Will Tax Debt Collection be Outsourced?

If you’ve been paying attention to financial news lately, you’ve probably heard that the Senate Republications have proposed a controversial new legislation. Frustrated with the IRS and with the fact that reducing its funding doesn’t seem to be getting the desired results, these people are asking to outsource its tax debt collections, one of the IRS’ main sources of survival and primary functions.

The legislation request is included as part of a law to help extend the Highway Trust Fund, and the GOP is requesting that Senate leaders foot the bill for the extension by outsourcing some of the IRS’ collection duties to private collection agencies. The Senate Republicans believe that outsourcing can lead to over $2 billion in savings in a decade.

As is to be expected, not everyone is on board with this idea. The National Treasury Employees Union, for example, believes that outsourcing to private collection agencies would waste taxpayer’s money.  Likewise, the Center for Effective Government has been adamant about its belief that it is the government’s job, and the government’s job alone, to collect taxes.   

Those who do argue in favor of the new legislation are quick to point out that the IRS has not been very effective at collections. Others are looking for specific people or offices on which to cast blame, with many pointing to IRS managers and Congress itself. Many Democrats believe that the only problem the IRS has is poor funding, and that it needs more funding in order to better pursue collections.

Even those who are not politically affiliated tend to agree with the Democrats, saying that the IRS would do just fine at collections if it had more money and that outsourcing is not necessary. Because the vast majority of people see the potential flaws and threats of outsourcing IRS tax collection efforts, it’s not looking very likely that this will happen…but only time will tell.

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Deducting Medical Expenses Just Got Harder

Smart taxpayers know that deducting any expenses possible is an easy way to save on taxes. For many years now, wise taxpayers have made sure to deduct all applicable medical expenses during the tax return preparation process. Unfortunately, however, recent changes to deduction laws have made it more difficult for medical expenses to qualify for deduction.  

While it used to be that the threshold for deducting medical expenses was 7.5% of the taxpayer’s adjusted gross income, the threshold is now at 10%. Fortunately, however, the change does not apply to individuals over the age of sixty-five; they can utilize the old rate for the next three years.

Even if you are no longer able to deduct medical expenses, the right accountant can still handle your tax return preparation in such a way that you get maximum benefits, so contact the friendly accountants at Susan. S. Lewis, Ltd. today.

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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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How Does Inflation Affect Your Taxes?

Nobel prize-winning economist Milton Friedman once said that “Inflation is taxation without legislation.”¹ You’re probably aware of how taxes reduce your earnings, but have you thought about the effect of inflation?

Over the last 50 years, U.S. inflation (as measured by changes in the consumer price index or CPI) has averaged a little more than 4% a year.² A hypothetical investment earning a 5% average annual return during this period would have returned only about 1% after inflation. The rate of return would have been further reduced by income taxes.³

Inflation, which was near zero in 2008 during the depths of the recession, reached almost 3% in 2011.⁴ If you want to help protect your investment dollars from future inflation, you might consider Treasury Inflation-Protected Securities (TIPS). Not only do TIPS have similar earnings potential to other Treasury bonds, but they are adjusted for inflation. If the CPI rises, the principal value of TIPS increases. If the CPI falls, the principal value falls. TIPS pay interest twice a year, and the investor receives either the original or the inflation-adjusted principal (whichever is greater) when they mature.

The principal value of TIPS fluctuates with market conditions. As the principal amount grows, so do the interest payments, which means that the income generated has the potential to increase over time. However, unless you own TIPS in a tax-deferred account, you have to pay federal income tax on the income plus any increase in principal, even though you won’t receive the accrued principal until the bond matures.

U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. If not held to maturity, they may be worth more or less than their original value.

1) brainyquote.com, 2012
2, 4) Thomson Reuters, 2012 (CPI for the period 12/31/1961 to 12/31/2011)
3) This hypothetical example is used for illustrative purposes and does not represent the performance of any specific investment. Actual results will vary.

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 Accounting Firm or 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. Copyright © 2012 Emerald Connect, Inc.

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