Pulling money out of your retirement?

If you are under age 59 1/2 and you need money now, you may be tempted to pull it from retirement funds (401K, IRA).  I get it – the money is there just waiting for you to use it.  But it is an EXPENSIVE source of money.  For the typical middle class family with kids, about 1/2 of the money is lost to taxes when you pull it out.  You pay Fed tax, IN tax, the 10% Fed penalty….but the extra income also typically causes you to lose a child tax credit, phase you out of a refundable credit, make you phase out of deductions, etc…all causing you to pay more taxes than you expect and end up with 1/2 of the money that you pull out.

I don’t have any bright ideas on where you are going to get the money that you need to live, but keep this in mind the next time you wonder about accessing this easy money.

Now That the Election is Long Over, Who Are the 47%

Who pays taxes and why?  There was a lot of talk during the election about the “47%” of Americans who pay no Federal income taxes.  Now that the inauguration date has passed, let me give you some detail on that figure.  The breakdown of the 47% of Americans that pay no tax is (based on 2010 and 2011 figures):

  • 22% – Americans over age 65
  • 17% – Students, disabled, or long-term unemployed Americans
  • 50% – Americans who earn less than the standard deduction and exemption amounts (incomes basically under $20,000/year)

This accounts for 89% of the 47%.

That leaves 11% of the 47% as those Americans that take advantage of the refundable earned income tax credits and refundable child tax credits, the daycare credit, etc….basically those credits designed to “motivate” the working poor to actually work or to give the working poor a break.

With 3 Trillion of projected Federal budget deficits to close over the next 10 years, we Americans wonder who should be picking up the tab?  Do we ask this 47% to pay more than $0?

Keep in mind that this group of Americans, like the rest of us, likely pay (or have paid, if retired) Social Security taxes, Medicare taxes, state taxes, property taxes, sales tax, fuel tax, excise taxes built in to products that they purchase, etc.

I have been following individual tax law since 2000.  The 2010 and 2011 overall average Federal tax rates were the lowest I had ever seen.  Other organizations that I follow said that the current tax rates were the lowest (measured broadly) that we had seen in the last 60 years.

The bottom line is that all of us paid the lowest Federal tax that we ever would in 2010 and 2011. 2012 wasn’t too bad either.  2013’s rates are only slightly higher (maybe 3% higher overall, mainly due to the repeal of the 2% social security tax cut) for the average family earning under $150,000.  I expect average Federal tax rates to go up in 2014 and beyond…so enjoy it while it lasts.

Most of this information was gleaned from the Center on Budget and Policy Priorities, which is one of the lobbying groups (left and right) that I follow.  Regardless of what slant that you put on the numbers, numbers are numbers…you can put your own slant on them.

What if your return is suspect?

Did you make the mistake of going to a national tax preparation firm in 2009, 2010, or 2011?  Our experience tells us that you might want us to review that return.  We don’t keep any accurate statistics on this matter, but roughly speaking, those returns that we review are wrong about 20% of the time.  How can this be?  Well that is a long story that requires some understanding of how those places operate.  Nevertheless, you might have a 20% chance of hitting the lottery by bringing that return to us to review.  We might find that you paid too much tax in one or all of those years.  If you did, you have until at least 4/15/2013 to amend those returns to get some of that tax back.

Common areas where they err:  college credits, self-employment income and deductions, health insurance deductions, daycare credits, farm income, clergy income, S-Corp tax returns, capital-loss carryforwards, Indiana 529 credits…the list goes on and on.

We don’t charge to review your return…why not give it a shot?

The Expiring 2% Payroll Tax Cut

Congress and the President decided to cut the Social Security tax that workers pay by 2% in 2011 and 2012.  The law originally was designed to last for 2011, but at the end of 2011, Congress decided to extend it for 2012.  Will Congress decide to extend it for 2013…I am guessing that they won’t.  How much will this law change cost you?  The math is fairly easy…but here is a calculator that will help you more accurately calculate the impact to you:

http://www.kiplingers.com/tools/Social_Security_payroll_tax_increase_calculator/index.php

The Fiscal Cliff – What will Congress Do?

I hear this question everyday.  What will Congress do?  Will tax rates rise?  Of course, I don’t know the answer, but my past experience tells me that Congress will do something before it comes time to file your tax return.

See, the situation that we are hearing about in the news isn’t new.  Congress has gotten in the bad habit of passing laws that are effective for one year only.  That means that the taxpayers don’t know the laws that apply to the year until the year is about over.  Of course, this doesn’t make sense in any logical sense.  How can you plan when you dont know the rules that you are playing by?

Why does Congress pass laws that are effective for only one year…and then often pass them at the end of the year in which they are effective?  Many insiders think they do this so that they can get lobbying attention each and every year.  Why pass a law that lasts forever and lose power over that issue when you can have domain over that issue each and every year.

I am not going to prognosticate on what Congress will do.  But I will venture to guess that this isn’t the last year that Congress will wait until the last minute to make up their mind on the tax law until the end of the year.  I have seen this consistently happen for at least the last 8 years…I bet that it will continue to happen.