2013 Tax Rates - Income Brackets

The major accomplishment of the American Taxpayer Relief Act, aside from keeping the country (and us!) from falling off the "fiscal cliff," was that it made permanent most of the tax laws we've become used to following for the last 12 years.

What does this mean for me?

I know, permanence doesn't mean the same thing to Congress as it does to you, me and dictionary editors. Officially, it simply means that we don't have to worry about tax breaks like the $1,000 amount of the child tax credit expiring at a preset date.

Of course, the biggie from this latest tax bill is that it keeps the lower tax rates first enacted under the George W. Bush administration in place, aka, permanent.

Tax (Photo credit: 401(K) 2013)

And it tacks on a new top rate for wealthier folks.

But deciding what our 2013 and future taxes would look like was just one part of the process. We had to wait for the Internal Revenue Service to figure out, based on inflation, just how much of our earnings fall into these now permanent tax brackets.

Tah-dah! We now know.

The IRS has released the remainder of the 2013 inflation adjustments, including this year's tax rates and income brackets. Bankrate has published the complete information in a spanking new 2013 tax rates table.

2013 tax rates

Tax rate	Single filers	Married filing jointly or qualifying widow/widower	Married filing separately	Head of household
10%	Up to $8,925	Up to $17,850	Up to $8,925	Up to $12,750
15%	$8,926 - $36,250	$17,851 - $72,500	$8,926- $36,250	$12,751 - $48,600
25%	$36,251 - $87,850	$72,501 - $146,400	$36,251 - $73,200	$48,601 - $125,450
28%	$87,851 - $183,250	$146,401 - $223,050	$73,201 - $111,525	$125,451 - $203,150
33%	$183,251 - $398,350	$223,051 - $398,350	$111,526 - $199,175	$203,151 - $398,350
35%	$398,351 - $400,000	$398,351 - $450,000	$199,176 - $225,000	$398,351 - $425,000
39.6%	$400,001 or more	$450,001 or more	$225,001 or more	$425,001 or more

What to expect under the new brackets

The first $8,925 of your income is taxed at 10 percent if you're a single taxpayer. A head-of-household sees $12,750 of his income taxed at this lowest rate. Married couples filing a joint return have $17,850 of their income taxed at 10 percent. If the tax bill hadn't made this Bush-era rate permanent, all this money would have been taxed at 15 percent, so there's a 5 percentage point savings.

On the much publicized other end of the scale, which we all hope to one day reach even though we'll complain about the taxes then, single taxpayers will pay a tax rate of 39.6 percent if they make more than $400,000. That top tax rate kicks in for a head-of-household at $425,000 and a jointly filing couple at $450,000.

Now here comes the fun part of the 2013 tax table.

If you're tax geeky like me (and aren't you, since you're reading this blog?), you'll also notice that the 35 percent income bracket is tiny for single taxpayers. Only about $1,650 is covered in this filing status' tax bracket -- earnings from $398,351 to $400,000.

The spread is larger for head-of-household and married joint filers. Single taxpayers claiming dependents will see $26,650 of their earnings taxed at 35 percent. The penultimate tax rate will apply to $51,650 of a married couple's income.

But that $1,650 amount could be a problem one day. Depending on inflation, a single filer could soon see his or her income tax rate jump from 33 percent to the top 39.6 percent rate.

This is one of those frequent unintended consequences of hurried tax legislation. Don't be surprised if Congress soon revisits the rate structure and we have another big Capitol Hill fight over what to do about the incredibly shrinking 35 percent income tax bracket.

By Kay Bell · Bankrate.com

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Tax Ramifications due to Distribution from 401K Account

How much will I pay in taxes when I take a distribution from my account?

When you take a distribution from your account, you'll pay ordinary income tax plus a 10%
penalty if you're younger than 59½. In fact, cashing out a $10,000 401(k) account could leave you with $7,000 or less due to taxes and penalties. In addition, you are losing out on compounding potential. So think twice before taking a distribution, it could cost more than you think.

The cost of lost time
If you cash out your 401(k)'s $10,000 balance with 30 years to go before you retire, you are potentially missing out on $100,627 for your retirement, assuming an 8% before-tax average annual rate of return. It does not reflect the return of any investment, which will fluctuate.
Regular investing does not ensure a profit or protect against a loss in a declining market.

Talk to your Naperville Tax Accountant, Susan S. Lewis for advice.

To Convert or Not to Convert? That’s the Roth Question

Nearly 20 million U.S. households have a Roth IRA — a significant number considering that it has been around only since 1998. However, Roth IRA participation still lags behind that of traditional IRAs, which were first introduced in 1974.¹

The good news is that you can invest in more than one type of IRA (the combined contribution limit in 2012 is $5,000, or $6,000 for those aged 50 and older). And regardless of your income, you can convert all or part of your traditional IRA investments to a Roth IRA and benefit from tax-free withdrawals in retirement.

Paying Taxes Now or Later

Contributions to a Roth IRA are made with after-tax dollars (subject to income limits), whereas contributions to a traditional IRA are generally tax deductible. When you withdraw money, however, qualified distributions from a Roth IRA are free of federal income tax if you’ve satisfied the requirements (distributions may be subject to state income taxes). By contrast, traditional IRA withdrawals are taxed as ordinary income.

When you convert tax-deferred IRA assets to a Roth IRA, the conversion amount is taxed as ordinary income in the tax year of the conversion. This can be a significant expense, but there’s a trade-off: Under current tax law (and if all conditions are met), the Roth account will incur no further income tax liability for the rest of your lifetime or for the lifetimes of your account beneficiaries, regardless of how much growth the account experiences.

Here are some considerations to help determine whether a Roth IRA conversion might be appropriate for you.

Changing tax brackets. The logic behind deferring taxes on retirement savings is that investors may be in a lower tax bracket in retirement than they were during their working years. This is not always the case, of course, so you need to consider your own situation. Also keep in mind that tax rates are scheduled to increase after 2012 (unless Congress takes further action), so you may pay higher tax rates in the future.

Mandatory distributions. Unlike the case with traditional IRAs, there are no required minimum distributions (RMDs) at age 70½ for original Roth IRA owners, so you can keep money in your account until you need it, or bequeath it to your heirs if you wish (IRA beneficiaries must take RMDs). The longer your investments can pursue growth, the more advantageous it might be for you and your beneficiaries to have tax-free withdrawals.

Current value versus growth potential. If your tax-deferred assets have fallen in value over the last few years, one silver lining is that taxes on a conversion may be lower. Again, your choice on converting may depend on how much time your portfolio will have to pursue growth.

Keep in mind that you can convert as much or as little of your traditional IRA assets as you wish, and you can even spread the conversion process over a number of years to help manage the tax liability.

Traditional and Roth IRA withdrawals prior to age 59½ may be subject to a 10% federal income tax penalty. To qualify for a tax-free and penalty-free withdrawal of earnings, a Roth IRA must meet the five-year holding requirement and the distribution must take place after age 59½ or result from the owner’s death, disability, or a first-time home purchase ($10,000 lifetime maximum).

A Roth IRA conversion may not be an appropriate strategy for everyone, but it’s worth considering depending on your personal situation, time frame, and current and future tax brackets.

1) Investment Company Institute, 2011

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent Naperville Tax Accountant. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright © 2012 Emerald Connect, Inc.

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What Tax-Advantaged Alternatives Do I Have?

Money hand (Photo credit: RambergMediaImages)

A strong savings program is essential for any sound financial strategy.

We take Benjamin Franklin’s saying to heart, “A penny saved is a penny earned,” and we save our spare cash in savings accounts and certificates of deposit.

Investors who’ve accumulated an adequate cash reserve are to be commended. But as strange as it sounds, it is possible to save too much. Although this may not sound like much of a problem, it can be if you save too much of what you should be investing.

You see, many investors simply put their savings into the most convenient and stable financial instrument they can find. Often, that turns out to be certificates of deposit (CDs). The benefits of CDs are that they are FDIC insured (up to $250,000 per depositor, per federally institution) and generally provide a fixed rate of return.

Unfortunately, placing all your savings in taxable instruments like certificates of deposit can create quite an income tax bill.

In an effort to help provide stability, some investors inadvertently produce a liability. It’s a bit like turning on all the taps in your house just to make certain the water’s still running. Sure, you’ll know that the water’s still running, but a lot of it will go down the drain. The solution is simply to turn off some of the taps.

A number of financial instruments can help you to defer or eliminate income taxes. By shifting part of your cash reserves to some of these instruments, you can keep more of your money working for you, and turn off the taps that hamper your money’s growth.

You can consider a number of tax-advantaged investments for at least a portion of your savings portfolio.

One possibility is a fixed-annuity contract. A fixed annuity is a retirement vehicle that can help you meet the challenges of tax planning, retirement planning, and investment planning. Fixed-annuity contracts accumulate interest at a competitive rate. And the interest on an annuity contract is usually not taxable until it is withdrawn. Most annuities have surrender charges that are assessed in the early years of the contract if the contract owner surrenders the annuity before the insurance company has had the opportunity to recover the cost of issuing the contract. Also, withdrawals made from an annuity prior to age 59½ may be subject to a 10 percent federal income tax penalty. The guarantees of fixed annuity contracts are contingent on the claims-paying ability of the issuing insurance company.

Another tax-exempt investment vehicle is a municipal bond. Municipal bonds are issued by state and local governments and are generally free of federal income tax. In addition, they may be free of state and local taxes for investors who reside in the areas in which they are issued.

Municipal bonds can be purchased individually, through a mutual fund, or as part of a unit investment trust. You must select bonds carefully to ensure a worthwhile tax savings. Because municipal bonds tend to have lower yields than other bonds, the tax benefits tend to accrue to individuals with the highest tax burdens. If you sell a municipal bond at a profit, you could incur capital gains taxes. Some municipal bond interest could be subject to the federal alternative minimum tax. The principal value of bonds may fluctuate with market conditions. Bonds redeemed prior to maturity may be worth more or less than their original cost. Investments seeking to achieve higher yields also involve a higher degree of risk. Bond mutual funds are subject to the same inflation, interest-rate, and credit risks associated with their underlying bonds. As interest rates rise, bond prices typically fall, which can adversely affect a bond mutual fund's performance.

A number of other tax-advantaged investments are available. Consult with your financial professional to determine which types of tax-advantaged investments may be appropriate for you.

Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent Naperville Tax Accountant. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2012 Emerald Connect, Inc.

Insurance for Two Could Benefit Your Heirs

Tax (Photo credit: 401K)

Since the federal estate tax was established in 1916, the amount exempted from the tax has been raised substantially over time. The $5 million exemption for 2011 and 2012 is the highest in history, and the 35% top estate tax rate is the lowest in 70 years.1

However, these generous provisions may not last. After 2012, the federal estate tax is currently scheduled to revert to a $1 million exemption and a 55% top tax rate. Many families with a home and large retirement accounts could easily have estates worth $1 million or more. A survivorship life insurance policy is one way to help heirs pay estate taxes, probate costs, and other final expenses.                      

Preserving a Legacy

Also called second-to-die insurance, a survivorship life insurance policy insures two people and pays a benefit after the death of the second person. The premiums are usually less expensive than premiums for a single life insurance policy, because they are based on the life expectancies of both insured individuals.

The unlimited marital deduction allows assets to pass to a surviving spouse free of federal estate taxes, so estate taxes typically do not become an issue until estate assets pass to nonspouse heirs. Thus, a survivorship life insurance policy could pay a benefit at the time it may be needed most.

Moreover, by purchasing the survivorship policy in an irrevocable life insurance trust, the proceeds may not be considered part of your taxable estate. The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced Naperville estate planning professional and your legal and Naperville tax accountant before implementing such strategies.

Even if you are not concerned about the estate tax, a survivorship life policy could be a relatively inexpensive way to leave a legacy, especially considering that an individual life insurance policy may be more expensive or difficult to obtain later in life. Survivorship life might also be used to insure business partners.

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications.

With the uncertain future of the estate tax, now may be a good time to consider a survivorship life insurance policy. Even if the estate tax doesn’t apply to your estate, the insurance proceeds could benefit your heirs or a favorite charity.

1) Internal Revenue Service

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2012 Emerald Connect, Inc.

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Preparing Your Naperville Taxes: What Are Your Options?

We all know the saying, right? “The only things certain in this life are death and taxes...” And some people get so out of sorts when the time comes to file their Naperville taxes, that you might think they'd prefer to never have to deal with filing a tax return again. But since we're all going to have to deal with tax returns, as long as we're around it pays to know what your options are.

Filing Your Own Taxes
Unless you're very familiar with the latest tax laws, and understand all of the deductions that you are eligible for, filing your own taxes may not be the best option. But for people with very limited incomes, and no investments, filing taxes can be a bit simpler and easier to do without professional guidance.

The Yearly Tax Preparation Services
You know it's truly spring time when those tax preparation places start popping up in strip malls all over the place. And while these places may be preferable to filing taxes on your own, it's not often that you get a certified tax professional when you choose to use one of these establishments.

Tax Software
The latest craze in tax filing is the various tax preparation software programs that are available. These tools do make it quicker to file your own taxes, but again, if you don't understand the tax laws, even these programs may miss important deductions that you should be taking.

Hiring an Accountant
If you choose to hire an accountant to file your Naperville taxes, you'll have a professional, experienced, and certified tax expert taking care of your return. Of course, we know that not every “accountant” out there is a CPA or tax expert, so you'll want to check the credential of any accountant that you hire to take care of your taxes.

In Naperville, Lewis CPA has earned a reputation as the best resource for tax preparation services. If you're in need of an accountant, either for tax preparation or for other financial planning, we recommend contacting the staff at Lewis CPA.

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Starting an Investment Plan

With the ups and downs of the stock market in recent years, many folks have been asking whether or not this is a smart time to get involved with investing. Truth be told, there's not a bad time to consider investing. Of course, there are times to be cautious, and having a Naperville Tax Accountant is the smart way to prepare for investing for the future.

Image by septuagesima via Flickr

Why a Tax Accountant?

If you think that you only need the services of a Naperville Tax Accountant during tax time, and not when you're preparing your investment plans, you may want to reconsider. You see, any type of investment plan, whether it's a 401K or a mutual fund, is going to have tax benefits or consequences to consider. And since most folks simply aren't up to date on all of the latest tax laws, as they apply to investment plans, it only makes sense to have a knowledgeable, skilled tax and investment professional on your side.

At Lewis CPA, we specialize in all things related to taxes and finances. We help people take the smart, safe approach to investing, while covering all the bases where tax breaks or penalties are involved. Of course, no accountant or financial professional can guarantee that you'll create the perfect investment portfolio, starting your planning off, with the advice of a seasoned accounting pro certainly beats jumping into your planning for your financial future on your own.

And even though there have been some turbulent financial times in recent years, it's still possible to build a solid financial future for you and your family. You can contact us to get the professional financial advice and services you need to get your planning underway.

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Everyday Business Accounting Advice

 When you start your own business, you wind up being very protective of it. After all it takes a lot of hard work, money and sacrifice to get your business where it needs to be. Unfortunately, though, many Naperville business owners get a bit too protective and never seek out accounting or bookkeeping services from a Naperville Tax Accountant. And as your business continues to grow and change, it becomes more important than ever to have an accounting firm you can rely on.

Superior Organizational Skills

As you know, running a business means that you have to wear a lot of hats. If all of the different roles you are playing is leading to disorganized record keeping, it may be time to contact the Naperville Tax Accountant specialists at Susan S. Lewis Ltd. We are experts at keeping financial records organized. The more organized your financial records are, the better you'll be able to access crucial records when you need them most. And when the next tax payment comes due, you'll have all your records ready with less fuss and worry.

Your business is too important to leave financial bookkeeping tasks to chance. By taking time to let us pros get started on your bookkeeping now, you can concentrate on more pressing issues; all the while knowing that your financial record keeping is being performed by the area's most trusted accountants. With that kind of peace of mind, you'll be able to keep your business thriving and growing for years to come. And you'll never have to scramble again when tax time rolls around. Imagine what a relief that will be.

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