How to Increase Your Social Security Checks

December 2012

I recently attended a tax seminar reviewing the 2012 tax year and beyond changes. There is much uncertainty regarding our current tax code and it would be safe to say that until Congress agrees on what should happen, it will continue. There is an impending deadline quickly approaching where they need to make some very hard decisions. My belief is that the tax code will probably change yet again (no surprise there), but it is very possible that even though they talk about tax relief and simplicity, it will only become more complex. We have many Bush tax cuts that are expiring (or have already expired - and very possibly won't be renewed) and even though they talk about not raising taxes, the reality is... that is a good possibility.

As I went down the list of deductions and tax credits that were expiring, many will be renewed, and Congress must act. Taxes will increase for the "wealthy". Trying to determine what group that is will be the trick. I believe that many of the tax breaks available for small business will continue. I have talked with many of you over the years about these benefits and feel that they are just as important now.

First of all, if you are employed and receive W2 wages, your paychecks will be smaller in January 2013. The 2% payroll tax cut we have had for the past two years is once again expiring and I don't believe that it will be extended again. This will also effect anyone who is self-employed. In reality it funds Social Security and somehow we have to figure out how to make it more solid. Here are a few other topics that caught my eye.

If the IRS thinks you were involved with identity theft, they will issue an Identity Protection PIN, which needs to be used when filing this tax return. Affected persons may call (800) 908-4490. If you receive a letter (LTR4868CS) it will have the PIN number. Please have it ready when we are doing your taxes if you have received one.

With the recent election in California, we generously agreed to increase our California income taxes. Rates are now as high as 13.3% - some of the highest (if not the highest) in the nation.

There will be changes this year if you have tuition expenses. They are more strict in following these expenses and in many cases, we will need two years of for 1098-T to correctly capture education expenses. If you have a student, please have the last two years of these statements - we will need it to correctly fill out the tax return. Also it is possible there will be changes next year regarding student loan interest. The tuition and fee deduction is one of those currently on the chopping block.

We still don't know if tax rates will be increasing. They currently are set to expire at the end of 2012 and hopefully will know if they are to be extended. If they expire the new rates will be: 15, 28, 31, 36 & 39.6% up from the current 10, 15, 25, 28, 33 and 35%. The other option being talked about is the capping of deductions which will also increase the overall tax liability.

There is an additional .9% Medicare tax that will be imposed on individual taxpayers on wages and net self-employment income in excess of $250,000 MFJ; $125,000 MFS; or $200,000 for all others return (S & H of H). There is also a 3.8% Medicare tax on investment income. The threshold limits above apply. This is on interest, dividends, annuities, royalties and rents (unless these items are derived from the ordinary course of a trade or business). Note that rents from an active trade or business (generally Schedule C) are not included in investment income, but rents from a passive activity (generally Schedule E) are included.

Unless extended the marriage penalty on the standard deduction will once again be imposed.

Unless Congress acts, for the 2013 tax year, the child tax credit will be reduced from the current $1,000 to $500.

If you received the First Time Homebuyers Credit the first year it was put into place, it is important to point out that this was actually a loan not a gift (credit) and the repayment of this will start kicking in.

The Schedule A limit for deduction medical expenses increases from 7.5% to 10% for tax years beginning after 31 December 2012. There is an exception for taxpayers 65 and over. For taxpayers who have reached age 65 by the end of the calendar year, the effective date for this is delayed until January 1, 2017.

Congress needs to decide on the following expiring credits and deductions:
  • The deduction for sales tax vs. state income tax may no longer be available. This is another item Congress needs to decide (for tax year 2012).
  • Qualified mortgage insurance premium deduction (for tax year 2012).
  • Certain contributions may be made directly from an IRA (or Roth) to a charity (for tax year 2012).
  • Taxation of qualified dividends has been at the same rates as long-term capital gains. For 2013 these dividends are scheduled to simply be ordinary income unless it is extended.
  • A modified HOPE credit called the American Opportunity Tax Credit is expiring in 2012.
There are changes in the reporting requirements of foreign financial assets. Everything needs to be reported. If you have bank accounts, homes or other assets they must be reported and the fines are very high. If you fall into this category, please let me know so it can be reported correctly.

There have been changes in the exclusion of gain of a personal residence if it was once a rental. Part of the gain will be excluded.

The reporting requirement for landlords for form 1099 has been repealed (this is wonderful news).

Mileage allowances for 2013 are as follows: business miles 56.5¢, charitable miles 14¢, medical or moving 24¢.

Let me mention again that the Kiddie Tax applies to children to age 23 if they are full-time students.

And this is just the tip of the iceberg. There are more changes and many areas that yet to be determined and will have far reaching affects, but these seemed like the most common. Needless to say that there is great uncertainty in the current state of tax law and it doesn't look like that will be changing anytime soon.

You will find on my website forms to help organize and remind you of the information and forms that are needed at tax time this year. I will be including a few more. You can find them here. Please fill free to pull it down to help. Hopefully it will jog your memory of what we need. Note that I generally don't use this form when entering tax data (it's best if I have copies of the forms the information is sent with).

I have started to include valuable home based business information to the client portal, so feel free to log into your account to access that information.

Please call me at (951) 775-7944 for an appointment. I want to again encourage you to refer me to family, friends and associates who may need my tax services.

As always, feel free to call me if you have any questions.

Doug