Wow, what a relief, huh? No, I'm not talking about finally getting rid of the in-laws now that Christmas is over.
I'm talking about the last minute deal reached last week by Congress to extend the payroll "tax break" for another couple of months into 2012. And just in the nick of time too. Thankfully, we could all enjoy our cooked goose, latkes or whatever we've been eating this holiday season with the knowledge that our taxes will remain the same... at least for the short term.
And I mean the very short term. Small business owners know that the reprieve we received was just that. A reprieve. Like the in-laws, taxes are returning. So now that the relatives have packed up and gone home, maybe it's time to spend a few hours with someone even more important to you and your family.
Like your accountant. Are you seeing your accountant this holiday season?
Given what's going on in Washington these days I think that's the one person we all need to spend a little time with before we go back to work in January. What do these guys like to do? I don't know. Something boring, I guess. Like watching C-SPAN. Or playing a little chess. Or going to see the new Sherlock Holmes movie.
Believe it or not, I'm a Certified Public Accountant. I know, when you saw my picture you were thinking professional hockey player, right? But really, I've held the certificate for almost twenty-five years. I take 80 hours of continuing professional education credits every two years. But here's the thing: I'm really not a very good accountant. In fact, I'm really a lousy one The good news for the accounting profession is that I haven't practiced public accounting in twenty years I've never been very good at doing tax returns and accounting work. For me, if it was close enough... it was good enough. You don't want to hire me to do your accounting work, OK? This is why I've stuck to technology. It requires less details And besides, there are plenty of other, great CPAs out there believe me.
But you don't have to be a CPA to know one thing. The payroll tax reprieve is just temporary. And like it or not, taxes (and not just payroll taxes) are about to rise. A lot. There are some laws on the books now that are going to affect us all. This is reality. Don't like it? Tough. Take it to the polls. But for now, it's fact. And smart business owners I know have put aside their emotions, politics and their frustrations and are dealing with the facts at hand. So what are these facts?
Fact one is that in 2012 there won't be much of a tax increase. Even if that dreaded "payroll tax" cut expires the rates will revert back to the original 6.2% that we were paying up to 2011 when the tax was "temporarily" reduced to 4.2% as part of one of those stimulus plans (there were so many I can't even keep track). I know we were enjoying paying a rate two percentage points lower than normal. And if the cut is allowed to expire then someone earning $50,000 per year will pay about $1,000 more in social security taxes. But hey, that's cool. Even if the tax goes back up, it's just returning to what we've all used to been paying for the past umpteen years. It's all good too, because it's funding our social security retirement fund so Boca... here I come!
But there is an added burden in 2012 that small businesses will need to address. We will need to begin reporting on each employee's W-2 how much health benefits were paid on their behalf. Are you preparing for this? Remember, these things have to be filed by January 31 so we better be. Talk to your accountant. Or your payroll company. Or your therapist. And if you don't have a therapist yet, you may well be needing one.
Because soon the fun will really start.
In 2013 a new unearned income tax will affect anyone making over $200K (or $250K for families). Pay up, you disgustingly filthy rich people. You know who you are! That tax is 3.8% on interest, dividends and capital gains. A portion of your capital gain on your home may be taxable too so watch out. Also in 2013 we'll be seeing a rise in our Medicare taxes. Right now 1.45% is deducted from our pay. That will go up to 2.35% If you're self-employed you'll see your Medicare tax rate go up from 2.9% to 3.8%.
Wait! Not done. Also in 2013 there will be a change in itemized deductions. Right now itemized deductions are limited to expenses over 7.5% of adjusted gross income. In 2013 that floor goes up to 10% of adjusted gross income. Which means that more of our expenses become un-deductible.
This is related to the 2010 healthcare legislation. That legislation is real. Don't be fooled because it's being contested in the courts and the Supreme Court will weigh in on its constitutionality. We don't know if it will pass that test. But for now it's law. Smart business owners are assuming that it's going to happen as planned. So they're making their plans now.
By the way the healthcare legislation will, in 2014, cause another tax. That's the mandate. For individuals that don't get health insurance they will be fined the greater of $695 or 2% of their adjusted gross income. For companies with more than 50 employees that don't provide healthcare insurance they will be fined $2,000 per employee.
Pretty impressive, me throwing around all these numbers, huh? Well, let's just take a quick time out while I provide you with another important disclaimer: please don't trust me. I'm pretty sure this is all correct I got these numbers from the internet which always has correct information. But just in case of the highly remote chance that maybe, just maybe, I'm screwing something up here please check with your accountant first. Remember my previous warning from above.
Now where was I? Oh yes. More taxes on the horizon.
Like the Alternative Minimum Tax For the life of me, I could never understand how this was calculated. I'm convinced the complexity of this rule is a well-designed scheme between the IRS and the accounting profession to boost employment. But I've never been able to prove this. The AMT was designed to tax people who were smart enough to get around paying all the normal taxes they owed. Every year the government takes pity on these people and defers parts of this rule. But not anymore. The current AMT laws come to an end at the beginning of 2012 too. Apparently there are like twenty million people who will be affected by this. They'll be paying higher taxes.
My advice? Die. Preferably soon. There's a lot of upside here. Firstly, you don't have to listen to that kid crying behind you on your flight to Chicago. Secondly, you no longer have to feel inadequate every time that commercial comes on where the boyfriend half your age is buying his girlfriend a new Lexus with a red bow on top for Christmas. That would be a huge relief. And if you're going to take this advice then you might as well die before 2013. Because if you go now, you'll save your loved ones big bucks on estate taxes. Currently, your first $5 million of assets are excluded from tax. But after January 1, 2013 the exclusion falls to only $1 million. Dying before 2013 is not a bad tax planning strategy.
If you don't plan on dying, then get ready for the biggest tax increase of them all.
That one comes from our former President Bush. Remember all those tax cuts he enacted? Well, they're about to expire in 2013. And the current government has no plans to stop that. So for those disgustingly filthy rich people earning more than $175,000 per year they'll be seeing their taxes rise more than 10%. The top tax rate will go from 35% to 39.6%.
Will this all happen? Right now, it's the law. Sure, there's an election year coming up. If there's a new President there may be some changes. But the mood in Washington now is that the money to pay down our huge deficits has to come from somewhere. So it's likely to come in the form of new taxes. Many business owners are preparing for that fact right now. They're accelerating income where they can, so that they can pay less taxes now than pay higher rates later.
And they're spending a little quality time with their accountants this holiday season. Doing things that accountants like to do. Like shuffleboard. And watching freight trains. I know, sounds boring. But it could be worse. You could be paying a lot more in taxes. Or stuck with my in-laws for a long weekend.