How much do you keep of what you earn? 2013 Tax Plan

Have you noticed “The IRS” spells “Theirs”?  Paying tax is required.  How much you pay is determined, in part, by how you plan.

If you are married, or plan to be, for the 2013 Federal tax year, now is the time to look at your potential tax liability and determine your financial plan. Nobody wants to find out at the end of year that they owe taxes when there is little time to do anything about it.

The U.S. uses a graduated tax rate, which means that the tax rate increases as the income goes up.

There are five filing statuses:

  • Single (S)
  • Married Filing Joint (MFJ)
  • Married Filing Separate (MFS)
  • Head of Household (HOH)
  • Qualifying Widow (er) with Dependent Child (Q/W)

More than one filing status can apply to you. You can choose the one that gives you the lowest combined tax.

Generally, Married Filing Joint will result in the lowest amount of tax. There are exceptions and good tax planning involves reviewing “what if” scenarios.

Are you “withholding” enough to cover the estimated tax liability by the end of the year? If not, you need to either increase your withholding or use other methods, such as deferring income, to decrease the estimated amount owed.

The following will help you get started:

Filing Single is the easiest. All you need to decide is if you are going to save more money by using the Standard Deduction or to itemize deductions.

Married Filing Joint (MFJ) can be used if:

You are married on the last day of the year

Both you and your spouse report all your income, exemptions, deductions, and payments

Both spouses must sign the tax return because both of you may be held responsible for accurate reporting and tax payment

Married Filing Separate

Report your income, exemptions, credits, and deductions

Different rules apply if you live in a community property state. See Publication 555

You will “generally” pay more combined tax on Married Filing Separate returns than you would on Married Filing Joint returns for the reasons listed under “Special Rules” in IRS Publication 501

Some of the “Special Rules” include:

If your spouse itemizes deductions, generally, you cannot take the standard deduction

You cannot take the student loan interest deduction, the tuition and fees deduction, the education credits, or the earned income credit.

There are reasons why you might want to choose the Married Filing Separate (MFS) status:

  • You only want to be responsible for the accuracy and the payment of your tax liability
  • If your Adjusted Gross Income  (AGI) is lower by filing MFS than MFJ you may be able to deduct a larger amount for certain deductions that are limited by AGI such as medical expenses. For the 2012 tax year, you can deduct only the part of your medical and dental expenses that exceeds 7.5% of your Adjusted Gross Income. This increased to 10% for 2013.
  • Head of Household is for unmarried, or are considered unmarried, you provide a home for certain persons, and you meet the criteria by passing one of two tests. Detailed information can be found at IRS.Gov.

Tax rules are complicated and this is by no means comprehensive. Hopefully, it is enough to encourage you to look at your tax situation and to take action so you are not surprised with a big tax bill next year. A large return because of overpayment equates to giving the IRS an “interest free loan”.

Suggestions:

Use the 2012 tax rules to estimate your 2013 income and the amount of federal tax withheld

If it appears that you will either owe or have a possible large refund, consider filing a new W-4, the Employee withholding Allowance Certificate, with your employer

Reasons to change the amount withheld may include a change in your marital status or your dependents. Perhaps, you bought a house this year and know you will have enough deductions to itemize rather than use the standard deduction. Maybe, because of multiple jobs, too much is being withheld from your checks.

You work hard for your money. Don’t you want to keep as much as you can? After all, it is yours, not all theirs.

Defense of Marriage Act is Dead. Now What?

Credit: Getty Images

Credit: Getty Images / SAN FRANCISCO, CA – JUNE 28: Supporters applaud as same-sex couple Sandy Stier (2R) and Kris Perry (R) prepare to get married at San Francisco City Hall by California Attorney General Kamala Harris on June 28, 2013 in San Francisco, California.

My name is Deb Fox and I am a CPA and this is my first blog post. As a CPA I was aware of the financial inequalities created by the Defense of Marriage Act (DOMA) and I felt that it was wrong. I was elated to learn that the Supreme Court of the United States agreed with me.

I have the unusual blessing of having not one, but two gay brothers. One is my younger brother; he and his partner have been together for 13 years and they live in San Diego. The other is my older stepbrother; he and his partner have also been together for many years and live in Orlando, Florida.

Our parents are in their early 80’s and have been great role models for all of us. They have always been accepting of my brothers and their relationships. Our family is very close and we enjoy our time together as much as possible. We are fortunate to be blessed by loving and supportive relationships. This post is dedicated to my brothers and to all those that celebrate this victory with me.

A brief history of DOMA & a glimpse into what it means now for the 130,000 same-sex couples that are legally married living in the current 13 states and in the District of Columbia:

DOMA History:

  • In 1993, the Supreme Court of Hawaii, ruled that the state needed to show a “compelling state interest” in disallowing gays and lesbians from marrying
  • The case turned marriage into a possibility of obtaining the same rights of partnership as heterosexuals
  • In 1996 DOMA was signed into law, which restricted federal law from recognizing any unions between two persons who were not a man and a woman. The rule also said that no state had to accept any other states definition of marriage
  • On 6/26/13, the U.S. Supreme Court declared DOMA (section 3) unconstitutional .The federal government cannot discriminate against married lesbian and gay couples for the purposes of determining federal benefits and protections
  • States can still define marriage (section 2). The IRS will provide guidance about what happens if you are in a non-same sexed marriage recognition state

By striking down DOMA this now means that same-sex couples who are married in the 13 states and DC where same-sex marriage is legal are now “qualified” (spouse related) to receive:

Federal Benefits:

  • Receive Social Security, Medicare, & Disability Benefits
  • Receive Veterans & Military Benefits
  • Receive Cobra health insurance benefit continuation for your spouse
  • File Married Filing Joint or Married Filing Separate if you are married on 12/31/13

Employment Benefits:

  • Not be taxed by your employer for the health care benefits provided for your spouse
  • Take Family Medical Leave for your spouse
  • Receive wages and retirement plan benefits for deceased spouse

Gift/Estate Tax:

  • Make unlimited tax-free gifts to each other as long as the receiving spouse is a U.S. citizen
  • Leave your assets to your spouse without incurring estate taxes (Edie Windsor)

Congratulations to those that have been married for years & have not had the rights or the benefits as those heterosexual couples that obtained them when they spoke “I do”.

There is a lot to be considered with this recent decision by the Supreme Court which is why I have limited this initial post to the 2013 tax year. The IRS will soon let us know if we need to consider the tax implications retroactively – 3 years back or not.

But for now my friends, this is the time for you to:

  • Enjoy the 1,138 spousal benefits provided by the federal government – if you are in a same-sex marriage and living in a location that recognizes your marriage
  • Consider changing your W-4 from single to married.  You need to make sure that you are “withholding” enough to prevent being accessed a penalty
  • Know that the United States tax is a “pay as you go” tax system, which means that tax must be paid as you receive or earn your income. See IRS Topic 306 – Penalty for Underpayment of Estimated Tax
  • Celebrate – it is Pride week here in San Diego! Maybe, I will meet you there?

Happy Pride and Congratulations on a long fought battle.