2013 Itemized Deductions Limitation

You can thank Donald Pease democratic congressman from Ohio for this nice little haircut in your deductions who originally sponsored this legislation. If your adjusted gross income(AGI) exceeds $250,000 (single) or $300,000 (joint), you have to reduce your itemized deductions by 3% of the excess AGI over those amounts. These thresholds will be adjusted for inflation after 2013. All itemized deductions are affected except casualty losses, gambling losses, investment interest, and medical expenses which are not reduced. You also cannot lose more than 80% of the itemized deductions which are affected such as charitable contributions, state and local taxes, mortgage interest, and miscellaneous. For example, a couple with an adjusted gross income of $745,000 would lose $13,350 in itemized deductions based on the following calculation: $745,000-$300,000 x 3% = $13,350.

Self Employment Tax

Self employment tax of 15.3% is imposed on the net profit from all trades and businesses. It can apply to sole proprietors, partners, and members in an LLC. This tax is in addition to income tax and is meant to cover both the employer and employee portions of social security and medicare for the self employed. This can come as a shock to those who quit their W2 job and start their own business. They may have no taxable income but yet still owe tax if they had a net profit on their new business.

Late Filing Penalty

This is a penalty that will  put the hurt on you because the IRS really, really wants you to send in that tax return. They impose a penalty of 5% of the unpaid balance each month that the tax return is late up to a maximum of 25%. An extension can get you another 6 months to file the individual return, but you better send it in by that extended due date of October 15 to avoid the penalty. If you have never had a tax penalty before including a late payment penalty, you will probably be able to get a waiver of the penalty by the IRS. If you have other penalties but never a late filing penalty, you may be able to get 25% of the penalty waived. Even if you can't make any payments on the amount due on your tax return, it is much better for you to send in the return to avoid this punishing penalty.

Roth Conversions and the 5 Year Rule

If you convert your regular IRA into a Roth IRA, you can't take a distribution from the Roth for five years without a 10% penalty unless you meet some specific exceptions. After five years, you can withdraw the conversion amount, but not any earnings penalty free even if you are under age 59 1/2. Each conversion amount is subject to its own five year period.

Top Five Ways to Help Your Tax Preparer

The 2012 tax return filing season is upon us and if you would like to make it easier on your busy tax preparer, please consider the following top 5 ways you can help.

5. Use email to respond to questions from your tax preparer or to ask tax questions. This is an efficient way to communicate and saves time for both of us. Mail or drop off your tax work. Usually if you are a longtime client with no significant changes, there is no need for an office appointment.

4. Provide annual totals of amounts for the year. For example add up all your medical bills for the year and give the preparer the total only. You don't want the preparer spending time adding up individual receipts.

3. Don't provide receipts for expenses. Put just the amounts in a worksheet or on an organizer and total them.

2. Answer the tax preparer as soon as possible when you get follow up questions so that your tax return can be completed promptly.

1. The number one way you can help your tax preparer is to fill out the tax organizer as completely as possible and provide all tax information forms that are reported to the IRS such as 1099s.

Thank you.

Death and Taxes by State

Federal estate tax now only kicks in if the individual's estate exceeds $5.25 million which exempts most estates from the death tax. This is also true in 29 states including Georgia that have no state estate or inheritance taxes. Maryland and New Jersey get the prize because they impose both an estate tax and inheritance tax. Wealthy taxpayers there need to move before they die. Six states only impose an inheritance tax. Generally, inheritance taxes are levied on  recipients who are not direct relatives. For example, Maryland charges a 10% inheritance tax on all money paid to a niece, nephew, friend or other unrelated person, but none to children, grandchildren or spouse.  19 other states and the District of Columbia have an estate tax that generally starts after a $1 million exemption and a top rate of 16%. Illinois is the most recent state to impose an estate tax with a $4 million exemption effective 1/1/2013.

Georgia's New Car Tax

All cars bought on or after 3/1/2013 will be exempt from sales tax and the annual ad valorem tax. Instead you will pay a one-time 6.5% title ad valorem tax based on the value of the vehicle. The rate goes up to 6.75% in 2014 and 7% in 2015. It can never go above 9% per statute. You also can opt into the new law if you bought a vehicle 1/1/2012 through 2/28/2013 by paying any difference if any between what you've already paid in sales tax and ad valorem tax and the new 6.5% rate beginning 3/1/2013. There is a calculator on the GA Dept of Revenue website that can help you decide. You have until 1/1/2014 to decide whether to opt in to the new tax. I believe it will be advantageous for those eligible to opt in since most county sales tax rates alone exceed 6.5%. This new tax does not appear to be deductible as personal property tax since it is not charged on an annual basis so that is one downside. Overall this is a great deal for Georgia's taxpayers.