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Taxes Taxes Taxes

January 2nd, 2013 at 07:03 pm

I have extremely mixed feelings about the tax bill that just passed in Congress. I will note the changes at the end of this post, for inquiring minds who want a quick summary.

My feelings are a little bit of "Holy heck, our taxes would have been insane" without these tax extensions. On the flip side, the tax extensions are expected to add $4 trillion to the deficit over the next decade. My ire goes to why these tax cuts were ever put in the first place (during times of high spending/war, etc.). This can be seen as very political, but to me it just is what it is. We certainly wouldn't run our household in this way financially - it is totally insane.

I think a lot of it is fine temporarily with the economy in the toilet, but not sure why so much of this is being made more permanent.

As to Congress? Seriously? Like you couldn't have figured this out 30 days ago? 2 weeks ago? Life has been rendered beyond complicated for me in the tax field. I feel more sorry for software developers and the IRS, though.

I am so relieved AMT is patched and we saved that $500. Not that I have strong opposition to paying another $500 in taxes. But I Really thought Congress was going to pay lip service to middle class tax cuts while letting stealth taxes like AMT run rampant. As they have been for a long time. The fact it was going to affect us was not a good sign for the lower middle class. I am more relieved that they made a permanent patch, indexed to inflation. This should have been done about 15 years ago...

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I ran some tax projections today. We are still at owing about $1,000; is what I projected early in 2012. Final number was highly dependent on medical bills for the year, which ended up as low as could be.

I ran tax projections for next year, but our software has not been updated for the very recent tax law changes. So, I refigured what it will be. Interesting to note, our taxes would have gone up $2500 this year without recent tax law changes. Add in $1500 for the payroll tax holiday ending. That is no small sum, to me. 5% of our income would have gone to increased taxes. Ouch! Dodged a bullet, for sure. We'd survive, but not sure how most people would handle it. Which is why I have so many mixed feelings... (ETA: I think more to the point - our Federal income taxes would have about *doubled* with that $2500 increase. Ouch! I think that is what bothered me more than anything. I'll agree our taxes are too low and should go up, but no matter how you slice it, it is going to be painful when it comes to pass).

Since the payroll tax holiday expires, and my withholdings are probably due for a change due to less medical deductions allowed in 2013 (Obamacare tax increase) and lower mortgage rates, I refigured my paycheck at a few different exemption levels. Decided to move my allowances down from 12 to 10. I also increased my state withholding by $20 per month.

The net effect of all this is to decrease my paycheck by $230 per month. But would have me at about breakeven for our taxes *this year.* Which means we will still owe a little next year with all the reduced deductions - is fine.

Our health insurance also went up about $75/month. So we are down about $300/month between this and taxes. I had set aside the payroll tax holiday and refinance "monthly savings" to our savings account last year, but will lose that $300/month.

This leaves my savings goals mostly as is:

--$1200/month to short-term savings. I was thinking of upping this to $1300 for property tax increases, but that will only be half the year, and I have run out of savings room anyway. Paying more income taxes and owing less later will help with just keeping our savings at $1200/month. All this money is spent within the year (mostly various insurances and taxes)

--$400/month to mid-term savings.

--Max out ROTHs, of course

--Overtime saved for China

--Extra mortgage payments will have to be snowflaked and come from other income sources. I think $4k is still very possible. Dh's folks seem very generous of late. It is also not every year that we will be saving a large sum for an overseas trip. More like "once every decade or two." So still gives us wiggle room for ever rising health insurance and ability to prepay more to the mortgage in future years, all else being equal.

--Raise? Perhaps, but doubt it will be much if anything. If so, I will put it to the ROTHs. We have been doing about $800/month. $900/month is a better clip for the new contribution limits. (It doesn't matter for this year, since I already advanced the additional $1000, but will help for next year, and is probably where any raise should go).

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**I harvested some capital gains in the kids' accounts this year, since the stock market kept going up, up and up. Basically, first $1900 or so of investment income is tax-free for them, annually. I was also unsure if this would still be true for 2013 (0% capital gains rate for them, and us, in 2012).

We don't bother with the complications of 529s and such, because hell would freeze over before we actually were eligible for any financial aid, and because it is pretty darn simple at this stage in the game to keep their earnings tax-free. Our strategy can always be re-evaluated as money grows and actually starts hitting kiddie tax limits. For now, I sell high and reset the cost basis of their mutual funds. This is the first time I have ever had any motivation to do so (in about 10 years).

I checked today and they were well under the limit. They both had about $1,100 in investment income for 2012. I was checking to be sure, when projecting our taxes.

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**Did you hear that California now has highest income tax bracket in the U.S. 13.3%? Ouch! A huge tax increase just went into effect on higher incomes. Thing is we already totally gouge the rich. I don't intend to ever be *that* rich, so we are okay. Our effective income tax rate for 2012 was less than 1% of my salary.

It's such a progressive tax state, that I don't have many complaints at our income level. I was thinking of tracking our sales taxes this year, out of curiosity. I don't think we pay that much because we don't consume that much. But I am curious to see real numbers. I may only have the energy to track for a month. Might be pretty tedious.

Obviously this is more painful with big purchases. So not that it never affects us - but less likely to affect us much on a day-to-day basis.

The ugliest taxes we pay are probably gasoline taxes. I should probably track those too.

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Recent Federal tax changes of note:

--Top rate 39.6% (up from 35%) for individuals making $400k+ and married households with $450k+ income.

--Payroll tax holiday is gone - Social security tax goes up from 4.2% to 6.2%, starting January 1.

--AMT patch made permanent, indexed to inflation, starting 2012.

--The maximum capital gains tax will rise from 15% to 20% for individuals taxed at the 39.6% rates ($400k+ income, as noted above)

--The itemized deduction phase-out is reinstated, and personal exemption phase-out will be reinstated, but with different AGI starting thresholds (adjusted for inflation): $300,000 for married filing joint, and $250,000 for single.

--The estate tax will continue to provide an inflation-adjusted $5 million exemption (effectively $10 million for married couples) but will be applied at a higher 40% rate (up from 35% in 2012).

--The $1,000 Child Tax Credit will be extended through 2017.

The following is for 2013 only:

--No taxes on discharge of debt (e.g. foreclosure) for primary residence.

--Mortgage insurance premiums treated as deductible interest.

--college tuition deductions

--favorable business write-offs for equipment purchases, extended one year

12 Responses to “Taxes Taxes Taxes”

  1. Jenn Says:

    Thanks for your summary of tax changes. If only news articles could be so concise!

  2. ThriftoRama Says:

    How did you acquire mutual funds for the kids? Did you open an account with their SSNs? just curious. I too am in disbelief about this whole fiscal cliff thing has played out. It's shameful really that our leaders cannot get it together, and that we seem incapable of addressing any of the nation's real, long-term problems.

  3. MonkeyMama Says:

    @Thrift - The kids have UGMA accounts. The money belongs to them, but they need an adult custodian.

    I am careful to bring up the financial aid aspect whenever it comes up - there are several other reasons why UGMAs may not be ideal. All my kids have is gift money from other people, is doubtful it will even be used for college, and so on and so forth. So it makes the most sense for this money. I personally would not move any of our own assets into a UGMA for them.

  4. LuckyRobin Says:

    Do you know if HSA's will still be fully deductible in 2013? These are ones financed with after tax dollars, not pre-tax dollars. I am not looking forward to what the end of the payroll tax holiday is going to do to us. Thank goodness we will soon be out of credit card debt. That will give us a lot more breathing room, but it will slow down all of our other goals for the year.

  5. MonkeyMama Says:

    Yes - HSA is still fully deductible in 2013.

  6. LuckyRobin Says:

    Oh, thank goodness. You know, I am so grateful you are on these blogs and you can really explain things to the rest of us when it comes to taxes!

  7. scfr Says:

    Thanks for the updates and thoughts MM. Always educational to hear your insights.

    QUOTE: "I feel more sorry for software developers and the IRS, though." Since I use Turbo Tax to do our taxes, this has me wondering if I should not be in a hurry to get them done ... Give them time to work the bugs out since they'll probably be rushing to incorporate the changes and some errors and bound to occur?

    QUOTE: "--The estate tax will continue to provide an inflation-adjusted $5 million exemption (effectively $10 million for married couples) but will be applied at a higher 40% rate (up from 35% in 2012)." A personal mission of mine is to remind people every chance I get that if you have a non-citizen spouse the spousal exemption doesn't apply automatically. Now that the estate tax has been raised to $5M it won't affect as many, but back when it was $1M some non-citizen spouses who lived in HCOLAs where real estate prices had shot up had unhappy & completely unexpected surprises when their spouse passed. Not only "rich" people were being hit with the estate tax. Imagine a couple with a house they bought at $200K that shot up to $800K during the real estate bubble and $700K in retirement savings, with the citizen spouse (often the husband) dying at age 65, before they started spending down their savings. Estate taxes would be owed on $500K. This sometimes resulted in the non-citizen spouse being forced to sell the house. If you have a non-citizen spouse, pay closer attention to what happens with the estate tax!


  8. Looking Forward Says:

    Agreed on all points! This whole "Fiscal Cliff" thing should have been dealt with at least before the holidays. And you are totally right - there isn't a household, or business for that matter, that could treat their finances like our gov does.

    Thanks for the great, detailed post. Smile

  9. MonkeyMama Says:

    Yes, I would hold off on any tax software purchase for a bit. Though I am sure they do online updates for all the changes. So purchasing is maybe okay - but doing taxes should probably wait. IRS will have to announce when they are ready to accept tax filings - will be delayed.

  10. MonkeyMama Says:

    @LF - I know many businesses and individuals that treat their finances like the government. LOL. But I know what you mean - does not mean they thrive and survive...

  11. Looking Forward Says:

    Yeah, I hear you. My boss is not good with his money at all.

  12. Caoineag Says:

    Yeah, the AMT patch saved us about $1400, was surprised by the flip. (I start using software in the fall to gauge because we can land all over with our income). I can imagine that despite them having a little button to switch AMT patch on and off, my software won't issue a final patch for quite some time. That was a very last minute change to taxes.

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