Tax Articles
Three Hidden Taxes, Hiding in Plain Sight!
Taxes take different shapes and forms, and their incidence falls in varied and unexpected ways.
In this article, I’m using the word, ‘tax’ to describe economic costs that can easily go missed because, in these cases, they are not explicitly stated or explained anywhere in the tax code. However, these taxes will cost you thousands if you are not careful.
Marriage Penalty
The marriage penalty refers to the difference that the income tax is assessed on two single individuals who have comparable incomes, as opposed to one married couple, due to tax brackets. For example, take two unmarried individuals who each have $100,000 in income. They will fall into the 28% Federal income tax bracket, and each pay $21,617, or $43,234 combined. If they filed jointly, the tax will be $44,070. The marriage penalty in this case is the difference, or $836.
The Refund ‘Tax’
Whereas most people look forward to receiving income tax refunds, a closer look shows that large income tax refunds pack a hidden tax. The IRS and most state governments do not pay interest on regular tax refunds. Therefore, if you receive a tax refund in April, you essentially had extended the government an interest-free loan for the last four to sixteen months. However, if you owe the state and Federal governments $1,000 or less in income taxes at year-end, interest nor penalties will be assessed on the balances. The effect is the government will be giving you a $1,000 interest-free loan! The lost interest income, or use of your own money is the hidden tax. Using conservative assumptions, on $5,000 of Federal and state tax refunds, the hidden tax is about $300.
Government Budgeting
When the Federal or state governments reduce certain public funding or assistance, the effect is one of a hidden tax. For instance, the President reduced funding for public nutrition by $1 million; in Connecticut, Medicaid expenses were cut; and in New York, Medicaid and public education are facing cuts. Also, in 2010 and 2011, social security recipients did not receive automatic increases in their payments to make up for inflation. The effects of the above are taxes on students, the elderly and those who have lower income levels.
The best advice to safeguard your wealth from these risks and others is to speak with a tax specialist that understands your tax situation and can help you plan to reach your financial goals.
In this article, I’m using the word, ‘tax’ to describe economic costs that can easily go missed because, in these cases, they are not explicitly stated or explained anywhere in the tax code. However, these taxes will cost you thousands if you are not careful.
Marriage Penalty
The marriage penalty refers to the difference that the income tax is assessed on two single individuals who have comparable incomes, as opposed to one married couple, due to tax brackets. For example, take two unmarried individuals who each have $100,000 in income. They will fall into the 28% Federal income tax bracket, and each pay $21,617, or $43,234 combined. If they filed jointly, the tax will be $44,070. The marriage penalty in this case is the difference, or $836.
The Refund ‘Tax’
Whereas most people look forward to receiving income tax refunds, a closer look shows that large income tax refunds pack a hidden tax. The IRS and most state governments do not pay interest on regular tax refunds. Therefore, if you receive a tax refund in April, you essentially had extended the government an interest-free loan for the last four to sixteen months. However, if you owe the state and Federal governments $1,000 or less in income taxes at year-end, interest nor penalties will be assessed on the balances. The effect is the government will be giving you a $1,000 interest-free loan! The lost interest income, or use of your own money is the hidden tax. Using conservative assumptions, on $5,000 of Federal and state tax refunds, the hidden tax is about $300.
Government Budgeting
When the Federal or state governments reduce certain public funding or assistance, the effect is one of a hidden tax. For instance, the President reduced funding for public nutrition by $1 million; in Connecticut, Medicaid expenses were cut; and in New York, Medicaid and public education are facing cuts. Also, in 2010 and 2011, social security recipients did not receive automatic increases in their payments to make up for inflation. The effects of the above are taxes on students, the elderly and those who have lower income levels.
The best advice to safeguard your wealth from these risks and others is to speak with a tax specialist that understands your tax situation and can help you plan to reach your financial goals.
Hurricane Tax Relief: An often missed measure that can help businesses and homeowners
(10/31/12)
The Bush tax cuts may expire, however, there is one long-standing (and often missed) tax deduction that some taxpayers may be able to use, especially those affected by the recent storm - the Casualty Loss Deduction.
This is an unusual deduction because homeowners AND business owners (including owners of home-based businesses) may be able to take advantage of this benefit. In less common cases, renters also may be able to use this deduction.
To qualify, one must have suffered a loss that was not fully covered by insurance. It's important, therefore, to have good records, including records of your paid deductibles, the cost of the damaged property, and its value at the time of the event.
There are additional rules and special reporting requirements with which to comply. This deduction is thought to attract IRS attention due to the complexity.
For those reasons, I urge you to contact me if this is something you would like explore in greater detail. My email address is geoff@levinetax.com my direct telephone number is (203) 273-6300.
The Bush tax cuts may expire, however, there is one long-standing (and often missed) tax deduction that some taxpayers may be able to use, especially those affected by the recent storm - the Casualty Loss Deduction.
This is an unusual deduction because homeowners AND business owners (including owners of home-based businesses) may be able to take advantage of this benefit. In less common cases, renters also may be able to use this deduction.
To qualify, one must have suffered a loss that was not fully covered by insurance. It's important, therefore, to have good records, including records of your paid deductibles, the cost of the damaged property, and its value at the time of the event.
There are additional rules and special reporting requirements with which to comply. This deduction is thought to attract IRS attention due to the complexity.
For those reasons, I urge you to contact me if this is something you would like explore in greater detail. My email address is geoff@levinetax.com my direct telephone number is (203) 273-6300.
2011 Standard Mileage Rate Deduction
Following simple steps can save valuable tax dollars and protect against IRS attacks when you report this misunderstood and overlooked deduction.
Tax-deductible mileage is the number of miles you drive between two points for either a business-, charitable-, medical- or moving- related purpose.
For business mileage, one of the points generally may not be your home.
It pays to be informed. This deduction is overlooked because it’s a non-cash deduction. It doesn't ‘jump out’ at you or your accountant like other deductions.
For 2011, the mileage rates are as follows:
• 51 cents per mile for business miles driven
• 19 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations
IRS audits routinely contest this deduction. The best way to protect your deduction is to journal, and use as proof, these items for each qualifying trip:
• The date
• The number of miles driven
• The starting and destination points
• The purpose of the trip and the people you will see
Additional rules apply for certain business owners and people who are moving.
Contact me to take full legal advantage of this deduction.
Tax-deductible mileage is the number of miles you drive between two points for either a business-, charitable-, medical- or moving- related purpose.
For business mileage, one of the points generally may not be your home.
It pays to be informed. This deduction is overlooked because it’s a non-cash deduction. It doesn't ‘jump out’ at you or your accountant like other deductions.
For 2011, the mileage rates are as follows:
• 51 cents per mile for business miles driven
• 19 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations
IRS audits routinely contest this deduction. The best way to protect your deduction is to journal, and use as proof, these items for each qualifying trip:
• The date
• The number of miles driven
• The starting and destination points
• The purpose of the trip and the people you will see
Additional rules apply for certain business owners and people who are moving.
Contact me to take full legal advantage of this deduction.
2010 Tax Act
Year-End Tax Planning Alert—The 2010 Tax Act
The newly passed and signed 2010 Tax Act could significantly affect your tax planning. Here is the information you need to know.
Major Provisions
2010 Gift Exclusion
Gifts to Grandchildren
Estate Tax
The Act reinstates the estate tax, with an estate tax rate of 35% and an estate tax exemption of $5 million (adjusted for inflation after 2011). For 2010, estates have a choice between being subject to the estate tax or having heirs inherit taking the decedent’s basis in the property.
Payroll Tax
For 2011, the Act reduces the rate for the Social Security portion of payroll taxes to 10.4% by reducing the employee rate from 6.2% to 4.2%. The employer’s portion remains 6.2%.
Family
The Act extends several expired or expiring provisions affecting
families, including:
Business
The Act introduces 100% bonus depreciation for business property acquired after September 8, 2010, before January 1, 2012, and placed in service before January 1, 2012 (or before January 1, 2013, in the case of certain property). It also sets the expensing limitation under IRC §179 at $125,000 and the phase-out threshold amount at $500,000 for 2012. Those amounts will then be reduced to $25,000 and $200,000 for tax years beginning after 2012.
The temporary 100% exclusion of gain from the sale of certain small business stock under IRC §1202, enacted by the Small Business Jobs Act of 2010, is extended through 2011.
AMT
The Act includes an AMT patch for 2010 and 2011.
The newly passed and signed 2010 Tax Act could significantly affect your tax planning. Here is the information you need to know.
Major Provisions
- Postpones the sunset of the 2001 and 2003 tax cuts;
- Reduces the estate tax;
- Extends unemployment benefits;
- Includes an alternative minimum tax (AMT) patch;
- Continues through 2012 the lower capital gains tax rate introduced by the Jobs and Growth Tax Relief Reconciliation Act of 2003; and
- Extends for two years the repeal of the itemized deduction phase-out and the personal exemption phase-out.
2010 Gift Exclusion
- The gift exclusion remains at only $1 million for 2010. If you are married, you and your spouse can together gift $2 million.
- After 2010, the gift & estate tax exclusions are unified at $5 million.
- Caution: These figures assume that you have never made taxable gifts before (gifts in excess of $13,000 per donee/year).
- Caution: The $5 million gift exclusion does not begin until 2011. This might be confusing to many taxpayers because the $5 million exclusion for estate and Generation Skipping Transfer (GST) is effective January 1, 2010.
Gifts to Grandchildren
- In 2011 & 2012 transfers to grandchildren—and other “skip persons” in GST parlance—will be limited to the $5 million GST exemption.
- Unless Congress acts in 2013 the GST exemption drops to $1 million (inflation indexed) and the rate increases to 55%.
Estate Tax
The Act reinstates the estate tax, with an estate tax rate of 35% and an estate tax exemption of $5 million (adjusted for inflation after 2011). For 2010, estates have a choice between being subject to the estate tax or having heirs inherit taking the decedent’s basis in the property.
Payroll Tax
For 2011, the Act reduces the rate for the Social Security portion of payroll taxes to 10.4% by reducing the employee rate from 6.2% to 4.2%. The employer’s portion remains 6.2%.
Family
The Act extends several expired or expiring provisions affecting
families, including:
- the increased standard deduction for married taxpayers filing jointly, scheduled to expire after 2010, continues for two years;
- the $1,000 child tax credit amount continues for two years instead of reverting to $500;
- the increased starting and ending points for the earned income credit continues for two years;
- the $3,000 amount for the child & dependent care credit, which was scheduled to revert to $2,400 continues for 2 years; and
- the American Opportunity Tax Credit continues for two years.
Business
The Act introduces 100% bonus depreciation for business property acquired after September 8, 2010, before January 1, 2012, and placed in service before January 1, 2012 (or before January 1, 2013, in the case of certain property). It also sets the expensing limitation under IRC §179 at $125,000 and the phase-out threshold amount at $500,000 for 2012. Those amounts will then be reduced to $25,000 and $200,000 for tax years beginning after 2012.
The temporary 100% exclusion of gain from the sale of certain small business stock under IRC §1202, enacted by the Small Business Jobs Act of 2010, is extended through 2011.
AMT
The Act includes an AMT patch for 2010 and 2011.
- For 2010, the AMT exemption amounts will be $47,450 for
unmarried individuals and $72,450 for married filing jointly.
- For 2011, the amounts will be $48,450 and $74,450, respectively.
