RSS

Scandals Fueling Job Market, But Many Hires Will be Temporary

If you want a job in finance today, follow the blood trail. The most aggressive hiring is happening in business units charged with cleaning up other people’s mistakes, or making sure they don’t happen again.

Look at banks in the U.K., which created at least 20,000 new jobs last year to deal with claims over mis-sold payment protection insurance (PPI) and interest rate swaps, according to a new report from recruitment firm Manpower. The job gains generated by the scandals drove financial services to be the best performing sector in the study, despite the fact that front office staffers are getting let go each day.

“These scandals have spawned a new industry to deal with the fallout,” said ManpowerGroup U.K. Managing Director Mark Cahill.

The job gains are expected to continue through 2013, with firms like Barclays and Lloyds putting aside millions to deal with PPI claims, according to Cahill.

Recent scandals have also inspired hiring in risk and compliance on both sides of the pond as firms attempt to mitigate against future black eyes. Five of the top six most talent-starved positions are in risk and compliance, according to a recent study of our database. And the pay is pretty good. A senior compliance professional working in an investment bank in New York can expect to make between $250,000 and $525,000.

Jobs in compliance and risk are likely much safer than those tasked with handling the immediate fallout of the scandals themselves. They’re real jobs, but they likely aren’t sustainable.

Bold and Unrelenting (LA Times)
Mary Jo White, President Obama’s nominee for the head of the Securities and Exchange Commission, will take a tough stance on Wall Street if confirmed, telling senators that she will be “bold and unrelenting.” Wrongdoers “will be aggressively and successfully called to account by the SEC,” she said.

They’re Still Commodities (Bloomberg)
Former Citigroup oil trader Andrew Hall, who made headlines for receiving $100 million in compensation the same year Citigroup received a federal bailout, is putting his money to work in Vermont. Hall bought a farm that sells handmade lavender soap and grass- fed Angus beef.

Advertisements
 
Leave a comment

Posted by on March 13, 2013 in Tax Relief

 

IRS To Accept Returns Claiming Education Credits by Mid-February

As preparations continue for the Jan. 30 opening of the 2013 filing season for most taxpayers, the Internal Revenue Service announced today that processing of tax returns claiming education credits will begin by the middle of February.

Taxpayers using Form 8863, Education Credits, can begin filing their tax returns after the IRS updates its processing systems. Form 8863 is used to claim two higher education credits — the American Opportunity Tax Credit and the Lifetime Learning Credit.

The IRS emphasized that the delayed start will have no impact on taxpayers claiming other education-related tax benefits, such as the tuition and fees deduction and the student loan interest deduction. People otherwise able to file and claiming these benefits can start filing Jan. 30.

As it does every year, the IRS reviews and tests its systems in advance of the opening of the tax season to protect taxpayers from processing errors and refund delays. The IRS discovered during testing that programming modifications are needed to accurately process Forms 8863. Filers who are otherwise able to file but use the Form 8863 will be able to file by mid-February. No action needs to be taken by the taxpayer or their tax professional. Typically through the mid-February period, about 3 million tax returns include Form 8863, less than a quarter of those filed during the year.

Issue Number: IR-2013-10

The IRS remains on track to open the tax season on Jan. 30 for most taxpayers. The Jan. 30 opening includes people claiming the student loan interest deduction on the Form 1040 series or the higher education tuition or fees on Form 8917, Tuition and Fees Deduction. Forms that will be able to be filed later are listed on IRS.gov.
Updated information will be posted on IRS.gov.

 
Leave a comment

Posted by on January 31, 2013 in New Rulings, Tax News

 

IRS Loses Lawsuit Challenging Authority to Regulate Tax Preparers

In a stunning blow to the Internal Revenue Service’s efforts to regulate the tax preparation profession, a federal judge struck down the IRS’s licensing requirements for tax preparers on Friday, including testing and continuing education.

Three independent tax preparers—Sabina Loving of Chicago, John Gambino of Hoboken, N.J., and Elmer Kilian of Eagle, Wisc.—joined forces with the Institute for Justice, a libertarian public interest law firm, in filing suit against the IRS in the U.S. District Court for the District of Columbia.

U.S. District Court Judge James E. Boasberg ruled against the IRS and in favor of the tax preparers in enjoining the agency against enforcing its Registered Tax Return Preparer requirements.

“Today’s ruling is a victory for hundreds of thousands of tax preparers across the country and the tens of millions of taxpayers who rely on them to prepare their taxes,” said lead attorney Dan Alban. “This was an unlawful power grab by one of the most powerful federal agencies and thankfully the court stopped the IRS dead in its tracks. The court ruled today that Congress never gave the IRS the authority to license tax preparers, and the IRS can’t give itself that power.”

The opinion is available online at http://www.ij.org/images/pdf_folder/economic_liberty/irs_tax_preparers/irs-opinion-1-18-13.pdf. The court enjoined the IRS from enforcing its new licensing scheme for tax preparers. The ruling does not affect CPAs, Enrolled Agents and tax attorneys, who were exempted from the RTRP regime as they are already regulated under Circular 230 requirements.

“Through these regulations, the IRS set itself up as king and sought to license hundreds of thousands of tax preparers without being authorized to so do under the law,” said Institute for Justice senior attorney Scott Bullock. “But as Judge Boasberg noted, under our system of law, ‘statutory text is king.’”

Former IRS Commissioner Doug Shulman made tax preparer regulation a priority, aiming to root out tax preparers who were unqualified, filed fraudulent refund claims and even cheated clients, with the further goal of improving tax compliance. Shulman ended his term last November and is now a guest scholar at the Washington, D.C., think tank, the Brookings Institution. His successor, IRS Acting Commissioner Steven T. Miller will now have to deal with the fallout from the lawsuit.

Boasberg recognized that the IRS recently did a “flip-flop” with regard to its ability to license tax preparers, the Institute for Justice noted, declaring for years it did not have the authority to do so but only recently claiming that it did have that power.

The IRS can appeal the ruling to the U.S. Court of Appeals for the District of Columbia Circuit. The IRS had no immediate comment on the ruling, according to IRS spokesman Dean Patterson.

“They may very well appeal, but the District Court ruled that the IRS is enjoined from enforcing the RTRP licensing regulations,” said Alban. “Assuming the ruling stands, tax preparers no longer are going to need to comply with the IRS licensing requirements. It returns things to the way they were before the IRS passed those regulations in the first place. No longer do you have to get the IRS’s permission to work as a tax return preparer.”

He noted that the IRS’s continuing education requirements only just went into effect on January 1. “The timing on this really couldn’t have been any better,” said Alban. “Tax preparers should be able to prepare tax returns in this 2013 tax season without getting permission from the IRS. Tens of thousands of tax preparers who would have otherwise been put out of business, including two of our clients, can now continue to prepare returns.”

All three prongs of the IRS tax preparer regulation regime were affected by the ruling, including the testing, continuing education and RTRP registration requirements. However, the Preparer Tax Identification Number, or PTIN, which is part of the registration requirements, is not affected by the lawsuit.

“Anything that’s part of the RTRP regulations is struck down by this decision today,” Alban explained. “The PTIN is a separate regulation and it’s done under separate statutory authority. It’s a ‘shall issue’ type of permit. If you pay the fee, if you pay that amount of about $65, you’ll get a PTIN. The IRS was going to make the PTINs conditional on having the RTRP credentials, but now they’re not allowed to do that. It will go back to how it was last year, when you had to get a PTIN, but anyone could get one and you didn’t have to pass an exam or complete any continuing education.”

It is unclear how the IRS will deal with tax preparers who were scheduled to take the competency exam. “I don’t know how the IRS is going to wind things down,” said Alban. “As of the court’s ruling today, those regulations are null and void. Tax preparers don’t have to take that exam and they don’t have to comply with those regulations. The court ruled that these regulations did not have statutory authority.”

Judge Boasberg found that the text of the relevant statute does not support what the IRS claims as its authority to regulate tax preparers.

“Without deciding whether any of these three textual points alone would be dispositive, the Court concludes that together the statutory text and context unambiguously foreclose the IRS’s interpretation of 31 USC Section 330,” the judge wrote, adding, “The IRS also makes a number of nontextual arguments in favor of its interpretation, but none of these can overcome the statute’s unambiguous text here. In the land of statutory interpretation, statutory text is king.”

“They found that the IRS misinterpreted the statute and was basically trying to use it to expand its own authority in ways that the statute didn’t authorize,” said Alban. “On the first page of the opinion, they said that ‘the statute’s text and context unambiguously foreclose the IRS’s interpretation.’”

“With an invalid regulatory regime on the IRS’s side of the scale and a threat to plaintiff’s livelihood on the other, the balance of hardships tips strongly in favor of plaintiffs,” Boasberg wrote later in the ruling.

There was no trial in the case because there were no disputed facts, Alban noted. The ruling came after cross-motions for summary judgment. The lawsuit was originally announced in March (see Tax Preparers Sue IRS over New Requirements). The Institute for Justice filed a motion for summary judgment in September, and the IRS filed a cross-motion for summary judgment in October. “We trialed a couple of reply briefs, and that was it,” said Alban. “It was just in front of the court on the papers to rule on the case.”

The IRS had argued that the statute was unambiguous and could be read expansively to give the agency the authority that it claimed. “They also claimed that they had inherent authority as an agency to regulate anything related to what they do and the court rejected both of those arguments,” said Alban.

On the first page of the opinion, the court said, “Agency action, however, requires statutory authority. The IRS interpreted an 1884 statute as enabling these new regulations. That statute allows the IRS to regulate ‘representatives’ who ‘practice’ before it. Believing that tax-return preparers are not covered under the statute, and thus cannot be regulated, Plaintiffs—three independent tax-return preparers—brought this suit.”

“That was pretty much the basis of its decision,” Alban explained. “An agency can’t act without statutory authority, without Congress giving them authorization to do something.”

If the IRS appeals the ruling, which it is almost certain to do, Alban said the Institute would then argue the case in front of the D.C. Circuit court, and to higher courts if necessary. “If the IRS loses again in front of the D.C. Circuit, we’d be happy to argue it in front of the Supreme Court if they take the case. But all of that is speculative. I have no idea if the IRS is going to appeal the decision on this. We’ll certainly take it as far as it goes. We’re willing to represent the rights of independent tax preparers.”

Washington, D.C. (January 18, 2013)
By Michael Cohn

 
2 Comments

Posted by on January 20, 2013 in New Rulings, Tax News

 

Fiscal Deal Passes As House GOP Clown Car Crashes, Again

Observing the Congressional Republicans repeatedly stumble in and out of their caucus clown car, blowing loud kazoos and muttering angry threats, should be painful, embarrassing, and highly instructive to any American voter with the patience to watch.  When their latest performance concluded late Tuesday night with a 257 to 187 vote passing the stopgap fiscal deal negotiated by the Senate and the White House, an unavoidable question lingered: What is wrong with those people?

The simple explanation is that the House of Representatives has increasingly been dominated over the past two decades by a coterie of tantrum-prone extremists, who lack the probity and steadiness required for democratic self-government. Their diminished capacity is reflected in the low quality of leadership they have chosen during this long twilight, from Newt Gingrich, Dennis Hastert and Tom DeLay to John Boehner and Eric Cantor, even as their politics have grown more and more extreme.

Under the stress of their incoherence, the Republican caucus is unable to escape one humiliating mess after another. The damage they routinely inflict on the country’s economy and future is reaching incalculable levels – and is almost certain to grow worse when they again hold the debt ceiling hostage next month.

By the end of the current episode – which is only an interlude rather than a true resolution – the top Republicans in the House had split, with Boehner casting a rare vote in favor, and House Budget Committee chair and former vice-presidential nominee Paul Ryan (R-WI) voting yes, along with 84 fellow Republicans and almost all of the House Democrats, while House Majority Leader and would-be Speaker Eric Cantor (R-VA) voted no. On the floor, House Ways and Means chair Dave Camp (R-MI) tried to claim that this bill is “the largest tax cut in history,” although he might have difficulty explaining why more than 150 Republicans voted against it.

The Republicans’ incompetence in government is inextricably connected with their ideological extremism, as the latest events demonstrate. Hogtied by the craziness of the ultra-right Tea Party faction, the House GOP leadership cannot even cooperate with other Republicans in the Senate – who overwhelmingly voted for the “cliff” deal negotiated with Vice President Joe Biden – let alone conduct serious discussions with the White House.

Having refused to support the leadership’s “Plan B” scheme to raise taxes only on households making $1 million or more annually – despite confident claims by Boehner and Cantor that they had counted the necessary votes — the Republican caucus made both themselves and their leaders look ridiculous. It was a dreadful right-wing plan, but still much too liberal for too many of them. Tacitly acknowledging that he could no longer manage his restless wingnuts, Boehner insisted that the Senate and White House should come up with an emergency measure on their own.

Yet when the Senate leadership, including Minority Leader Mitch McConnell, offered a bill negotiated with Vice President Joe Biden — just as Boehner had urged — the House Republicans descended into crisis. Their leaders couldn’t endorse the bill, fearing that the GOP caucus crazies would defenestrate them. But they could hardly employ their usual partisan tactics to keep the bill off the House floor, after the Senate had passed it by a vote of 89-8, with only five Republican defections. They might have noticed as well their declining numbers in every public poll, with the latest Republican-leaning Rasmussen survey showing a Democratic lead in the generic congressional contest of 11 points and climbing.

Astonishingly, they nevertheless wasted several hours debating whether to amend the bill with new spending cuts and then send it back to the Senate, where leaders of both parties would have surely and justly rejected such tardy handiwork. Consistent only in their ineptitude, the House Republicans were reportedly unable to agree among themselves on exactly how to change the bill, in any case.

Finally, they folded – or at least their leaders did – and proclaimed that they were girding themselves for the battles to come over the budget and the debt ceiling, which have now been postponed for another month or so.

The deal itself is not a bad one, from the Democratic perspective, raising significant new revenues from the wealthiest taxpayers and excluding any “grand bargain” (or raw deal) to weaken Medicare, Social Security and Medicaid. Its specific provisions are still far too generous to the highest-income taxpayers and will not, in the long run, raise enough revenue to sustain decent government, rebuild the nation’s infrastructure, and prepare for the future.

The struggle over what government should do and how to pay for its functions continues, almost immediately. And perhaps soon the president and his party will explain, without hesitation, what this brief tumble over the “cliff” has shown us, and what we may hope they have finally learned: That there is no negotiating partner among the House Republicans, who must be defeated if progress is to be possible.

January 2nd, 2013  12:25 am Joe Conason

 
Leave a comment

Posted by on January 2, 2013 in Tax Relief

 

IRS retroactively removes de minimis rule for testing partnership allocations

IRS has retroactively removed a de minimis rule in the partnership regs because it may have resulted in unintended tax consequences. The rule had provided that, for purposes of determining substantiality of a partnership allocation, the attributes of de minimis partners (those owning less than 10% of capital and profits and who are allocated less than 10% of each partnership item) need not be taken into account. IRS will study alternative approaches suggested by commentators.

Background. Under Code Sec. 705(b), a partner’s distributive share of income, gain, loss, deduction, or credit (or item thereof) is determined in accordance with the partner’s interest in the partnership (determined by taking into account all facts and circumstances) if the allocation to a partner under the partnership agreement of income, gain, loss, deduction, or credit (or item thereof) does not have substantial economic effect. The determination of whether an allocation of income, gain, loss, or deduction to a partner has substantial economic effect involves a two-part analysis that is made as of the end of the partnership tax year to which the allocation relates. (Reg. § 1.704-1(b)(2)(i)) (1) The allocation must have economic effect within the meaning of Reg. § 1.704-1(b)(2)(ii); and (2) the economic effect of the allocation must be substantial within the meaning of Reg. § 1.704-1(b)(2)(iii).

In general, for an allocation to have economic effect, it must be consistent with the underlying economic arrangement of the partners. This means that, if there is an economic benefit or burden that corresponds to the allocation, the partner to whom the allocation is made must receive such economic benefit or bear such economic burden. In general, the economic effect of an allocation (or allocations) is substantial if there is a reasonable possibility that the allocation (or allocations) will affect substantially the dollar amounts to be received by the partners from the partnership, independent of tax consequences.

Removed de minimis partner rule. Under the de minimis partner rule, for purposes of applying the substantiality rules, the tax attributes of a de minimis partner did not need to be taken into account. A de minimis partner was any partner, including a lookthrough entity, that owned, directly or indirectly, less than 10% of the capital and profits of a partnership, and who is allocated less than 10% of each partnership item of income, gain, loss, deduction, and credit.

IRS says that commentators agreed with it that the de minimis partner rule was too broad, was easily abused, and/or was not consistent with sound tax policy. Accordingly, the rule has been removed from the final regs.

Alternative approaches. The preamble to the proposed regs requested comments on how to reduce the burden of complying with the substantial economic effect rules, with respect to lookthrough partners, without diminishing the safeguards the rules provide. In response to this request, IRS received a number of comments. Some commentators requested that future guidance in regs amend the de minimis rule, while others suggested alternative approaches for de minimis partners and look-through partners. IRS says it needs more time to consider these comments and may address them in future guidance.

Effective date. Whether an allocation is considered to be substantial is generally determined at the time the allocation becomes part of the partnership agreement. The final regs provide that the de minimis partner rule does not apply to allocations that become part of the partnership agreement on or after Dec. 28, 2012. (Reg. § 1.704-1(b)(2)(iii)(e)(1))

With respect to preexisting allocations, IRS agreed with one commentator who suggested that the de minimis partner rule was sufficiently flawed that it should not continue to apply to allocations that became part of the partnership agreement before its removal. Accordingly, the final regs are effective, and the de minimis partner rule is no longer applicable, for all partnership tax years beginning on or after Dec. 28, 2012, regardless of when the allocation became part of the partnership agreement. Thus, the substantiality of all partnership allocations, regardless of when they became part of the partnership agreement, must be retested without the benefit of the de minimis partner rule. For allocations in existing partnership agreements, the retest has to be as of the first day of the first partnership tax year beginning on or after Dec. 28, 2012. (Reg. § 1.704-1(b)(2)(iii)(e)(2); T.D. 9607)

References: For partnership allocations, see FTC 2d/FIN ¶ B-2400 ; United States Tax Reporter ¶ 7044 ; TaxDesk ¶ 586,100 ; TG ¶ 2162 .

(12/27/2012)
Federal Taxes Weekly Alert Newsletter

 
Leave a comment

Posted by on December 27, 2012 in Tax Relief

 

Tags: , , , , ,

IRS Proposes Regs on Additional Medicare Surtax

The Internal Revenue Service has issued proposed regulations on the 0.9 percent Additional Medicare Tax for upper-income taxpayers scheduled to take effect next year as a result of the Affordable Care Act.

The proposed regulations in REG-130074-11 provide guidance for employers and individuals relating to the implementation of Additional Medicare Tax. The guidance also contains proposed regulations relating to the requirement to file a return reporting Additional Medicare Tax, the employer process for making adjustments of underpayments and overpayments of Additional Medicare Tax, and the employer and employee processes for filing a claim for refund for an overpayment of Additional Medicare Tax. In addition, the document provides notice of a public hearing on the proposed rules.

In addition, the IRS posted a FAQ on the Net Investment Income Tax of 3.8 percent on the net investment income of individuals, estates and trusts above a certain threshold. It too takes effect next year as a result of the Affordable Care Act.

The IRS noted that calculating wages for purposes of withholding Additional Medicare Tax would be no different than calculating wages for FICA generally. Thus, for example, if an employee has amounts deferred under a nonqualified deferred compensation plan and the nonqualified deferred compensation is taken into account as wages for FICA tax purposes under the special timing rule, the NQDC would likewise be taken into account under the special timing rule for purposes of determining an employer’s obligation to withhold Additional Medicare Tax.

Similarly, when an employee is concurrently employed by related corporations and one of the corporations disburses wages for services performed for each of the employers and the arrangement otherwise satisfies the common paymaster provisions, the liability for FICA tax with respect to the wages disbursed by the common paymaster is computed as if there was a single employer. In this case, the obligation to withhold Additional Medicare Tax on wages in excess of $200,000 disbursed by the common paymaster would also be determined as if there was a single employer.

The proposed regulations provide rules for the withholding, computation, reporting and payment of Additional Medicare Tax on wages, self-employment income and Railroad Retirement Tax Act compensation. The proposed regulations also provide rules for when and how employers may make an interest-free adjustment to correct an overpayment or an underpayment of Additional Medicare Tax and how employers and employees may claim refunds for overpayments of Additional Medicare Tax. These procedural rules for interest-free adjustments and claims for refund track the existing rules that apply to income tax withholding rather than the rules that apply to FICA tax. The regulations take this approach because Additional Medicare Tax, like income tax withholding, does not include an employer portion, and the ultimate liability is reconciled on the individual employee’s income tax return.

The proposed regulations also update the rates of tax for the Social Security and Medicare tax on employees, and add a paragraph describing the rate of Additional Medicare Tax. The proposed regulations provide an updated example illustrating that the Social Security and Medicare rates applicable to the calendar year in which wages are received apply to compute the tax liability.

The proposed regulations describe the extent to which an employer is required to withhold Additional Medicare Tax. The proposed regulations provide that an employer must withhold Additional Medicare Tax from an employee’s wages only to the extent that the employee receives wages from the employer in excess of $200,000 in a calendar year. In determining whether wages exceed $200,000, an employer does not take into account the employee’s filing status or other wages or compensation which may impact the employee’s liability for the tax. An employee may not request that the employer deduct and withhold Additional Medicare Tax on wages of $200,000 or less.

However, an employee who anticipates liability for Additional Medicare Tax may request that the employer deduct and withhold an additional amount of income tax withholding under Section 31.3402(i)-2 on Form W-4. This additional ITW can apply against taxes shown on Form 1040, including any Additional Medicare Tax liability. An employee might request that the employer deduct and withhold an additional amount of ITW on wages that are not in excess of $200,000 if, for example, the employee is married and files a joint return, and anticipates liability for Additional Medicare Tax because the combined wages of the employee and the employee’s spouse will exceed $250,000.

The proposed regulations include examples illustrating the extent of the employer’s obligation to withhold Additional Medicare Tax.

Further, the proposed regulations under section 3102(f) provide that to the extent Additional Medicare Tax is not withheld by the employer, the employee is liable for the tax. The proposed regulations also provide that the IRS will not collect from an employer the amount of Additional Medicare Tax it failed to withhold from wages paid to an employee if the employee subsequently pays the Additional Medicare Tax.

However, the proposed regulations also specify that the employer would remain subject to any applicable penalties or additions to tax for failure to withhold Additional Medicare Tax as required.

Washington, D.C. (December 4, 2012)
By Michael Cohn

 
Leave a comment

Posted by on December 6, 2012 in Tax News

 

The New Upcoming Tax Rates

As the saying goes, nothing is certain but death and taxes. we’d like to clarify that bit of common wisdom. You see, as certain as the payment of taxes may be, what isn’t certain is how much individual Americans will be paying. If the legislature and the president can figure out a way to work together, it is likely that at least those Americans making over $200,000 (or married taxpayers making $250,000) will see their top marginal rates go back up to the pre-Bush Tax Cuts level of 39.6%.

So what does that mean?

As we explained in January, the current top marginal rate for 2012 is 35% on every dollar of taxable ordinary income earned by an individual or married couple over $388,350.00. President Obama has proposed increasing that rate to 39.6% for every dollar of taxable earned income earned over $390,051. He has also proposed raising the second-highest marginal rate from 33% to 36%, so that every dollar of taxable ordinary income earned between $193,501 ($241,901 for married couples) and $390,051 will be subject to 3% additional taxes. The result, if President Obama gets his way, is that many middle-class families will be paying higher taxes in 2013.

And wait there’s more in the package

On top of these proposed increases in marginal rates, additional taxes are set to be imposed on middle and upper-income families by the Affordable Care Act (AKA Obamacare.) Individuals will also pay an additional 0.9% in hospital insurance payroll taxes on wages over $200,000.

And I haven’t even discussed changes in the dividend and capital gains tax rates yet. The preference for qualified dividends is set to expire in 2013. That means that the qualified dividend will disappear without government intervention. And even if the government can reach a deal, it is likely that President Obama will insist that dividend taxes go up as part of any grand bargain. This goes along with his desire to impose the so-called “Buffet Rule.” Top rates on dividends would increase to 39.6% under Obama’s proposals during the presidential campaign. Right now, qualified dividends are taxed at similar rates as long-term capital gains, with a top rate pegged at 15%. No matter where the top rate on dividends ends up, Obamacare tacks on an additional 3.8% to all dividends and capital gains for certain taxpayers. The result is staggering. If you were paying 15% on dividends in 2012, you could be paying almost three times as much (or 43.6%) on those same exact dividends in 2013. Capital gains rates are also set to increase. In 2012, the top rate on Long-Term Capital Gains was 15%. The top rate is set to increase to 20%, and it is also subject to the 3.8% Medicare contribution tax discussed above.

The Republican-led House wants to see the Bush Tax Cuts extended for all Americans in 2013. If the House gets its way, people will be paying roughly the same amount in taxes that they paid in 2012. However, this is unlikely because of what will happen in the case of a political stalemate on this issue. It’s likely that President Obama will get what he has been asking for the entire campaign season. “Wealthy” (but really middle class) Americans will pay “a little bit” more and that’s because if a deal can’t be struck, everyone loses.

To see why, let’s imagine a deal can’t be struck. What happens then? In that case, the Bush tax cuts will expire for everyone. That’s right, everyone’s taxes will go up. Currently, income that falls within the lowest tax bracket is taxed at a rate of 10%. That rate will increase automatically to 15% if our government fails to act. The other rates will changes as follows: 25% to 28%, 28% to 31%, 33% to 36%, and 35% to 39.6%. One result of this scenario is that less Americans will be subject to the Alternative Minimum Tax. Instead of 36% of taxpayers being exposed to the AMT under current tax rates, 20% will be exposed to the AMT if congress does nothing. That’s because they will be paying more in taxes under the progressive tax structure.

Worse news. It gets worse. For everyone.

Right now, anyone receiving W-2 income is receiving a 2% break on their portion of payroll taxes (as are those individuals required to pay Self-Employment taxes), and that break will disappear if congress fails to act (and is likely going away even if a deal is struck.) The bottom line is that we all should be prepared to deal with an increase in our 2013 income tax rates. There isn’t much that can be done to avoid whatever the government tosses at our feet. Taxes are certain. If you thought the coming changes in income tax rates is scary, then you’ll want to take a look at our other article about death taxes, gift taxes, and how to plan for the coming changes in 2013. (link coming) We will continue to follow developments in the changes to tax rates and tax brackets as our government begins the grueling process of avoiding taxmaggedon and other parts of the looming fiscal cliff, so be sure to check for updates at: http://www.irsmedic.com.

 
Leave a comment

Posted by on November 15, 2012 in Tax News