Hopefully as you read the contents of this “blog” you won’t have the same surprised reaction as the one my friend andstickershock client of twenty years had in relation to his personal tax situation for 2013…..let me explain. He knew he was having a pretty good year and as a result he had ball parked his tax liability as compared to last year and paid in an extra 20% figuring that would be pretty close to where he would end up.  Logical…. right?  Needless to say, he vastly underestimated his 2013 tax liabilities.  You can understand his confusion and surprise as to how this possibly could be; after all, he didn’t make that much more money.

We all have been hearing for a number of months, if not years, that various things are happening in the tax area to increase the burden for upper income earners.  Let me be more specific:

  • The expiration of the Bush tax cuts allow for qualified dividends and long term capital gains that once were taxed at 15% to now be taxed at 20%, an increase of 5% for the same dollars earned.
  • The increase in the top tax brackets in order to assure that “we all pay our fair share” has added another approximate 4% to the total.
  • In order that everyone can receive medical care via the Affordable Care Act, an excise tax of approximately 4% is added to all interest, dividend, net capital gains, and passive income (such as net rental property income for most of us).
  • The infamous “FICA tax” ceiling was raised in 2013 to $113,700 from $110,100 in 2012 which effectively added 6% on that incremental piece.  In 2014, the ceiling was raised another $3,300 to $117,000.
  • Given we live in California, what I call a “weather tax” was retroactively passed in 2012 that adds up to another 3% to our tax burden.

While none of these items in and of themselves seem like a “huge” amount, and some of the increases only apply to certain pieces of income, the overall impact added up to an approximate rate increase of over 16% for him in 2013.  Given he experienced the blessing of having a better year in 2013 than in 2012 and made a bit more money, he was essentially caught with what I have come to call tax “sticker shock”.

Those of you who ran year-end projections are probably feeling the same sensation my friend did (I won’t get into too much detail here as to exactly what those thoughts and sensations are).  For those of you who did not have this work done, PLEASE DON’T SHOOT THE MESSENGER when you get your completed returns this year.  As always, we will do our best to bring your tax burden down as low as possible but we are fighting upstream on this one.  Just wanted to give everyone a heads up considering the true surprise my friend experienced.  Good luck.

Russ Wertz – Founder and CEO of Wertz & Company, LLP, a Professional Services Firm located in Orange County, CA that specializes in working with entrepreneurs along their journey to success.