How will the fiscal cliff affect my taxes? What does the fiscal cliff mean to you?

What does the fiscal cliff mean to you?

By Jeffrey Brooks, CPA, CFP, MBA for Jbrooks Wealth Advisors, PC, a Professional CPA and CFP Firm 602-687-9900 x101 Please consult with your professional tax CPA regarding your specific circumstances!

Some CPAs say you should pay more taxes now due to the increased income tax rates and additional taxes when your payroll is $200,000 or more in 2013.

In addition, if your adjusted gross income is more than $250,000 (married) or $200,000 (single), you will pay an additional 3.8% on the adjusted gross income amount over the $250,000 (married) or $200,000 (single).

I disagree with these CPAs who argue that you should accelerate income from 2013 into 2012. And that you should pay 2012 bills into 2013 (I am assuming your business is on the cash basis).

Why do I disagree? If your marginal tax rate is in the 38% tax bracket, you will pay $3,800 on each additional $10,000 of adjusted gross income.

Most of us do not know what 2013 is going to look like. Maybe we will lose our biggest patients, customers or clients and our income will be lower.

Maybe we will be able to prepay 2014 expenses in 2013 and defer collecting 2013 income until 2014.

My position is that we shouldn’t be aggressive in prepaying a lot of 2013 expenses in 2012 or deferring a lot of 2012 income into 2013 unless we are in the highest tax bracket of 38%.

Let us say that Dr. Jones (fictitious name) is in the 20% tax bracket and beliefs that 2013 will be a banner year. In this case, Dr. Jones practice should accelerate income into 2012 and hold off on paying 2012 expenses until 2013. We want Dr. Jones tax rate to increase to a higher tax rate for 2012. We do not want Dr. Jones to be in a low tax bracket in 2012 because we prepaid 2013 expenses in 2012 or accelerated income from 2012 to 2013. If we are aggressive an Dr. Jones is in a low tax bracket in 2012, the additional income moved from 2012 to 2013 and the prepaying of 2013 expenses paid in 2012, will push Dr. Jones into the top highest bracket in 2013.

Dr. Jones earned income over $200,000 will be subject to the 0.9 percent Affordable Care tax on earned income greater than $200,000 if single ($250,000 on a joint return)
The 3.8 percent Medicare tax on investment income more than $200,000 if single
($250,000 if filing a joint return).

In general, the term “fiscal cliff” refers to the following changes that will occur at midnight on
December 31, 2012, unless lawmakers do something before then:
Capital gains taxes will increase from a maximum of 15 percent to a maximum of 20
Tax rates on ordinary income will increase, with the top rate going from 35 percent
to 39.6 percent.
Tax rates on dividends will go from a maximum of 15 percent to a maximum of 39.6
The alternative minimum tax (AMT) will apply to millions of additional taxpayers.
Self-employment and employee payroll taxes will see a 2 percent increase.
Extended federal unemployment benefits will expire.
Dozens of tax extenders, such as the research credit and the itemized tax deduction
for sales taxes, will expire.
Cuts in defense and other discretionary and mandatory spending will take place.
Medicare payments for physicians’ services will take a cut.

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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