2013 taxes and rates

When taxpayer's see their 2013 Form 1040, they will notice a few changes to the taxes and rates from previous years.  Following is a summary of the major tax rates and taxes that will be applicable for 2013. For the purposes of this article, MFJ = married filing jointly, S = single, O = any other filing status.

Regular tax rates

Here are the tax brackets for 2013:

Tax rate	Single filers	Married filing jointly or qualifying widow/widower	Married filing separately	Head of household
10%	Up to $8,925	Up to $17,850	Up to $8,925	Up to $12,750
15%	$8,926 - $36,250	$17,851 - $72,500	$8,926- $36,250	$12,751 - $48,600
25%	$36,251 - $87,850	$72,501 - $146,400	$36,251 - $73,200	$48,601 - $125,450
28%	$87,851 - $183,250	$146,401 - $223,050	$73,201 - $111,525	$125,451 - $203,150
33%	$183,251 - $398,350	$223,051 - $398,350	$111,526 - $199,175	$203,151 - $398,350
35%	$398,351 - $400,000	$398,351 - $450,000	$199,176 - $225,000	$398,351 - $425,000
39.60%	$400,001 or more	$450,001 or more	$225,001 or more	$425,001 or more

When calculating tax using this table, taxpayers must work "up the ladder".  This means if a MFJ taxpayer has taxable income of $100,000, they will pay tax at 10% on the first $17,850, then tax at 15% on the amount between $17,851 and $72,500, and then tax at 25% on the remaining amount.  As far as water cooler conversation goes, this taxpayer is "in the 25% bracket", but that doesn't mean they pay a flat 25% on $100,000.

3.8% Medicare surtax

Taxpayers with modified adjusted gross income in excess of $250,000 MFJ / $200,000 S might find themselves completing Form 8960 with their 2013 income tax return.  Taxpayers with this level of income potentially will be subject to the 3.8% Medicare surtax on their net investment income.  Net investment income is loosely defined as all taxable interest, dividends, capital gains, rental/royalty income, and other business activities that are considered passive.  The 3.8% tax is calculated on Form 8960 and added to the taxpayer's regular tax.  For example, MFJ couple has $300,000 modified adjusted gross income that includes $1,000 of taxable dividends.  The couple will pay an additional 3.8% tax on the dividends.  The IRS has recently issued final regs on what is subject to the Medicare surtax.

Higher capital gains rates

Taxpayers with modified adjusted gross income of $400,000 S / $450,000 MFJ will see their long-term capital gains taxed at 20% instead of the 15% rate from the past several years.  This applies to both long-term capital gains and qualified dividends, but short-term capital gains will still be taxed at regular rates.

Personal exemption (PEP) and itemized deduction (Pease) phaseout

Once taxpayers reach a certain level of income, they can potentially be subject to a phaseout of allowable personal exemptions and itemized deductions, which has been discussed in a previous post.

As can be seen, there are several changes to individual tax rates, deductions, and exemptions for 2013.  With proper planning, some of these issues can be either minimized or avoided altogether.

2013 year end planning

Over the next few weeks, this publication will address several topics related to year end tax planning. With Thanksgiving coming next week, it is time for business and individual taxpayers to get their financial houses in order for the end of the year. Topics to be addressed include the following:

• New tax rates for 2013, including new capital gains rates and the Medicare surtax
• Alternative minimum tax
• Incentive stock options
• Capital gains harvesting
• Retirement contributions and other year end expenditures
• Depreciation allowances for businesses
• Considerations for cash vs. accrual basis taxpayers

If you have other topics you would like see addressed, please comment on this post or contact me below.

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Give yourself a raise

With Halloween having come and gone and stores now ramping up to sell Thanksgiving turkeys and other holiday treats, 2013 is quickly drawing to a close.  This brings colder weather and the inevitable task of raking leaves, but it also presents an opportunity to take a moment and analyze employment benefits, spending for the year, and a budget for 2014. I am joining a group of financial writers to encourage people to increase their savings in 2014 by 1%.  One of the easiest ways to increase savings is through a retirement account, the most common of which I have discussed previously.  The related benefits to increased savings can be demonstrated using the grade school theory of the "5 W's".

WHO needs to increase their savings by 1%?

Anyone that wants to retire or anyone that pays taxes.  Everyone has an idea of what they want to do in retirement.  Whether they want to travel the country in an RV, play golf everyday, or move to Italy, all of those activities require money.  Since it is rare for people to work and earn an income in retirement, those dreams require a nest egg to become a reality.  Employees that participate in a 401(k) plan or similar arrangement can enjoy tax benefits by increasing their retirement contributions.  Contributions are not included in taxable income, so for a taxpayer in the 25% tax bracket, every dollar contributed saves approximately 25 cents in taxes.

WHAT money should be used to increase savings by 1%?

This is the biggest challenge for most people trying to increase savings.  "I want to save more, but I also want to keep my subscription to HBO!"  Instead of looking at the savings goal in total, break it down into monthly or weekly amounts.  A goal to increase savings by $1,000 for a year is only $83/month and $19/week.  That equates to not eating lunch out 2 days a week, one less round of golf a month, or no more lattes on the way to work.  Taxpayers that typically receive a refund on their taxes can also consider adjusting their withholdings in order to keep more of that money during the year.  By decreasing tax withholdings and increasing retirement contributions by an equal amount, the taxpayers net take-home pay does not change.  But, the taxpayer will not receive a large refund on their tax return, and that money will have been saved towards retirement.

WHERE should savings be increased by 1%?

As discussed above, a qualified retirement plan offered through an employer is the easiest place to start.  If that's not available, a Traditional or Roth IRA can accomplish similar objectives.  There are also a variety of options available for the self-employed.  IRA accounts can be opened at almost any brokerage such as Vanguard, Fidelity, or TD Ameritrade.

WHEN should savings be increased by 1%?

As soon as the opportunity presents itself.  Several large employers use November and December as "benefits season", giving their employees the opportunity to adjust their benefits, including retirement plan contributions.  Taxpayers contributing to IRA's can make contributions for 2013 by the date their 2013 tax return is filed or 4/15/14, whichever earlier.

WHY should savings be increased by 1%?

Aside from the reasons already listed above, increased retirement contributions align with the time value of money concept.  In short, the time value of money means $1 today will be worth more in the future.  For example, $1,000 today, growing at an average rate of 5% annually for 40 years will be worth $7,040.  These calculations can be made here.

The savings rate in our country has dropped from 5% last year to 4.6% this year.  From an accounting sense, that indicates that current obligations are being met, but future obligations are likely to not be met.  So, I encourage you to put pencil to paper and see where you can adjust your finances to give yourself a raise in 2014 by increasing your savings by 1%.  If anything I have given you a reason to put off raking those leaves for another day.

This post encouraged by the Financial Duckmail blog - see their site and other works here.

Corporate minutes scam

Over the past few weeks, several businesses in Arkansas have received solicitations in the mail requesting that the business pay a service to keep them in compliance with an "Annual Minutes Requirement Statement".  On November 5, Attorney General Dustin McDaniel released on his website information regarding the solicitations, confirming that it was a scam.  After a simple Google search, this same scam appears to be present in several states around the country. Arkansas law does require corporations to maintain minutes of the meetings of owners and board of directors.  But, as noted in the Attorney General's release, these minutes are not required to be filed with the State.

Best practice is for owners and directors to meet at least annually in order to satisfy their obligations as those charged with governance of the entity.  Topics to cover at such meetings can include (but are not limited to):

• Elect corporate officers
• Review and analyze financial results
• Approve corporate borrowing or debt financing
• Approve incentive compensation plans
• Review employer-sponsored retirement plans and performance
• Retain independent auditors, and approve audit reports or tax returns prepared by external CPA's
• Discuss status of pending or threatened litigation

Minutes should be signed by the Secretary and Chairman and evidence all members present, and the original signed minutes should be stored in a safe place with other corporate records.

Minutes are required to be kept by all corporations, whether they are $1 billion businesses with 20 board members, or a small S-corporation with one shareholder.  In the event of an IRS exam, one of the items the IRS will most likely request to review is the company's meeting minutes for the year under exam.

A copy of the Attorney General's announcement can be found on his webpage here.

Employee vs. contractor

A hot topic with the IRS right now is classifying workers between employees and independent contractors.  There can be both positive and negative results on how a worker is classified, both for the company/employer and the worker.  The IRS considers three factors when determining whether a worker is an employee or an independent contractor. Behavioral control

This characteristic deals with how the company/employer behaves towards the worker and the work they are performing.  If the employer/company has the right to direct or control how the worker does the work, then they are most likely an employee.  The business does not actually have to direct or control the way the work is done, as long as they still have the right.  Also, if the company/employer requires the worker to attend any kind of training, this suggests that the worker is an employee.  If the business does not have the right to direct how the work is done, but merely suggests timing and deadlines, then the worker is most likely an independent contractor.

Financial control

This characteristic deals with how the company/employer directs or controls the financial and business aspects of the work.  If the worker has a significant investment in their work, has unreimbursed expenses related to the work, or has the opportunity to realize a profit or loss on the work, then they are most likely an independent contractor.  Employees typically do not incur expenses that are not reimbursed by their employer, including significant investments such as vehicles or computers.  Employees also do not realize a profit or loss from performing their work since they are paid their same hourly/salary rate.

Relationship of the parties

This characteristic deals with the relationship the parties have and includes written contracts, benefits, the term of the relationship, and whether the services provided are a key part of the company’s/employer’s business.  If the worker is provided any kind of benefit by the company/employer, such as health insurance or participation in a retirement plan, they are most likely an employee.  If the services provided by the worker are at the core of the business’ operations, then they are most likely an employee.

The terms of the worker’s relationship can be easily defined in a written contract, which will also serve as evidence if the worker’s status is called into question.  The worker and employer/company can use the contract to pass or fail all of the tests listed above in order to classify the worker as expected.  A word of caution – if the signed contract says one thing but the actual work performed is different, the classification of the employee or independent contractor can be reversed based on what actually occurred.

In closing, with the IRS calling into question employment status more often, both employers and employees are encouraged to revisit their staffing arrangements and verify that workers are properly classified based on the characteristics above.