How to benefit at tax time
Some articles may depress readers. Taxes. Of course, there are some good taxes, mostly those that I don’t have to pay.
Let’s start with income taxes. We Hoosiers are thrice-blessed with federal, state, and county income taxes.
The federal income tax rate ranges from 0% for those with little taxable income up to 35% for the wealthy taxpayer. But these rates apply after numerous exemptions, deductions and credits. Popular deductions include the residential mortgage payment, charitable contributions, and medical expenses, all of which require itemizing to take full advantage of those expenses to reduce your taxable income. However, only about 25% of the taxpayers itemize; the other 75% take a standard deduction. For taxpayers with young children, the two most significant credits are the child credit and the child care credit which reduces the tax itself and does not require itemizing. The last so-called tax reform act was in 1986, with virtually no reform. Congress and the President never seem very serious about real reform as they continue to discuss the huge deficit.
Indiana income tax has a basic rate of 3.4%, with the county income tax tacked on for collection. One advantage for Social Security recipients is that the state does not tax their SSA payments. The Indiana General Assembly and governor have provided benefits for the 65-and-over taxpayers with an additional deduction, and provided some relief for the residential property taxpayer and renter with a limited property tax deduction.
For wage-earners and the self-employed, the FICA tax for social security and Medicare amounts to 15.3% of compensation. The Social Security portion of the tax is capped at an income level, which was $106,800 in 2010, but the Medicare portion is not capped and continues at 2.9% rate. Many folks pay more in FICA than for federal income tax. For the self-employed, they pay the entire tax, while an employer pays half for its employees. The federal income tax does provide a deduction of one-half of the tax for the self-employed.
Death may not relieve the deceased from taxes. The decedent may owe income taxes from the period before death. The good news is that the estate which reports the income in the last 1040 and IT 40 can claim the entire year’s exemptions and deductions for the last months of life. For death planning, I suggest dying early in the year. And the decedent’s estate may earn income from its assets, so it has to pay income taxes, notably at a considerably higher rate.
Passing on may mean you pass on assets to your heirs. The federal estate tax for this year and next has a $5 million exemption for heirs who are not a spouse or charity (spouse receipts are tax-free and the charitable devise is a deduction). Indiana has an inheritance tax based upon who receives the decedent’s assets. A spouse’s inheritance is tax-free, and children/grandchildren are exempt up to $100,000 and their tax rate begins at 1%; however, other heirs have either a $500 or $100 exemption and a tax rate that begins at either 7% or 10%.
If you intend to make a gift to anyone other than a spouse or charity, there may be a federal gift tax (no Indiana gift tax). Fortunately, there is a lifetime gifts exemption of $5 million for at least this year and next, and an annual exclusion of $13,000 per recipient.
Space limits me, so I will discuss the Indiana property tax, sales tax, hotel tax, unemployment tax and other taxes in a later column. I used to tell my clients that the good news is – you are not taxed at 100% of your income, but if you add in the other taxes, well, that is just too depressing.
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