Anyone else noticed - taxes up more than income

[Catherine]

Has anyone else noticed this?

On my comparison with prior-year sheets, I am seeing, over and again, taxes increasing (by percentage) substantially more than income.

Client after client -- total income up 4%; taxes up 11%. Income up 12%; taxes up 27%. Income DOWN 5%; taxes UP 7%. No matter what kind of income (including unemployment) -- tax is going up, and in a higher percentage. This is specifically NOT including bracket creep cases, either.

Catherine

[joanmcq]

Less deductions? No making work pay credit?

[Randall]

That's what I'm thinking too joan. Remember with the no make work credit, those working got a 2% cut in SS. One recent client couple had a surprise when they owed $5000. He retired mid-year, took some retirement money (no withholding), took SocSec (no withholding),she still worked making decent income (low withholding), they paid off mortgage (much lower deduction). They were a new client but even so, they really didn't plan. But they had the money to pay, just were surprised. Another client, husband died, she took $35k in IRA out at once (no withholding). Couldn't understand why she owed so much. I realize she was under stress but she didn't call me to ask. I wonder why the financial institute didn't talk to her about some withholding on the IRA.

[rfassett]

I have had a few that lost the child tax credit for one or more of their children. Coupled with the loss of the Making Work Pay credit, it makes for a pretty good increase. And I am about to the point where if I hear one more client say that their kid is still in high school so they should still be getting the credit, somebody is going to get smacked.

[Catherine]

The clients I am talking about either have very small children (so child credit is NOT outgrown), or grown children.

NOT the lack of MWP credit either -- go to the Comparison, page/tab 2, and look at lines 43 (taxable income) and 61 (total tax; BEFORE payments and credits) -- then all the way to the right; percentage change from prior year.

I'm seeing line 43 go up X%, and line 61 go up ~2X%. Over and over.

[JohnH]

I have had a few that lost the child tax credit for one or more of their children. Coupled with the loss of the Making Work Pay credit, it makes for a pretty good increase. And I am about to the point where if I hear one more client say that their kid is still in high school so they should still be getting the credit, somebody is going to get smacked.

I'm not always successful at remembering to do this, but I try to take note when kids reach age 15 or 16 and point out to the parents that they will lose the child tax credit in the next year or two. I usually explain it in terms of "if you have exactly the same income and deductions, and even though you can still claim him/her as a dependent, your tax liability will be $1,000 greater".

If they have twins or for some other reason two kids born in the same year, it's almost mandatory to warn them. I'm pleasantly impressed with how many of them remember this when it happens. When I give them the bad news in the target year, they will usually tell me they remember me mentioning it to them, even if it initially slipped their mind in the interim.

[Randall]

Most clients confuse the child credit with the dependent deduction. When you tell them they don't get the cedit anymore, they think they're losing the dependent deduction too. 'What do you mean, I can't claim him anymore!!'

[Randall]

Catherine, something's got to be happening because for the most part, the tax laws were the same, extended two years thru 11 and 12 (although the extenders were extended two years for 10 and 11). So something's happening. Line 61 is before payments and refundabe credits but after the non-refundable credits (lines 48-54). There could be cap gain instead of $3k cap loss. Could be less ordinary dividends, something could trigger more Soc Sec taxable, loss of child credit, ed credits, AMT. I don't know but if normal income (W2) is the same, something else has to give.

[jainen]

>>total income up 4%; taxes up 11%. Income up 12%; taxes up 27%<<

Remember that all of the new income is taxed in the top tax bracket, so the new tax will be proportionately higher. Some taxpayers get double-taxed when higher income catches more of their SS.

You are comparing taxable income with total tax. Total tax is AFTER calculating capital gains rate, most credits and SE tax, so depending on the mix those elements can indeed raise tax even if total income goes down.

Good time for planning engagements, if only we could figure out how to charge more.

[Margaret CPA in OH]

Oh, I can figure out how to charge more with little effort. The real trick is getting clients to agree to the charges and actually paying them. I have lost a client or few when raising my rates or charging for extra services but am grateful for those who do value me and stick around - and pay.

[Randall]

I'm trying to charge more for new clients, setting my minimums higher, asking in advance about rentals, Sch C activity, Sch D activity, even Sch A stuff. Quoting higher fees up front. For existing clients, trying to keep them but raising fees gradually, unless something new is going on, then letting them know up front that new circumstance will increase the fee.