It is difficult to be funny about taxes. Cartoonist Randy Glasbergen drew a cartoon of a person behind a desk saying, “Instead of punitive tax rates, could I just get a spanking?” Many Americans may be asking that question this year and again next year.
A more serious view of taxes is suggested by economist Milton Friedman: “We have a system that increasingly taxes work and subsidizes nonwork.”
With President Barack Obama’s signature on a two-year congressional budget deal, unemployment benefits for 1.3 million people will be denied, according to a Center on Budget and Policy Priorities report. An estimated 60,300 unemployed will lose benefits in Nevada.
Taxes have always been a mixed blessing for Americans. On one hand, many public services are taken for granted by Americans who pay taxes. Benefits from American taxation become clear when traveling to other countries. The clarity is in the water we drink, the toilets we flush and the roads we travel.
On the other hand, taxes may be used for reasons that interfere with freedom of choice. As President Andrew Jackson said, “The wisdom of man never yet contrived a system of taxation that would operate with perfect equality.”
The following information has been written by a layman. Rely on a professional tax preparer or the Internal Revenue Service when preparing tax returns.
NBC News reports that in 2012, 22 percent of federal tax dollars went to health, 20 percent to Social Security, 20 percent to defense, 13 percent for a safety net (hardship programs for individuals and families), 7 percent for federal and veteran retirees, 6 percent for interest, 3 percent for transportation, 2 percent for education, 2 percent for science research, 1 percent international, and 4 percent classified as other. Its source was the Center on Budget and Policy Priorities.
Most individuals and many businesses will be completing tax forms soon. The following is a rough summary of some tax changes and consequences affecting 2013 returns. For more information, visit www.irs.gov.
Small businesses that make $400,000 to $450,000 or more and have a limited liability company, S-corporation, partnership or sole proprietorship structure will see taxes increase for 2013. Payroll taxes revert to 6.2 percent from 4.2 percent on the first $113,700 earned in 2013 and will continue at the higher rate in 2014.
Also, quarterly 1040ES filing (tax estimate forms) changes are in store for small businesses that owe more than $1,000 in taxes. Small businesses will have to file quarterly estimated taxes and, if estimates are low, businesses may have to pay a fine — spanking is undoubtedly not an alternative.
Small-business employer withholding taxes went up in 2013. Medicare taxes rise to 0.9 percent for any employee who earns more than $200,000 per year. Incomes over $200,000 (or $250,000 for married couples) will see a Medicare surtax of 3.8 percent on unearned income.
On a slightly brighter side, home office expenses, to a maximum of $1,500, will be easier to deduct on 2013 filings. If qualified, a filer simply multiplies square-footage x $5 per square foot.
Also, several tax breaks have been extended. Deductions up to $500,000 for investment in equipment, hardware or software are still in place. Small businesses that hire veterans or individuals in underserved communities will earn work opportunity tax credits based on employee income. (Underserved communities are loosely described as low income, rural or urban areas that have significant inequities in health, disease burden and mortality or access to quality health care, preventive services, or health providers.)
Another thing to keep in mind for small businesses — businesses with fewer than 25 employees — is the health care tax credit. If an employee makes less than $50,000 and an employer provides health insurance that costs the small business half or more of the premium, then the company may be eligible for a tax credit of up to 35 percent of the premium.
And finally, there is a research and experimentation tax credit. The intention of this credit is to encourage product development that increases economic growth through productivity gains or competitiveness. It was implemented in 1985 but expired at the end of 2013.
Although not comprehensive, several tax breaks expired in 2013. Each should be confirmed with the IRS or a professional tax preparer.
From 2006 to 2013 a tax credit was available for an energy-efficient home improvement purchases — such as a new water heater or other energy conservation purchase. This credit expired.
After 2013, teachers’ $250 special deduction (requiring no itemization) for school classroom expenses expired. Now to receive any classroom expense reduction, teachers must itemize —which many choose not to do. Tuition and fees deduction expired.
State and local general sales tax deduction expired. Mortgage insurance premium deduction, as interest, expired.
The exclusion for discharge of principal residence debt expired at the end of 2013. This is a major concern to taxpayers who are still attempting to negotiate a short sale or foreclosure of their residences; the amount of discharged debt will be taxed as income.
For wealthier individuals 70½ years of age or older, IRA distributions could be distributed directly to charities to avoid taxation. This expired after 2013.
2013 may also be the last year 100 percent of capital gains can be excluded for stock purchases in certain qualified small businesses; beginning in 2014 only 50 percent of those gains will be excluded.
A tax credit for four-wheeled electric vehicles purchased in 2013 is $7,500. That vehicle credit is limited in 2014 to 200 manufactured vehicles per model. For example, if 200 Tesla Model S cars are purchased in 2014, the 201st manufactured model is not eligible for the credit.
Although most of the credits and deductions will not hit individual and businesses until filing 2014 tax returns, there are some major changes that will result in higher taxes when filing this spring. The maximum tax rate for high earners in 2013 increases to 39.6 percent for incomes above $450,000, married, filing jointly or qualifying widow; $275,000 head of household; $250,000 single; $150,000 married filing separate. These high earners will also see capital gains tax increase from 15 percent to 20 percent.
Tax returns for 2013 will see some major changes in itemized deductions. Medical expenses can only be deducted if they exceed 10 percent of taxpayer’s income unless having lived to be 65 — then the old floor of 7.5 percent applies. For higher income taxpayers, there are new limits that reduce itemized deductions and eligible personal exemptions. (See your local tax preparer or call the IRS for clarification.) These changes lead to higher taxes.
The estate tax is a tax on transfer of property at death. Estate taxes are exempted for inheritances below $5.25 million. This exemption becomes permanent in 2013 (with the caveat of further legislative action). Annual cash gifts allowed, that do not apply to the $5.25 million, rise from $13,000 to $14,000 per gifted person in 2013. The maximum tax rate for inheritance over $5.25 million rises to 40 percent from 35 percent.
The Affordable Care Act may increase 2014 individual taxes (the tax is actually an annual government fine that begins in 2014 and escalates in subsequent years). If one does not have health insurance, or fails to acquire it before the end March 31, a tax or fine will be levied in 2014.
Those older than 65 are exempt because they are eligible for Medicare. The annual tax or fine, which will be collected on 2014 returns, is $95 per adult and $47.50 per child — up to $285 for a family or 1 percent of family income, whichever is greater. Consequently, in addition to any losses incurred for family medical costs, the $285 tax or fine will be levied.
Part-time employment, multiple jobs and self-employment have become common in the harsh business environment of 2013. This makes tax withholding decisions more complicated. Employers will determine employee’ withholding based on employees’ completed W-4.
One can either review government Publication 919 or ask a professional tax preparer for help. If some income is from self-employment, the added income may affect how the W-4 is completed.
Two of the largest tax preparation companies in the United States have offices in Las Vegas: H&R Block and Jackson Hewitt. H&R Block has more than 50 tax offices in the valley.
According to Wikipedia, they process 24.5 million tax returns and have 11,000 retail offices worldwide. Jackson Hewitt has 10 offices in the valley. According to Wikipedia it processes 2.2 million tax returns and has 2,800 locations in Walmart and 400 in Sears’ retail stores.
Tax preparation can take a few minutes to many hours depending on one’s information organization and whether filing itemized or nonitemized returns. The IRS notes, “You must file a federal income tax return if your income is above a certain level; which varies depending on your filing status, age and type of income you receive.”
If unsure of the need to file a tax return or of any specific IRS requirement, ask a professional tax preparer or the IRS. The local IRS telephone number is 702-868-5005, available Monday through Friday.
There is also a “Frequently Asked Questions” page on the IRS website.