With the presidential election beginning to heat up in America over the next several months, we are all going to hear a lot about income taxes. We all know that with thousands of pages of tax code, it is impossible for the average citizen to really understand all of the different ways they can save money in taxes. There are many tax law changes set to take effect in 2013. If I had the opportunity to set the wheels in motion to make some tax law changes that would be permanent and easy to understand, here are four of them that I would recommend we change to become permanent.
1. Social Security Taxation - From the day you begin working and earning waged income, 6.2% of your paycheck (the last couple of years 4.2%) goes toward your future social security benefits. This is also known as your Federal Insurance Contributions Act (FICA) tax. You only see the 6.2% that comes out of your paycheck, but your employer also pays 6.2% tax into the Social Security fund as well. If you are self-employed, you get the personal joy of having to pay both halves of the tax. After 30 to 40 years of paying into the system, the Government has a special surprise for you when you begin receiving benefits from Social Security. If you are married, for example, at $32,000 Modified Adjusted Gross Income your Social Security Benefits become taxable. At $44,000, your Social Security benefits will be 85% taxable. (source: irs.gov) All of us believe we should not have double taxation, but here is a great example for people who are supposedly at a 'higher' level of income in retirement. Since when is $44,000 a high level of income? We just make Social Security benefits non-taxable permanently.
2. Sale Of Your Primary Residence - Home ownership is supposed to be one of the American dreams. As we have seen over the past several years, real estate values can fluctuate up and down. Many of the people who are born in Generation Y are considering waiting to buy their first home or renting a house altogether and skipping the notion of home ownership. The current law allows up to $250,000 of profit from the sale of a primary personal residence per person ($500,000 per couple) to be excluded from taxation. The full amount is available if the seller(s) used the home as their primary residence for at least two (2) years out of the five (5) years prior to the sale. This does not mean that the property had to be owned for a full five years, as some believe. (source: taxguru.org). We should want home ownership to be one of the long term ways the next couple of generations build their wealth as the 'property ladder' has been a big wealth building source in many countries for many years. I'd like to see the capital gain exclusion on the primary residence be eliminated permanently.
3. Itemized Deduction Phaseout- Every year, we spend time on our tax returns putting together documents for our CPA. These include getting our real estate taxes, personal property taxes, mortgage interest paid, charitable deductions, medical expenses, and unreimbursed employee expenses are laid out in a neat file come tax time. All of these types of deductions are included on Schedule A which is called our itemized deductions which are set out to give us a tax break for things like home ownership and charitable donations. You may have noticed that the last couple of years there has actually been no phaseout of these itemized deductions where in years past if you made more than a certain amount of income these deductions were actually 'phased out'. For married couples that make roughly $167,000 or more, you will begin to see your deductions get phased out in 2013 if nothing changes through this election. My opinion is we just phase this rule out entirely as most taxpayers don't even pay attention to the rule let alone understand how it affects them.
4. Tax Credits For Employing The Unemployed - When unemployment is low and job growth is happening most people are happy. I believe people live much better in an environment of certainty rather than constant unplanned change. There are a ton of entrepreneurs who are trying to grow businesses, and we want to continue to give incentive to people to become entrepreneurs. Employers who hire unemployed workers this year (after Feb. 3, 2010 and before Jan. 1, 2011) may qualify for a 6.2-percent payroll tax incentive, in effect exempting them from their share of Social Security taxes on wages paid to these workers after March 18, 2010. This reduced tax withholding will have no effect on the employee's future Social Security benefits, and employers would still need to withhold the employee's 6.2-percent share of Social Security taxes, as well as income taxes. The employer and employee's shares of Medicare taxes would also still apply to these wages. (source: irs.gov)
In addition, for each worker retained for at least a year, businesses may claim an additional general business tax credit, up to $1,000 per worker, when they file their 2011 income tax returns. (source: irs.gov)
These were some of the temporary 'tax breaks' a small business would get for hiring the unemployed. I think what would be more beneficial is to see a larger tax break (in the $5,000 range) for every full time employee that you hire and retain for at least two years. This way, the small business owner would benefit as their company grows and their company incomes rises while also being focused on employing people who currently do not have a job.
Nobody really knows where all of the tax law changes will end up at the end of this election. Most people want some sort of simplicity to the tax code so they can make better smart money moves when they plan their tax strategy. Making these four changes permanent could help put us on the path to making the complex just a little more simple for the average American.
Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Co-CEO and Founder of oXYGen Financial, Inc - The Leaders in Gen X & Y Financial Advice and Services
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