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PostHeaderIcon Tax Planning for 2013 – The Payroll Tax Cut

Enacted in 2011, employees and self-employed people alike received a temporary 2% cut in their payroll taxes.  Mired in Congress, the extension of this tax cut was given some odd treatment because the two sides of the aisle couldn’t agree on how to pay for it so for a while, there was just a two month extension.  At the end of February, a full year extension was finally passed but as we get closer to the end of the year, it’s unclear what the fate of this tax cut is going to be.

If you’re an employee (of a company you don’t own), there’s not a lot you can do to plan.  Either the cut will be extended and you’ll get or it won’t and you’ll see your pay check take a hair cut.  For the self-employed who pay SE tax, you fate is about the same.  If you’re an employee of your S-Corporation, there is a little bit you can do.  In December, if the political winds are telling you that an extension isn’t going to pass, it might be a good time to push some salary (maybe a one time bonus or an advance) from 2013 into 2012.  Other than that, this one is a big “wait and see.”

PostHeaderIcon Tax Planning for 2013 – The Tax Rate on Dividends

Last week we talked about capital gains and this week, we’re going to talk dividends.  This year, most dividends will be taxed at the capital gains rate which maxes out at 15%.  If nothing is done, that special rate goes away and dividends will be taxed at your marginal tax rate which could go as high as 39.6%.  If you thought the 5% increase on capital gains is big, managing your dividends if you’re able to is an even bigger deal.

For a lot of people with stock investments, there is no control over the dividends.  You can opt to move to stocks that pay no dividends and you might see some of that.  Where this rate change will really see an effect is if a person owns a C-Corporation or has an S-Corporation that has some C-Corporation earnings and profits.  If you do and you have some cash sitting around, you might want to look at pulling it out as dividend.  I wouldn’t do it until after the election although you can get an idea on what the political climate is going to be like, but until then, you have some time to assess the situation.

PostHeaderIcon Competing Payroll Tax Bills Blocked By Senate

Congress is back to locking in on a payroll tax cut of course both sides of the aisle are arguing both the extent of the cut and how to pay for it.  Two different bills were looked that came from the House and neither were able to get the votes from the Senate to turn it into law.  Let’s take a look at the specifics of each plan.
Democrats

Cut payroll taxes for employees from 6.2% to 3.1% and the same cut would apply to employers who had wages under a set amount.  This would be paid for by a 3.25% surtax on people making more then $1 million.

Republicans

They basically wanted to extend the current law for another year, meaning the employee tax would be 4.2% for another year.  They wanted to pay for this by freezing the pay of federal workers for three years and eventually cutting the government workforce by 10% through attrition.

Of course now we’re looking at the Senate to come up with a compromise.  From what I’ve heard, some of the ideas that came out out of the Super Committee might be used to pay for some kind of tax cut.  Of course there’s plenty of sides to appease.  You also have to deal with the issue that time is running out and when it comes to payroll, making a retroactive adjustment could be an administrative nightmare.  Of course a lot of that would fall on the shoulders of the ADPs and the Ceridians of the world.