2013 Federal Tax Brackets

Current tax compliance is the first step and totally critical towards a successful resolution of your tax problems. It’s also the last step. That is, if you’ve entered into an Installment Agreement, or you’ve been successful in obtaining an Offer in Compromise the resolution is not set in stone. Any solution to your tax problem comes with one major caveat attached – you MUST remain in compliance with the requirements of the Internal Revenue Code. So it stands to reason, if your current tax liability increases on account of the increased tax rates, it will become more difficult to remain in compliant with the tax code. Defaulting taxpayers from their current tax negotiations, and increasing the likelihood that a while new slew of taxpayers begin to have tax problems, but shorting their estimated payments or withholding. UPDATE: Here are finalized 2013 Federal Income Tax Rate Brackets for Individuals indexed for inflation

Try to aim for the soft water

So what happens to taxpayers who have successfully settled their tax debt with the IRS if we go over the Fiscal Cliff? We mentioned earlier that without government action tax brackets (and rates) are set to return to the Pre-Bush-Tax-Cut levels. Some have suggested that the best route is to let the country go over the fiscal cliff. I have my own opinion on the matter – but it has nothing to do with politics and everything to do with protecting taxpayers who have successfully resolved their tax matters from unwittingly defaulting on their agreements with the IRS.

Here’s the problem…

If the government fails to act, rates will increase. But small businesses and payroll companies might operate under the assumption that the current tax regime will be extended. If they do that – people could end up under-withholding. Prepayment of income tax liabilities is one of the most important compliance requirements of the Internal Revenue Code. Here’s what CNN has to say about the sources of confusion:

There are several tax rates in play. The easiest to handle is the current payroll tax holiday. Workers typically pay a 6.2% payroll tax, meant to fund Social Security. For the past two years, they’ve been paying 4.2%, and that rate is set to rise back to 6.2% on the first $113,700 in wages.

But payroll won’t be simple to adjust if the Bush Tax Cuts expire and businesses also have to account for rising income tax rates. And that’s the bottom line, the longer congress waits, the longer payroll companies and small business who handle their own payroll will be left in the dark as to how much they should be withholding from your check once January 2013 rolls around. In the face of uncertainty employers will need to make a choice between possibly holding on to too much of your check and remitting it to the government or holding on to too little. And employers might choose the ladder approach, to dealing with employee complaints about what will amount to effective pay cut. Even if Congress and the President finally reach an agreement in 2013, withholding will have to be adjusted based on the assumptions made by an employer’s payroll department earlier. This adjustment will be no help to those who only work for part of the year. Fellow Nutmeggers (or Connecticutians, as we like to say) might remember the mess that was caused from retroactive Connecticut tax rate changes in 2011. Now imagine that on a national scale.

What you should do about it

If you have resolved your Tax Liability by agreement with the IRS, make sure that you know the assumptions your employer is using to calculate your withholding. If there is even a possibility that they are underwithholding at the start of 2013, you should consider making Estimated Tax Payments directly to the treasury, changing your exemptions on your W-4, or requesting that your employer withhold an additional set dollar amount from your pay every week.

And if you don’t have a back tax problem…don’t get one

Do not start under-withholding by claiming 9 exemptions or something, or not paying enough in estimated taxes if you are self-employed.  All you are doing is making a bigger problem down the line. Get your expenses in line. week.