The Importance of Tax Planning – Run the Scenarios, Minimize the Impact of the ‘Fiscal Cliff’

Posted By on Dec 19, 2012|0 comments


There’s no avoiding it—the ‘fiscal cliff’ may be on its way. In my recent post Team Up to Prepare Your Clients for the ‘Fiscal Cliff,’ I outlined ways to provide your clients with additional value and advice during this uncertain time. While I highlighted The Wall Street Journal’s infographic about how taxes will be impacted in “Most Households Face ‘Fiscal Cliff,’” let’s dive deeper into the nitty gritty.

My accountant Jon Bunyak, founder of Bivins & Bunyak, CPAs, PLLC, recently gave a webinar entitled 2013 Party Over, Oops Out of Time**” How the End of Bush Tax Cuts will Impact You in 2013.” After further discussion with Jon, I thought it would be best to share a scenario about how looming tax increases from the ‘fiscal cliff’ would impact an “average” couple.

For this example, let’s consider a working couple, Geoff and Victoria, with one child, Charlie. Geoff and Victoria earn $50,000/year each, lack investments that are taxable now, own a home, and live in Colorado.  Their tax return for 2013 (as of now with NO CHANGES MADE) would look like this:

Est. 2013

Est. 2012

Wages

$100,000

$100,000

AGI (Adjusted Gross Income)

100,000

100,000

Itemized Deductions  [This includes mortgage interest, property taxes (home and vehicles), donations, etc.]

(15,000)

(15,000)

Exemptions (Three individuals, assuming $3,800 per exemption for 2013 and $3,750 for 2012)

(11,400)

(11,250)

Taxable Income

73,600

73,750

Federal Tax  (*See below for calculation; taking into consideration ‘Marriage Penalty’ for 2013)

12,951

10,498

Credit for child (Set to be cut in half for 2013; $1,000 in 2012)

(500)

(1,000)

Total Federal Tax

12,451

9,498

Total State Tax  (4.63% in CO)

3,457

3,554

Total Taxes

$15,998

$13,032

Federal Taxes withheld (*Assuming claimed “Married – 2” for both, amounting to $3,900 each. If they happened to choose “Married – 3” since they have a child, the amount withheld would be even LESS!)

(7,800)

(7,800)

State Taxes withheld (Same assumption, $1,488 each)

(2,976)

(2,976)

Total Taxes Due

$5,222

$2,276

Under the current slate of tax changes accompanying the ‘fiscal cliff,’ Geoff and Victoria would pay almost $16,000 in income taxes, $5,222 of which they would likely owe with their tax return. During 2013, they will have also paid 2% more in FICA taxes (Social Security and Medicare taxes) than in 2012, for a total of $7,650 (7.65% of their income).  This means that they will have paid almost $23,650 in taxes on $100,000 in total income.

On the other hand, in 2012, they paid $18,702 on the same $100,000 [the $13,032 of “Total Taxes” outlined above plus $5,650 in FICA taxes (5.65% of their $100,000 income)].

With the $4,950 in additional taxes Geoff and Victoria will have paid in 2013, they could have funded one of their Roth IRAs or contributed to their child’s college education fund. It’s not just pocket change. By being proactive and addressing potential tax implications with your clients, you can help them minimize the impact of the ‘fiscal cliff.’

Homework: Run scenarios for your clients and for yourself so that you and your clients can be prepared for whatever lies ahead.

 

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