One way to do tax planning at the end of the year is to get a preliminary idea of how much your tax liability is, how much you have paid in so far, and figuring out how much of a refund or balance due you might have. You can do this yourself using tax software, or you can ask your tax professional to do this for you.
The goals of running a preliminary tax calculation:
- Figure out how much your federal and state tax liability is
- Figure out how much you have paid in so far (through withholding and estimated payments)
- Figure out how much you have left to pay or if you've overpaid already
- Figure out if there's any data being asked by the software or by your accountant that you need to collect or could organize better.
Once you have a pretty solid calculation of your tax liability, you can take a look at what the tax impact will be if you earn additional income and/or take additional deductions. Some tax programs even have whaat-if utilities to help you build and compare different scenarios for your income and deductions.
Some resources to help you out:
- Preview of TaxACT and TaxSlayer tax software programs (from About Financial Software)
- Top 5 tax software programs (from About Financial Software)
In order to plan out your taxes for the year, you'll need numbers. How much income have you earned so far, how much might you earn for the rest of the year? How much money have you spent on supplies, furniture, equipment, health insurance and other tax-deductible expenses? In short, you'll need to tally your income and expenses by category. From here, you or your accountant can work with tax software to come up with calculations for what your tax liability for the year is. So in order to get to this step, you'll first want to make sure your financial data is organized and up-to-date.
Some suggestions: Read More...
The IRS has updated Form W-9, Request for Taxpayer Identification and Certification.
The newly revised Form W-9 has added a line item for taxpayers to indicate an "Exemption from FATCA reporting code (if any)." And in the certification section of the form, the IRS added a fourth item, which reads, "The FATCA code(s) entered on this form (if any) indicating that I am exempt from FATCA reporting is correct."
The Instructions for Form W-9 have also been revised, these instructions are included with the form itself. The IRS has also revised the Instructions for the Requester of Form W-9.
The acronym FATCA refers to the Foreign Account Tax Compliance Act. This act requires that US persons report the value of their foreign bank and financial accounts to the IRS on Form 8938 if the total value of all foreign financial accounts exceeds $50,000 at any time during the year. FATCA also requires foreign banks to report interest, dividends and other earnings on foreign accounts to the IRS.
The new Form W-9 lists thirteen FATCA exemption codes on page 3 of the instructions. Individual taxpayers are generally not exempt from FATCA reporting by their financial institutions unless one of the thirteen exemptions applies to them.
A chart showing the average income earned by taxpayers in different age groups, using tax data from the year 2011.
For more details, see "Incomes Tend to Rise with Age" (Tax Foundation).
Image copyright belongs to the Tax Foundation and is used with permission.
Tax planning for the Net Investment Income Tax is similar to traditional tax planning. The goal is to manage net investment and adjusted gross income in an effort to reduce the amounts that are subject to tax. However, the net investment income tax (NIIT) adds further complexity, as the NIIT is based on the lesser of either adjusted gross income over a threshold amount or net investment income for the year. Planning strategies for the NIIT focuses on managing adjusted gross income, managing investment income or managing both. Read More...
Senator Max Baucus, chairman of the Senate Finance Committee, released three separate drafts of tax reform proposals this week.
On November 19, Baucus released proposals for reforming how businesses are taxed on their international operations.
- News Release: Baucus Unveils Proposals for International Tax Reform
- 1-page Summary (PDF)
- 6-page Detailed Summary (PDF)
On November 20, Baucus released proposals dealing mostly with tax administrative issues.
- News Release: Baucus Unveils Proposal to Combat Tax Fraud, Make Filing Safer, Simpler and More Efficient
- 1-page Summary (PDF)
- 9-page Detailed Summary (PDF)
- 50-page Technical Explanation from the Joint Committee on Taxation (PDF)
- 64-page legislative language (PDF)
And on November 21, Baucus released proposals to reform rules around depreciation.
- News Release: Baucus Works to Overhaul Outdated Tax Code
- 1-page Summary (PDF)
- 12-page Detailed Summary (PDF)
Of these three sets of tax reforms proposals, I found the proposals on tax administration to be the most interesting. Read More...
Several tax breaks are scheduled to expire at the end of the year 2013. Taxpayers may want to consider taking advantage of these tax breaks while they still exist as part of any year-end tax moves. Along the same lines, taxpayers who have been utilizing these tax breaks may want to prepare for the possibility of these tax breaks not being available for the year 2014, and adjust their withholding or estimated tax payments for 2014 accordingly. In order for these tax breaks to be renewed, Congress would need to pass new legislation to extend these tax breaks to future years. Read More...
"The question of who benefits from government spending is just as important as the question of who pays taxes. In other words, how do tax and spending policies redistribute income?"
This was the question asked by researchers at the Tax Foundation. The result is summarized in the following chart:
The IRS released the tax rates for 2014. Each of the tax brackets were adjusted for inflation. The following chart shows the marginal tax rate that applies to each bracket of taxable income. In the rightmost column is the corresponding tax rate that applies to qualified dividends and long-term capital gains. Read More...
For 2014, the Social Security wage base will be $117,000.
The wage base is the amount at which the Social Security tax max's out. The Social Security tax of 12.4% is paid on wages or net self-employment income up to the wage base for the year. Once wages or self-employment income goes over the wage base, no further Social Security tax is paid.
The Social Security Administration has further information about the Contribution and Benefit Base.