This week, Congress finally stopped arguing and posturing long enough to pass some legislation to help the nation avoid the Fiscal Cliff that would plunge our economy into oblivion (or maybe not depending on who you ask). The fact that it took until we technically went over the cliff to get a deal done only makes sense to someone inside the beltway, but I digress. I’ve had several calls and questions about how all of this is going to affect us going forward so let’s review what happened.

Your taxes are going up, but not as much as they could have:

• The payroll tax reduction was not extended, so the employee portion of payroll taxes will increase 2% to 6.2%.
• The highest marginal tax rate increased to 39.6% (starts above $450,000 for married filing jointly, $400,000 for individuals), but the other rates stayed the same.
• Personal Exemptions and Itemized Deductions are limited for high earners. The limitations start at $250,000 ($300,000 for married filing jointly).
• The $1,000 child tax credit was extended for 5 years. It was scheduled to be reduced to $500 per child.
• The estate tax went up to 40% from 35%, but the exclusion level remained at $5 million. Most expected the exclusion level to drop as low as $1 million and the rate to increase to up to 55%.
• Alt Min Tax has been patched to automatically increase every year.
• Capital Gains and Dividends will still be taxed at 15% for most Americans. High earners will pay 20%.
• Marriage penalty relief was extended. (In case you aren’t familiar, that is the scenario where a couple would pay more in taxes filing together than if they were each filing as separate individuals.)
• 50% Bonus Depreciation for qualified property was also extended for 2013.
• The deduction for sales tax was extended for 2013. That’s a big deal for everyone in Texas, Florida, and the other states with no income tax.

Of course, we all know that the government’s budget problems are much, much larger than a small tax increase will solve. This sums it up pretty well.

In the next few weeks, expect to hear much more about this from Congress. The deep spending cuts scheduled to hit defense and entitlement spending were simply postponed for 2 months as part of this deal. We’re also on pace to hit the debt ceiling yet again in the next few weeks as well. In March, the resolution currently funding the government is going to expire as well. So Congress really only scratched the surface of the real issues at heart with this law. Expect much more fun in the weeks to come.

Bottom line: Most taxpayers come out ahead of where they would have if no compromise had been reached. What it means long term for our country will be heavily debated in the coming months.

As many of you know, Mitt is a millionaire many times over and a big deal has been made about his tax returns. He recently released his tax return for 2011, where he paid 14.1% in income taxes. While I will not get into a debate about his politics, many people seem to be insinuating that Romney has done something illegal, unethical, or morally irresponsible by only paying 14.1%. I have a very hard time understanding this sentiment.

Romney employs several tax saving strategies including being selective about the types of income that he earns and where it comes from. I don’t blame him. I try to keep as much of my income as I legally can out of the federal coffers as well. I’ve seen and prepared thousands of tax returns, but I’ve never had a single person ask how they could pay more or if they were paying a “fair” amount. I don’t personally know anyone that believes that the US government is somehow more efficient, more effective, more qualified or somehow better suited to spend their own money.

In a court case from the 1930s, Judge Learned Hand once said, “Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” Essentially, he is saying that no one should pay more taxes than is absolutely required. I completely agree. (However, in a vacuum, that could lead to abuse so there are some measures built into the tax law to prevent gross abuse.)

There are no indications that Romney has done anything contrary to prevailing tax law. In fact, as a former PriceWaterhouse employee, I’m sure the tax guys at PwC were probably very cautious in their approach, knowing that this would probably be the most scrutinized tax return in US history. According to one of Romney’s trust managers, Romney could have paid even less in tax this year, but decided not to claim all of the available deductions in order to fulfill a promise he made earlier this year that “he paid at least 13% in income taxes in each of the last 10 years.” Not claiming deductions… ridiculous, but that is the state of the debate in America right now.

If you think that Romney should have paid more, that’s a valid argument. I don’t want to debate what a fair percentage would be as I’m sure every person would have a different opinion. But I think getting outraged at Romney is a bit like getting angry at someone for driving in the HOV lane. He didn’t put the lane there or set the speed limit. He just made sure he had a friend in the car when the time came. You can debate if there should be an HOV lane in the first place, but you can’t really get mad at the people that use it legally.

Anything you’d like to add to continue the discussion, let me know in the comments. I would like to remind you that the comments are heavily moderated and any comments outside the scope of this article will not be posted. Keep it civil and on topic. Thanks.

(Photo: SP8254)

With the Bush tax cuts set to expire again at the end of 2012 and the US mired in political gridlock, I wanted to take a high level look at what to expect with taxes. Obviously, we don’t know what will happen in Washington. A lot will be decided by the results of the coming election and the subsequent lame-duck session of Congress, however a lot of things are scheduled to happen if Congress doesn’t intervene.

If the Bush tax cuts are allowed to expire:

• Our tax brackets are changing for 2013. The lowest bracket moves up from 10% to 15%. The 15% bracket becomes smaller forcing more people into a higher bracket. The highest tax brackets increase 3% to 4.6%.
• Capital gains and qualified dividends will be taxed at up to 20%.
• Student loan interest phases out more quickly and is only deductible during the first 60 months payments are made.
• The standard deduction for married filing jointly is reduced (helping bring back the marriage penalty).
• The qualifications for the Earned Income Tax Credit are tightened so that fewer people will qualify.
• The child tax credit drops from $1,000 to $500.

Some things have already changed for 2012 that you might not have noticed:

• You can’t deduct sales tax instead of state income tax. This is a big one for all my clients in Texas.
• Teachers could deduct up to $250 of classroom related expenses. Not any more.

This is a quick review of the tax changes most likely to affect my clients. There are quite a few more things scheduled to change as well. And of course, Congress could decide to extend the Bush tax cuts again and make everything I just wrote irrelevant. I love it.

If you are concerned about how these changes will affect your situation, please get in touch. If you have a suggestion for what Congress should do on tax policy, let me know in the comments below.

(Photo: JJay)

Every now and then, I’m planning to run a feature with the best business articles and ideas that I’ve seen on the net. This first one is going to be big since I’ve been saving articles for a while now. These are all articles that either helped me with my business or provided some interesting ideas. I hope some of them will help your business as well.

• Pricing Experiments You Might Not Know but Can Learn From from conversionxl.com. Interesting study about the psychology of pricing and how different numbers appeal to consumers. I plan to test different pricing levels based on their study.
• Leadership Discipline of Successful Startup Entrepreneurs from Fox Small Business. Nothing earth shattering, but emphasizes cash management and adapting to customer feedback. Important enough they can’t be repeated too many times.
• Entrepreneurship and Parenthood – Making Room for Both from inc.com. 12 Tips about balancing work and family. I don’t have kids yet, but still I sometimes struggle with balancing my time.
• Are You Paid Enough? 3 Big Myths about CEO Pay from inc.com. Most small business owners probably don’t think of themselves as the CEO, even though they most likely hold that title and many others. You should consider designing your comp package to reflect it. There are some good tax planning strategies around this too.
• Pittsburgh reinvents itself as the new Hollywood for Film from Yahoo! Finance. I generally don’t think the tax code should be used to attempt to influence business and consumer behavior. Most of the time it doesn’t work. This time it did and the results have been impressive.
• Stop Talking about what you are Selling from inc.com. Short and sweet, pay attention to your customers and focus on meeting their needs. Easier said than done, but he says it better than I do. Worth a quick read.
• Five major ObamaCare taxes that will hit your Wallet in 2013 from FoxNews. Love it or hate it, somebody’s got to pay for it. This article outlines five of the changes that will be going into effect next year.
• Here are the New Taxes You’re Going to Pay for ObamaCare from Yahoo! Finance. Think Fox News is too right wing to give an objective opinion on ObamaCare? This list of new taxes from Yahoo! is even longer.
• The Only Management Strategy You’ll Ever Need from inc.com. Possibly the best article in the bunch. Please take 3 minutes to read this one. It will change your approach to working with other people and can be equally applied to all parts of life.
• Fix Your Website: 5 Things to Change Now from inc.com. Five ideas that have been tested thousands of times to increase conversions from your website. I need to think through this list and apply to mine as well.

Did you learn anything that you are planning to apply to your business? Let me know in the comments below.

What does this mean for you?

No matter what type of entity you have, there is always a chance you could be audited. The best audit defense is to have your financial books and records up to date and in good shape. Additional documentation, such as bank and credit card statements, mileage logs, and receipts (especially from company meals), is also important to have. It is also good to have a CPA review your records and make recommendations as you go along. Your CPA will have insight into potential trouble areas and should be able to help you avoid problems and ensure you have adequate documentation should the IRS audit your return.

If the IRS sends you an audit notice, it’s not the end of the world. Remember, 62% of the time the S-corps they audited had no changes. You have the right, as a taxpayer, to respond to the IRS and challenge any audit changes they propose. If you’ve kept up your books all along, they might not propose any changes at all.

If you know you will need a little extra time to get your return together this year, you can file form 4868 – Application for Automatic Extension of Time to File… It’s got a really long name, but the important part is you won’t have to file your return until October 15th. The catch (there’s always a catch with the IRS) is that it’s an extension to file, not an extension to pay. That means that you need to pay any tax that you owe by the April 17th deadline. If you normally have to pay a little extra with your return, do a quick estimate and see where you stand this year. It might make sense to pay a little to avoid any potential penalties and interest.

Either way, make sure you either file your return or file an extension. Get the pressure off and avoid those long lines on the 17th.

First, you can claim your children as dependents. There is a whole list of requirements to technically qualify as a dependent, but in general, if the child is under age 19 (or 24 and a full time student), a relative, and you provided more than half of their financial support, then they will qualify. This allows you to take a $3,700 exemption on your 2011 return. In a 15% tax bracket, that exemption is worth $555.

Children get their own tax credits. The child tax credit is worth up to $1,000 per qualifying child. A qualifying child must be claimed as a dependent and under the age of 17. The child must also be a US citizen or national. The credit is nonrefundable and slowly phases out for couples earning more than $110,000. There is a refundable credit called the additional child tax credit available for lower income taxpayers and is based on the amount of child tax credit used and the taxpayer’s income.

Also, if you adopted, there is an adoption credit available for up to $13,360 for adopting children under the age of 18 or for adopting a child with special needs. The credit depends on the amount of it costs to adopt the child. However, if you adopted a special needs child, you get the full credit regardless of the expenses incurred.

Since many parents still need to work after having children, Uncle Sam created the Child and Dependent Care Credit. You can take a tax credit for costs incurred for babysitters, after school programs and the like if those expenses allow you to continue working. The amount of the credit depends on the parent’s income, the amount of the expenses, and the number of children eligible. An eligible child must be a dependent under the age of 13.

I know some of that got a little technical, so thanks if you’re still with me. There are so many details and requirement that I did not address that I would encourage you to consult your CPA or do some additional research before you attempt to claim any of these credits or if you have any questions.

While there are some other ways your kids can give you tax benefits, the ones above are by far the most common and can easily save you several thousand dollars. I hope these ideas will help you save some taxes or at least help you to ask your CPA better questions when the time comes.

I come from the school of thought that I want to pay and treat service providers well. From the waitress at my favorite lunch place to the guy that fixed my chimney, I believe that if I treat them well and I am willing to pay a fair price for their service, whatever it is, they will take better care of me and do a better job for me than the person that haggles for every last penny. This doesn’t always hold true, but I believe that over time, I come out way ahead using this approach. However, this doesn’t mean that I want to pay more than I need to get the job done.

1. Organize Your Records. At least put them all in the same place when they come in the mail. I have a file cabinet that I use. When I open the mail, if there is something tax related in it, I throw it in my tax folder for that year. That’s the minimum.

If you are like most people, there are several things going into your tax return. Maybe you have a W-2, and there is one for your spouse, some interest from a savings and checking account, maybe a side thing where you sell yard sale treasures on E-bay, you went back to school, so there is tuition and amazon.com receipts for books, and you paid for daycare for the kids. That is a fairly common number of different situations that your CPA will have to analyze separately. Divide everything by category. You can use a paperclip, envelopes, manila folders, I don’t care. Otherwise, you have to pay your CPA’s hourly rate to sit in their office while you divide it up together.

***Bonus points. Summarize it. Add up all your receipts by category and write it down. Sure, if your CPA is any good, they will double-check everything you write down any way. It still saves your CPA time, which in turn will save you money.

2. Bring it All the First Time. Since you are organized from Step 1, this should be a complete no-brainer. But every year people forget to bring everything needed to complete their tax returns. This means their CPA has to look at their file several times, normally over the course of several days or weeks. There were days where I looked at 15-20 different client files individually. If your return goes to the bottom of the pile for a week, your CPA will have to spend time remembering what was going on and where to pick back up with your return. That extra time is extra money out of your pocket.

3. Be Prepared to Tell Your Life Story. Ok. I don’t need all the details. But having a new baby, going back to school, switching jobs, having unexpected surgery, buying a new house, or any number of other life situations that have changed in the past year can affect your tax situation dramatically. Most CPAs will try to ask questions that they think would be relevant. It can save you time and money if you are willing to tell about your life and any big changes from the beginning.

4. Talk to Us Year Round. Your CPA can do so much more for you than simply prepare your taxes each year. If you have an unusual situation come up or just need some advice, call us. Most CPAs won’t charge for a quick phone call. If it’s something bigger, I’ve seen many situations where an hour or two of planning has saved thousands in taxes. Also, year round communication helps your CPA anticipate and prepare for special issues that will need to be addressed during your tax appointment. Again, saving your CPA time and your money.

***Bonus Points. Offer to take your CPA to lunch. It doesn’t always work, but I’ve done this successfully many times with professionals when I need advice, but don’t want to pay their hourly rate. You get to ask unlimited questions for an hour or so and develop a better relationship with your CPA, all for the price of a couple burgers.

5. Financial Education. I realize that only a few sick, demented people will actually choose to keep up with the tax code and all it’s changes every year. I can say that since I’m one of them. But having a basic understanding of finances in general will help you make better financial decisions throughout the year and to communicate with your CPA whenever that time comes. A little investment in yourself can pay rewards for a lifetime.

Any other tips or suggestions? Let me know in the comments.