing jointly, up from $173,000 to $183,000 in 2012. For singles and heads of household, the income phase-out range is $112,000 to $127,000, up from $110,000 to $125,000. For a married individual filing a separate return who is covered by a retirement plan, the phase-out range remains $0 to $10,000.

Saver’s Credit
The AGI limit for the saver’s credit (also known as the retirement savings contribution credit) for low and moderate income workers is $59,000 for married couples filing jointly, up from $57,500 in 2012; $44,250 for heads of household, up from $43,125; and $29,500 for married individuals filing separately and for singles, up from $28,750.

Businesses

Standard Mileage Rates
The rate for business miles driven is 56.5 cents per mile for 2013, up from 55.5 cents per mile in 2012.

Section 179 Expensing
For 2013 the maximum Section 179 expense deduction for equipment purchases is $25,000 (down from $139,000 in 2012) of the first $200,000 (down from $560,000 in 2012) of business property placed in service during the year. The bonus depreciation (50% in 2012) expired at the end of 2012.

Transportation Fringe Benefits
If you provide transportation fringe benefits to your employees, for tax years beginning in 2013 the maximum monthly limitation for transportation in a commuter highway vehicle as well as any transit pass is $125 (same as 2012). The monthly limitation for qualified parking is $240 (same as 2012).

While this checklist outlines important tax changes for 2013, additional changes in tax law are more than likely to arise during the year ahead.

Don’t hesitate to call us if you want to get an early start on tax planning for 2013. We’re here to help!

For more information: www.onts9.com

 

Obama Signs Fiscal Cliff Bill into Law to Avert Most Tax Hikes

President Barack Obama signed the legislation that enacts a last-minute budget deal and averts income tax increases for most U.S. workers, marking an end to a yearlong impasse.

The legislation was sent to the White House today and a copy was transmitted to Obama in Hawaii, where he’s vacationing with his family. The president’s signature was put on the legislation by an autopen signing machine in Washington.

The legislation passed the House and Senate on Tuesday and it delays the automatic spending cuts by two months and raises taxes on individuals earning more than $400,000 a year and households making more than $450,000.

Obama last night called it “just one step” in a process to shrink the deficit, which has exceeded $1 trillion in each of the last four years, and strengthen the economy.

Obama has used a mechanical autopen to sign legislation into law at least twice before.

While at a meeting of Asian leaders Indonesia in 2011 the president authorized the use of the autopen to put his signature on legislation to fund the government. It also was used the same year to sign an extension of the Patriot Act while Obama was at a summit in France of leaders of the world’s industrial nations.

A July 7, 2005, opinion by the Justice Department under then-President George W. Bush argued that a president can sign a bill within the meaning of Article I, Section 7 of the Constitution “by directing a subordinate to affix the president’s signature to it, for example by autopen.”

The document cites common law and court opinions at the time the Constitution was drafted and thereafter holding that “personal handwriting” isn’t required to render a legal signature.

The 29-page opinion concludes “that the president need not personally perform the physical act of affixing his signature to a bill he approves and decides to sign in order for the bill to become law.”

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Congress Approves Fiscal Cliff Deal

The House passed a deal to avert an income tax rate increase on middle-class families on Tuesday night, following a New Year’s Eve vote by the Senate, sending the bill to President Obama for his signature.

 

House lawmakers voted for the bill by a 257 to 67 margin, after the Senate’s 89 to 8 vote, in a rare New Year’s Day session of a lame-duck Congress (see Senate Approves Post-Midnight Fiscal Cliff Deal, Shifting Pressure to Boehner). Vice President Joe Biden and Senate Minority Leader Mitch McConnell, R-Ken., worked out the final deal this week following a stalemate in negotiations between Obama and Speaker of the House John Boehner, R-Ohio.

Republican lawmakers had threatened to amend the bill with deep spending cuts to offset the tax cuts and send it back to the Senate, but with time running out before the re-opening of the financial markets on Wednesday morning, Boehner ultimately decided to allow an up or down vote on the bill.

The deal restores the top 39.6 percent rate for high-income households in effect during the 1990s. That rate would apply to single taxpayers with incomes above $400,000 and married couples with incomes above $450,000, up from 35 percent.

“Under this law, more than 98 percent of Americans and 97 percent of small businesses will not see their income taxes go up,” said Obama in a speech following the vote. He pointed out that the agreement reduces the deficit by raising $620 billion in revenue from the wealthiest households.

In addition, the agreement provides a permanent and retroactive patch for the alternative minimum tax to prevent it from ensnaring middle-class taxpayers. The bill indexes the exemption amounts to adjust them for inflation.

The capital gains tax rate would return to what it was under President Clinton, 20 percent, up from 15 percent. Counting the 3.8 percent surcharge from the Affordable Care Act, dividends and capital gains would be taxed at a rate of 23.8 percent for high-income households. These tax rates would apply to singles above $400,000 and couples above $450,000. The top capital gains rate would stay at 15 percent for lower-income taxpayers.

The agreement reinstates the Clinton-era limits on high-income tax benefits, the phaseout of itemized deductions (Pease) and the Personal Exemption Phaseout (PEP), for couples with incomes over $300,000 and singles with incomes over $250,000. These two provisions reduce tax benefits for high-income households. This sets the stage for future balanced approaches to deficit reduction, which could include additional revenue through tax reforms that reduce tax benefits for Americans making over $250,000.

The deal did not include an extension of the 20111 and 2012 payroll tax cut on Social Security tax withholding from paychecks, so most workers will see their Social Security taxes rise from 4.2 to 6.2 percent (see IRS Changes Income Tax Withholding Tables for 2013 to Reflect Expired Tax Cuts).

The agreement also raises the tax rate on the wealthiest estates from 35 percent to 40 percent, with an exemption of $5 million per person.

There is also a one-year extension of 50 percent bonus depreciation, and the extension of various tax breaks. The deal extends President Obama’s expansions of the Child Tax Credit, Earned Income Tax Credit, and the American Opportunity Tax Credit, which helps families pay for college. The agreement would extend the tax breaks for five years.

In addition, the agreement will prevent 2 million people from losing unemployment insurance benefits in January by extending emergency unemployment insurance benefits for one year.

The bill also extends renewable energy incentives and other business tax incentives through the end of next year. They include extensions of the Production Tax Credit, a key incentive for renewable energy, as well as the Research & Experimentation tax credit.

The agreement also avoids a 27 percent cut to reimbursements for doctors seeing Medicare patients for 2013 by fixing the sustainable growth rate formula through the end of next year (the “doc fix”). It also renews a price support program for the dairy industry to prevent a sharp increase in milk prices, as well as blocks a pay increase for Congress.

In addition, the bill postpones the sequester for two months, paid for with $1 of revenue for every $1 of spending, with the spending balanced between defense and domestic. The agreement saves $24 billion, half in revenue and half from spending cuts which are divided equally between defense and nondefense programs, in order to delay the sequester to give Congress time to work on a balanced plan to end the sequester permanently through a combination of additional revenue and spending cuts in a balanced manner.

Obama promised further deficit reductions would be worked out with Congress, but he indicated that he would not allow a fight over raising the debt ceiling to derail the economy, insisting he would not “have another debate with this Congress over whether or not they should pay the bills they’ve already racked up.”

However, Republicans indicated that they would push for further spending cuts. “Now the focus turns to spending,” said Boehner. “The American people re-elected a Republican majority in the House, and we will use it in 2013 to hold the president accountable for the ‘balanced’ approach he promised, meaning significant spending cuts and reforms to the entitlement programs that are driving our country deeper and deeper into debt.”

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