It’s pretty common that people want to pay less tax. But it’s not often as obvious how many taxes we have on our income. So, it’s a valid question to ask, which tax do you want to reduce?
Even stepping aside from the sales tax, use tax and estate tax, which are no small taxes, there is still plenty to think about when it comes to your income.
Self-employment tax is calculated based on net income from certain entities like Sole Proprietorships or LLCs that you work actively in. It’s not triggered by high income. It’s triggered by the wrong entity. We’re going to talk more about that later. Self-employment tax is 15.3%, so it’s a significant tax.
Federal income tax has higher rates. The top level is now 39.6%, as opposed to last year’s 35% rate. That, by itself is a 13% increase in tax. But, there’s more in 2013. Your itemized deductions and exemptions begin to phase out as your income increases.
State income tax is reaching even further than you might expect. The term to know here is nexus. Nexus means connection and if a state thinks you have nexus, they’re going to want to see a tax return and probably some tax. This is something to consider before you invest in partnerships that might give you multiple state K-1s. you may suddenly find you’re paying several thousand dollars for the preparation of your return. And if you have a business, it’s even more complicated.
And, while we’re talking about state income tax, there is more to be concerned with. Many states have increased their state tax rate. And, finally, more states have decoupled from the IRS’s definition of deductions and income. Things you can deduct on the federal return are no longer deductible on your state return. Higher rates and a looser definition of taxable income translates to higher state income tax.
And, this year we’ve got two new Medicare surtaxes, thanks to the Affordable Care Act. They are applicable if you have higher W-2 wages or if you have passive income and meet a certain income threshold.
There are plenty of reasons this year for looking at the tax you pay and strategically figure out how you can pay less. If you want to pay less in 2013, you’ll need to put together your plan before the end of the year. Want some ideas? Make sure you check out “12 Tax-Busting Strategies Before Year End.” If you didn’t sign up for it originally, you’ll need to go to the Insider’s Club as part of USTaxAid.