Ashleae Beling, Forbes.com: Tax Hikes Hit Trusts Hard, Beneficiaries Pull Money Out:
Folks with trusts, and that includes widows and the disabled, not
just the ultra-wealthy, have been hit with a double tax whammy this
year. First the 3.8% Obamacare tax that applies to net investment income
kicked in Jan. 1. Then, the American Taxpayer Relief Act was signed
into law on Jan. 2, imposing income and capital gains tax hikes on
trusts akin to those on the wealthiest taxpayers. The top income tax
rate is now 39.6%, up from 35%, and the top capital gains rate is now
20%, up from 15%.
The kicker: these taxes hit a trust on any income it does not
distribute over just $11,950, far less than the $400,000/$450,000 ATRA
and $200,000/$250,000 Obamacare thresholds for individuals.
“It’s hitting where it really shouldn’t,” says Laurie Hall, an estates lawyer and head of the Wealth Management Group at Edwards Wildman in Boston. “These increases weren’t intended to hit people with income below $200,000, and they will.”
Here’s why. Most trusts (non-grantor trusts) pay tax on capital gains
and accumulated income that stays in the trust, while the beneficiaries
pay tax on income that is distributed to them. So trusts—even
relatively small ones—will be hit with the 23.8% capital gains rate (the
20% rate plus the 3.8% Obamacare tax), even if the beneficiary himself
would be squarely in 15% capital gains territory. “Going forward you
have to think the trust is going to be hit with the extra 8.8%,” says
Hall.
See Ashleae Beling's full article Tax Hikes Hit Trusts Hard, Beneficiaries Pull Money Out, Forbes.com, January 9, 2013.
With tax season looming around the corner, Robert W. Wood explains the differences between IRS Form 1099 and IRS Form W-2 in his article on Forbes.com: 1099 or W-2? Giving or Receiving, Be Careful:
Both key tax forms arrive in January or February, so watch your snail
mail. If you’re an employee, taxes must be withheld. You’ll receive an IRS Form W-2 from
your employer in January the following year. If you’re an independent
contractor, you are liable for your own taxes. Assuming your total pay
was $600 or more, you’ll receive an IRS Form 1099.
But is it that simple? What if you’re the employer rather than the
recipient? This key decision is made thousands of times daily all over
America, often, it seems, without much thought. Some employers ask “1099
or W-2?” as if they were asking how you take your coffee.
If you’re the worker, you may be tempted to say “1099,” figuring
you’ll get a bigger check that way. Of course, you’ll actually
owe higher taxes. As an independent contractor, you’ll owe not only
income tax, but self-employment tax too. In contrast, if you’re an
employee, you pay only one half the Social Security tax, plus one half
the Medicare rate. Your employer pays the other half.
Apart from tax law, employee status carries protection under
nondiscrimination laws, pension and benefits laws. Wage and hour
protections apply to employees but not to independent contractors. For
all of these reasons, employers have considerable incentives to try to
pay independent contractors rather than employees. This can often be
done in ways that are perfectly proper.
See Robert W. Wood, Forbes.com: 1099 or W-2? Giving or Receiving, Be Careful:, January 25, 2013.
QUICK TIP: Skillserv.com has a handy online tool, which can be found here, that compares the different effective 'take-home pay' of equally compensated W-2 and 1099 employees.
Paul Bonner and Alistair M. Nevius, Congress passes the fiscal cliff act,
Journal of Accountancy:
Pulling
back from the “fiscal cliff” at the 13th hour, Congress on Tuesday
preserved most of the George W. Bush-era tax cuts and extended many
other lapsed tax provisions.
Shortly before 2 a.m. Tuesday, the Senate passed a
bill that had been heralded and, in some quarters, groused about
throughout the preceding day. By a vote of 89 to 8, the chamber approved
the American Taxpayer Relief Act,
H.R. 8, which embodied an agreement that had been hammered out on
Sunday and Monday between Vice President Joe Biden and Senate Minority
Leader Sen. Mitch McConnell, R-Ky. The House of Representatives approved
the bill by a vote of 257–167 late on Tuesday evening, after plans to
amend the bill to include spending cuts were abandoned. The bill now
goes to President Barack Obama for his signature.
“The AICPA is pleased that Congress has reached an
agreement,” said Edward Karl, vice president–Tax for the AICPA. “The
uncertainty of the tax law has unnecessarily impeded the long-term tax
and cash flow planning for businesses and prevented taxpayers from
making informed decisions. The agreement should also allow the IRS and
commercial software vendors to revise or issue new tax forms and update
software, and allow tax season to begin with minimal delay.”
With some modifications targeting the wealthiest
Americans with higher taxes, the act permanently extends provisions of
the Economic Growth and Tax Relief Reconciliation Act of 2001, P.L.
107-16 (EGTRRA), and Jobs and Growth Tax Relief Reconciliation Act of
2003, P.L. 108-27 (JGTRRA). It also permanently takes care of Congress’s
perennial job of “patching” the alternative minimum tax (AMT). It
temporarily extends many other tax provisions that had lapsed at
midnight on Dec. 31 and others that had expired a year earlier.
The act’s nontax features include one-year extensions
of emergency unemployment insurance and agricultural programs and yet
another “doc fix” postponement of automatic cuts in Medicare payments to
physicians. In addition, it delays until March a broad range of
automatic federal spending cuts known as sequestration that otherwise
would have begun this month.
Among the tax items not addressed by the act was the
temporary lower 4.2% rate for employees’ portion of the Social Security
payroll tax, which was not extended and has reverted to 6.2%.
See full article by Paul Bonner and Alistair M. Nevius, Congress passes the fiscal cliff act,
Journal of Accountancy,
January 1, 2013.
