2016 Post-Election Tax Update

mary g. daughteryAny change in Presidential Administration brings the possibility, indeed the likelihood, of tax law changes and the election of Donald Trump as the 45th President of the United States is no exception. During the campaign, President-elect Trump outlined a number of tax proposals for individuals and businesses. This article highlights some of the President-elect’s tax proposals.

Keep in mind that a candidate’s proposals can, and often do, change over the course of a campaign and also after taking office. This article is based on general tax proposals made by the President-elect during the campaign and is intended to give a broad-brush snapshot of those proposals.

At the same time, the end of the year may bring some tax law changes before President Obama leaves office. This letter also highlights some of those possible changes with an eye on how late tax legislation could impact your year-end tax planning.

Campaign proposals

During the campaign, President-elect Trump called for reducing the number of individual income tax rates, lowering the individual income tax rates for most taxpayers, lowering the corporate tax rate, creating new tax incentives, and repealing the Affordable Care Act (ACA) (including presumably the ACA’s tax-related provisions). The President-elect, in his campaign materials, highlighted several goals of tax reform:

  • Tax relief for middle class Americans
  • Simplify the Tax Code
  • Grow the American economy
  • Do not add to the debt or deficit

President-elect Trump also identified during the campaign a number of tax-related proposals that he intends to pursue during his first 100 days in office:

  • The Middle Class Tax Relief and Simplification Act: According to Trump, the legislation would provide middle class families with two children a 35 percent tax cut and lower the “business tax rate” from 35 percent to 15 percent.
  • Affordable Childcare and Eldercare Act:  A proposal described by Trump during the campaign that would allow individuals to deduct childcare and elder care from their taxes, incentivize employers to provide on-site childcare and create tax-free savings accounts for children and elderly dependents.
  • Repeal and Replace Obamacare Act: A proposal made by Trump during the campaign to fully repeal the ACA.
  • American Energy & Infrastructure Act: A proposal described by Trump during the campaign that “leverages public-private partnerships, and private investments through tax incentives, to spur $1 trillion in infrastructure investment over 10 years.”

Individual income taxes

The last change to the individual income tax rates was in the American Taxpayer Relief Act of 2012 (ATRA), which raised the top individual income tax rate. Under ATRA, the current individual income tax rates are 10, 15, 25, 28, 33, 35, and 39.6 percent. During the campaign, President-elect Trump proposed a new rate structure of 12, 25 and 33 percent:

  • Current rates of 10% and 15% = 12% under new rate structure.
  • Current rates of 25% and 28% = 25% under new rate structure.
  • Current rates of 33%, 35% and 39.6% = 33% under new rate structure.

This rate structure mirrors one proposed by House Republicans earlier this year. During the campaign, President-elect Trump did not detail the precise income levels within which each bracket percentage would fall, instead generally estimating for joint returns a 12% rate on income up to $75,000; a 25% rate for income between $75,000 and $225,000; and 33% on income more than $225,000 (brackets for single filers will be half those dollar amounts) and “low-income Americans” would have a 0% rate. As further details emerge, our office will keep you posted.

Closely-related to the individual income tax rates are the capital gains and dividend tax rates. The current capital gains rate structure, imposed based upon income tax brackets, would presumably be re-aligned to fit within President-elect Trump’s proposed percent income tax bracket levels.

AMT and more

President-elect Trump proposed during the campaign to repeal the alternative minimum tax (AMT). The last time that Congress visited the AMT lawmakers voted to retain the tax but to provide for inflation-adjusted exemption amounts.

During the campaign, Trump proposed to repeal the federal estate and gift tax. The unified federal estate and gift tax currently starts for estates valued at $5.49 million for 2017 (essentially double at $10.98 million for married individuals), Trump, however, also proposed a “carryover basis” rule for inherited stock and other assets from estates of more than $10 million. This additional proposal has already been criticized by some Republican members of Congress, while some Democrats have raised repeal of the federal estate tax as a non-starter.

Other proposals made by President-elect Trump during the campaign would limit itemized deductions, eliminate the head-of-household filing status and eliminate all personal exemptions. President-elect Trump also has called for increasing the standard deduction. Under Trump’s plan, the standard deduction would increase to $15,000 for single individuals and to $30,000 for married couples filing jointly. In contrast, the 2017 standard deduction amounts under current law are $6,350 and $12,700, respectively, as adjusted for inflation.

Possible new family-oriented tax breaks were discussed by President-elect Trump during the campaign. These include the creation of dependent care savings accounts, changes to earned income tax credit and enhanced deductions for child care and eldercare.

Health care

The Affordable care Act (ACA) created a number of new taxes that impact individuals and businesses. These taxes range from an excise tax on medical devices to taxes on high-dollar health insurance plans. The ACA also created the net investment income (NII) tax and the Additional Medicare Tax, both of which generally impact higher income taxpayers. The ACA also made significant changes to the medical expense deduction and other rules that affect individuals. For individuals and employers, the ACA created new mandates to carry or offer insurance, or otherwise pay a penalty.

President-elect Trump made repeal of the ACA one of the centerpieces of his campaign. During the campaign, the President-elect said he would call a special session of Congress to repeal the ACA. At this time, how repeal may move through Congress remains to be seen. Lawmakers could vote to repeal the entire ACA or just parts. Our office will keep you posted of developments as they unfold.

Business tax proposals

On the business front, President-elect Trump highlighted small businesses, the corporate tax rate, and some international proposals during his campaign. Along with simplification, and the reduction, of taxes for small business.

Particularly for small businesses, Trump has proposed a doubling of the Code Sec. 179 small business expensing election to $1 million.  Trump has also proposed the immediate deduction of all new investments in a business, which has also been endorsed by Congressional tax reform/simplification advocates.

The current corporate tax rate is 35 percent. President-elect Trump called during the campaign for a reduction in the corporate tax rate to 15 percent. He also proposed sharing that rate with owners of “pass through” entities (sole proprietorships, partnerships and S corporations), but only for profits that are put back into the business.

Based on campaign materials, a one-time reduced rate would also be available to encourage companies to repatriate earnings of foreign subsidiaries that are held offshore. Many more details about these corporate and international tax proposals are expected.

Year-end 2016

More immediately, the calendar is quickly turning to 2017. Congress will meet for a “lame duck” session and is expected to take up tax legislation. Exactly what tax legislation Congress will consider before year-end remains to be seen. Every lawmaker has his or her “key” legislation to advance before the year-end. They include:

  • Legislation to renew some expiring tax extenders, especially energy extenders.
  • Legislation to fund the federal government, including the IRS, through the end of the 2017 fiscal year.
  • Legislation to enhance retirement savings for individuals.
  • Legislation to help citrus farmers, small businesses and more.

Some of these bills, if passed and signed into law, could impact year-end tax planning. The expiring extenders include the popular higher tuition and fees deduction along with some targeted business incentives.  If these extenders are renewed, or made permanent, our office can assist you in maximizing their potential value in year-end tax planning.

Another facet of year-end tax planning is looking ahead. President-elect Trump has proposed some significant changes to the Tax Code for individuals and businesses. If these proposals become law, especially any reduction in income tax rates, and are made retroactive to January 1, 2017, your tax planning definitely needs to be reviewed. Our office will work with you to maximize any potential tax savings.

Working with Congress

When the 115th Congress convenes in January 2017, it will find the GOP in control of both the House and Senate, therefore allowing Trump to move forward on his proposals more easily. It remains to be seen, however, what compromises will be necessary between Congress and the Trump Administration to find common ground. In particular, compromise will likely be needed to bring onboard both GOP fiscal conservatives who will want revenue offsets to pay for tax reduction, and Senate Democrats who have the filibuster rule to prevent passage of tax bills with fewer than 60 votes. Beyond considering tax proposals one tax bill at a time, it remains to be seen whether proposals can be packaged within a broader mandate for “tax reform” and “tax simplification.”

The information generally available now about President-elect Trump’s tax proposals is based largely on statements by him during the campaign and campaign materials. President-elect Trump will take office January 20, 2017. Between now and then, more details about his tax proposals may be available. Please contact our office if you have any questions.

For more information regarding this or any other tax related concern, please contact us at 404-255-7400 or at info@hoffmanestatelaw.com.

2015 YEAR-END TAX PLANNING

Hoffman8Year-end tax planning for individuals, trusts and businesses provides not only the opportunity to review the activities of the past year, it also generates an invaluable opportunity to leverage tax planning techniques as they relate to new developments.  As in past years, individuals and businesses need to question the status quo, explore new strategies, and evaluate potential plans – most of which is done best before the current tax year closes.  This letter explores some of the traditional year-end planning techniques and how events in 2016 may impact this planning.  We are ready to help you plan efficiently and effectively for 2015 and future years.

Traditional Year-End Planning Techniques

While new and pending developments play a critical role in year-end tax planning, traditional year-end planning techniques should not be overlooked.  These techniques principally hinge upon the goal of smoothing out taxable income between the year about to close and the next year as best as can be predicated.  In turn, such planning relies on strategies to accelerate or deferred income and expenses as required.  Some of the most common techniques include:

Income Acceleration into 2015 (for deferral to 2016, delay the following actions):

  • Selling outstanding installment contracts
  • Receive bonuses before January
  • Sell appreciated assets
  • Redeem U.S. Savings Bonds
  • Declare special dividend
  • Complete Roth conversions
  • Accelerate debt forgiveness income
  • Maximize retirement distributions
  • Accelerate billing and collections
  • Avoid mandatory like-kind exchange treatment
  • Take corporate liquidation distributions in 2015

Deductions/Credit Acceleration into 2015 (for deferral to 2016, take contrary actions as appropriate):

  • Bunch itemized deductions into 2015/Standard deduction into 2016
  • Don’t delay bill payments until 2016
  • Elect Expanding/accelerated depreciation
  • Pay last state estimated tax installment in 2015
  • Dont delay economic performance
  • Watch AGI limitations on deductions/credits
  • Watch net investment interest restrictions
  • Match passive activity income and losses

You should discuss with your accountant if you are contemplating any of these actions.

Georgia Tax Credits

The State of Georgia has several credits that can be used to offset Georgia income taxes.  One of these is the Education Expense Tax Credit.  This tax credit is for contributions made to Georgia Student Scholarship Organizations.  These organizations provide scholarships for students to attend primary and secondary private schools.  Each year the State sets aside a specific amount of money which is available to taxpayers who are pre- approved to participate in the program.  A married taxpayer filing a joint return can claim up to $2,500, and a single taxpayer up to $1,000.  The benefit to an S corporation shareholder, LLC member or partner of a partnership can even be greater – up to $10,000, limited to 6% of the related income.  Since there is only a finite amount available, the 2016 fund will be utilized early in 2016.  It is  important to apply early in order to take advantage of this program.  Many of the Student Scholarship Organizations are currently accepting “pre-registration” for the 2016 credits.  This credit is a win/win since the contribution is deductible on your federal income tax return, and a dollar for dollar tax credit is allowed as an offset to your Georgia income tax.

The film industry is entitled to a special Film Tax Credit for film production in Georgia.  The Georgia law allows for these credits to be transferred to other taxpayers.  As a result, unused credits are sold by the film companies at a discount and you can purchase the credits to satisfy your Georgia income tax liability.  Additionally, you get a full itemized deduction for the gross amount of the credit but you must report the discount as a capital gain.

Qualified Land Conservation Contributions

Another tax planning opportunity exists for a charitable contribution deduction for the donation of a land conservation easement to a government unit or charity for conservation purposes.  The amount of the charitable deduction is the difference between the appraised value of the land before and after the conservation easement.  The deduction is limited to 50% of the donor’s adjusted gross income with a 15 year carryover of any unused deduction.  These rules were made permanent for all years beginning after December 31, 2014, by the Conservation Easement Incentive Act of 2015.  You do not need to contribute your own land in order to benefit from the conservation easement charitable deduction – the benefit is also available by investing in syndicated conservation easement partnerships.  If interested in learning more, please contact our office for additional information.

Georgia also has a state tax credit under the Georgia Conservation Tax Credit Program.  A state income tax credit is allowed for property donated for conservation purposes by approved qualified donors up to the lesser of $250, 000 or 25% of the value of the donation for individuals.  Any unused credit can be carried over for 10 years.  Qualified landowners are also allowed to sell the income tax credit to other taxpayers, subject to certain regulatory restrictions.

Year-End Individual Planning

Assessing current income or expenses, gains and losses, to map out a year-end buy, sell or hold strategy makes particular sense as markets, and the economy in general, continue to make adjustments.

Income and Capital Gains/Dividends

Spikes in your income, whether capital gains or other income, may push capital gains into either the top 39.6 percent bracket (for short-term gains), or the 20 percent capital gains bracket (for long-term capital gains).  Spreading the recognition of certain income between 2015 and 2016 may minimize the total tax paid for the 2015 and 2016 tax years.  And those individuals finding themselves in the 15 or 10 percent tax brackets should consider recognizing any long-term capital gain available to the extent that, with other anticipated income, will not exceed the top of the 15 percent bracket ($74,900 for joint filers and $37,450 for singles in 2015).

Net Investment Income Tax (“NII”)

Since creation of the 3.8% NII tax, individuals have learned that NII encompasses more than capital gains and dividends.  NII includes income from a business in which the taxpayer is a passive participant.  Rental income may also be considered NII unless earned by a real estate professional.  The NII threshold amount is equal to: $250,000 in the case of joint returns or a surviving spouse; $125,000 in the case of a married taxpayer filing a separate return, and $200,000 in any other case.  These threshold amounts are not indexed for inflation.

Planning Opportunity

Along with reviewing traditional techniques, individuals should examine carefully the potential impact of the NII tax, capital gains and dividends, alternative minimum tax (AMT), Additional Medicare Tax, “kiddie tax”, and more.  For some taxpayers, year-end strategies to keep income below certain thresholds may be valuable, such as the thresholds for the NII tax, the Additional Medicare Tax, the Pease limitation on exemptions and itemized deductions, and others.  Of course, the nuances of every individual’s situation must be taken into account. For example, not all capital gains are treated the same, or taxed the same.  The maximum tax rate on qualified capital gains and dividends increases from 15 to 20 percent for taxpayers whose incomes exceed the thresholds set for the 39.6 percent rate ($464,850 for joint filers and $413,200 for singles in 2015).  The maximum tax rate on qualified taxable gains and dividends for all other taxpayers remains at 15 percent; except that a zero-percent rate applies to taxpayers with income below the top of the 15 percent tax bracket.  The maximum tax rates for collectibles and unrecaptured Code Sec. 1250 gain are 28 and 25 percent, respectively.

New Legislation and Tax Extenders for Individuals

Equally important is not to overlook new tax legislation. So far in 2015, only a handful of tax bills have been passed by Congress and signed into law by President Obama.  Two new laws affect public safety officers.  A trade bill also makes a change to the child tax credit for taxpayers who elect to exclude from gross income for a tax year any amount of foreign earned income or foreign housing costs.  Congress also renewed the Health Care Tax Credit for qualified individuals.

Congress has not (as of the date of this letter) renewed the so-called tax extenders.  Many individuals have used the extenders, such as the state and local sales tax deduction, higher education tuition and fees deduction, Code Sec. 25C residential energy credit, IRA distributions directly to charities, and many more to maximize tax savings.  As in the past years, it’s a waiting game.  For year-end planning purposes, it is generally anticipated that Congress will renew these popular tax breaks, making them available for 2015.  It is unclear if Congress will also extend them into 2016.  Our office will keep you posted of developments.

Estate and Gift Taxes

The maximum federal unified estate and gift tax rate is 40 percent with an inflation-adjusted $5,000,000 exclusion (up to $5.43M for gifts made and estates of decedents dying during 2015 and $5.45M for 2016).  The annual use-it-or-lose-it gift tax exclusion allows taxpayers to gift up to an inflation-adjusted $14,000 to any individual ($28,000 for married individuals who “split” gifts) tax free and without counting the amount of the gift toward the lifetime $5,000,000 exclusion (adjusted for inflation) and, with proper planning, double for married couples who share the exclusion.

Affordable Care Act (“ACA”)

Unless exempt, the ACA requires that all individuals carry minimum essential coverage or make a shared responsibility payment.  Individuals with health insurance coverage should ascertain that their coverage satisfies the ACA’s minimum essential coverage requirements.  Individuals without minimum essential coverage may be liable for a shared responsibility payment unless exempt.  Individuals who obtain health insurance coverage through the ACA Marketplace may be eligible for the Code Sec. 36B premium assistance tax credit.

Planning For Retirement

Year-end is a good time to review if your retirement savings plans and tax strategies compliment each other.  Individuals can contribute up to $5,500 to an IRA or Roth IRA for 2015.  If they qualify, individuals can also make an additional so-called “catch-up contribution” of an additional $1,000.  This treatment is targeted to individuals age 50 and older.  Keep in mind that the maximum amount that can be contributed to a Roth IRA begins to decrease once a taxpayer’s adjusted gross income crosses a certain threshold.  For example, married couples filing jointly will begin to see their contribution start to phase out when their AGI is $183,000.  Once their AGI reaches $193,000 or more, they can no longer contribute to a Roth IRA.  For single filers the corresponding income thresholds for 2015 are $116,000 and $131,000.  Please note that individuals have until April 18, 2016, to make an IRA contribution for 2015.

Traditional IRAs and Roth IRAs are very different savings vehicles.  A traditional IRA or Roth IRA set up years ago may not be the best savings vehicle today or for the immediate future if employment and other personal circumstances have changed.  Some individuals may be contemplating rolling over a workplace retirement plan into an IRA.  Very complex rules apply in these situations and rollovers should be carefully planned.  The same is true in converting a traditional IRA to a Roth IRA.  Every individual has unique goals for retirement savings and no one plan fits all.

Retirement – Higher Deduction Options

Business owners seeking to make significant pension contributions should consider a Cash Balance Plan for their company.  In the right situation, an owner/employee can contribute up to 100% of their annual compensation limited to $210,000 for 2015.  However, skilled assistance is required to set up this type of plan and the plan requires annual administration not required for many defined contribution plans (401K, SEP, etc.).  For a 2015 deduction, the plan must be established by December 31, 2015, even though the actual contribution can be deferred until the due date of the tax return with extensions.

Life Events

Marriage, the birth or adoption of a child, the purchase of a new residence, a change in filing status, retirement, and many more life events impact year-end tax planning. Of course, timing is a factor.  In some cases, a life event may be planned; in others, events occur unexpectedly.  The possibility of significant changes and/or significant or unusual items of income or loss should be part of a year-end tax strategy.  Additionally, taxpayers need to take a look into the future, into 2016, and predict, if possible, any events that could trigger significant income or losses, as well as a change in filing status.

Year-End Trust Planning

Many of the tax planning strategies for individual taxpayers are also applicable to trusts.  As with individuals, spreading the recognition of income between tax years may minimize trust taxes. Another tax minimization strategy for a trust is to shift trust income from a high rate trust to a lower rate beneficiary.

Income and Capital Gains/Dividends

The tax brackets for trusts are  more compressed than the tax brackets for individuals.  For example, in 2015, the 39.6% tax bracket for individuals filing jointly begins at $464,850 of taxable income, but for trusts the 39.6% bracket begins at only $12,300 of taxable income.  As a result, shifting trust income to the beneficiary may produce significant tax savings.  One way this can be achieved is by making distributions from the trust to the beneficiary.

Net Investment Income Tax

While the 3.8% NII tax threshold for individuals is $250,000 for married filing joint and $200,000 for individuals filing single, the 2015 NII tax threshold for trusts begins at only $12,300 of taxable income.  This can result in a substantial amount of trust income being subject to the additional 3.8% NII tax.  However, trust exposure to the NII tax may be reduced through distribution planning (See the following paragraph).

Beneficiary Distributions & The 65 Day Rule

When distributions are made from the trust to the beneficiary, the trust is allowed a deduction for the distribution of certain classes of income.  The income is then included on the beneficiary’s individual income tax return.  In many cases, the beneficiary’s individual income tax rate is lower than the income tax rate for the trust.  This results in less total income tax on the trust income.

A trust can elect to treat distributions made in the first 65 days of the tax year as a distribution of current year or prior year income.  Therefore, a distribution made by March 5, 2016, can be treated as a distribution of 2015 trust income.  This allows some additional time to determine the income for the trust and determine if a distribution should be made to the beneficiary.

The decision on whether to make a distribution, and the amount of the distribution, should be reviewed each year.  The tax related factors can change from year to year and there are also other non-tax factors that should be considered.

Year-End Business Planning

As in past years, business tax planning is uncertain because of the expiration of many popular but temporary tax breaks that have been part of an “extenders” package of legislation.  Also added to the mix is the far-reaching ACA.  Other changes to the tax laws in 2015 made by new regulations and other IRS guidance should also be considered in assessing year-end strategies.

Code Sec. 179 Expanding

Code Sec. 179 property includes new or used tangible property that is depreciable under Code Sec. 1245 and  is purchased to use in an active trade or business.  Under enhanced expensing, for 2014 and prior years, businesses could write off (“expense”) up to $500,000 in qualifying expenditures.  This $500,000 cap was not reduced unless total expenditures exceed $2,000,000.  Until the enhanced provisions are extended, businesses can write off up to $25,000 of qualifying expenditures.  This cap is reduced if total expenditures exceed $200,000.

Bonus Depreciation

Congress provided for 50% bonus depreciation through 2014 (through 2015 for certain transportation and other property).  Legislation introduced in Congress in 2015 would extend bonus depreciation through 2016 or, alternatively, make bonus depreciation permanent.

“Repair” Regulations

A potentially beneficial provision in final, so-called “repair” regulations is the de minimis safe harbor.  The safe harbor enables taxpayers to routinely deduct certain items whose cost is below the specified threshold.  The de minimis safe harbor is an annual election, not an accounting method, so it can be made and changed from year to year.  The current threshold is set at: $5,000 for taxpayers with an applicable financial statement (taxpayers with an AS should have a written policy in place by the beginning of the year that specifies the amount deductible under the safe harbor); and $500 for taxpayers without an AS.

Domestic Production Activities Reduction

One incentive that is definitely available for 2015 is the Code Sec. 199 domestic production activities deduction.  This deduction is over 10 years old, but the number of taxpayers claiming the potentially valuable deduction is smaller than the other incentives.  In 2015, the IRS issued guidance that fleshes out the types of activities that may qualify for the deduction.  The types of activities are many and varied.  Our office can review your business activities and help you ascertain if the deduction may be worthwhile.

Vehicle Depreciation Limits

The IRS released the inflation-adjusted limitations on depreciation deductions for business-use passenger automobiles, light trucks, and vans first placed in service during calendar year 2015.  The IRS also increased the 2014 first-year limitations by $8,000 to reflect passage of the Tax Increase Prevention Act of 2014, which retroactively extended bonus depreciation for 2014 late last year. It is uncertain whether anticipated 2015 extenders legislation will make the same retroactive adjustment for 2015.

Other Business Extenders

Many other beneficial tax provisions for businesses are up for consideration in extenders legislation for 2015 and beyond.  These include the research tax credit; small business stock; S corp built-in gains; New Markets Tax Credit; Work Opportunity Tax Credit; employer wage credit for activated military reservists; Subpart F provisions; enhanced deduction for contributions of food inventory, empowerment zones; Indian employee credit; low-income credits for subsidized new buildings and military housing; treatment of regulated investment companies (RIBS); and basis reduction of S corporation stock after donations of property.

Small Business Health Care Tax Credit

Small employers with no more than 25 full-time equivalent employees may qualify for a special tax credit to help offset the cost of health insurance for their employees.  The employer must pay average annual wages of no more than $50,000 per employee (indexed for inflation) and maintain a qualifying health care insurance arrangement.

Filing/Reporting Changes

Due to changes in the tax laws and other events, some deadlines will be changing starting in 2016; with others starting for 2016 returns filed in 2017.  As a result, planning at year-end 2015 might start factoring in some of these deadlines when setting out schedules and strategies at the start of 2016.  Notably, under the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, partnerships will be subject to an earlier March 15 deadline and C corporations generally will move to an April 15th deadline starting for 2016 tax year returns.  Extensions-to-file are also adjusted.  The FBAR deadline for reporting a financial interest or signature authority over a foreign financial account also will move, from June 30 to April 15.

Individual Returns

A Washington, D.C. holiday, Emancipation Day, will shift the filing and payment deadline for 2015 individual returns from April 15, 2016 to April 18, 2016.

Estate Tax Uniform Basis Reporting

The IRS delayed new uniform basis reporting requirements for estate tax property until February 29, 2016.  The delay was provided to give the IRS time to issue guidance to executors, beneficiaries, and others on how to comply with the new reporting requirements.

Year-end tax planning can appear to be a daunting task, but our office is ready to work with you.  Please contact our office.  Together, we can create a customized tax strategy tailored to you.

Obamacare Implementation Update

Ian 1For many small business owners, dozens of questions have loomed about the implementation of the Affordable Care Act (the “ACA”).  Good news for them: the Obama administration has extended ACA transition deadlines to give small business owners a longer time to become compliant with ACA regulations.

When the ACA was first passed, all employers with 50 or more full-time employees would have had to have offered health insurance coverage to their employees by January 1, 2014.  However, the effective date for this requirement has been pushed back to January 1, 2015.  Additionally, 2015 will be considered a transition year, in which full compliance is not mandatory for employers with up to 100 full-time employees.

Since 2015 is considered a transition year, these mid-size employers (between 50 and 100 full-time employees) will not have to provide health insurance coverage until January 1, 2016 if the following two conditions are met:

  • From February 9, 2014 through December 31, 2014, the company’s number of employees and overall hours worked by employees were not reduced except for bona fide business purposes; and
  • From February 9, 2014 through December 31, 2015, health coverage for employees was not eliminated or materially reduced.

Many Hoffman & Associates clients can potentially benefit from this transition period. For employers with 100 or more full-time employees, the new regulations allow for coverage of 70% of employees in 2015 instead of 95%, which was the previous 2015 requirement.  All other provisions of the Affordable Care Act will be effective.

 

For more information regarding this or any other business planning concern, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com, call us at 404-255-7400 or send us an email.

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose. The information contained herein is provided “as is” for general guidance on matters of interest only. Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. Before making any decision or taking any action, you should consult a competent professional advisor.

2013 Year-End Tax Planning: Personal Tax Considerations

As January 1, 2014 gets closer, year-end tax planning considerations should be starting to take shape. New tax legislation has brought greater certainty to year-end planning, but has also created new challenges. The number of changes made to the Tax Code and the opportunities these changes bring may seem overwhelming. However, early planning will help you to maximize your potential tax savings and minimize your tax liability. This letter is intended to be a mile-high view of some key year-end tax planning strategies.

Changes for 2013 and beyond

In 2012, year-end planning was complicated by the great uncertainty over the fate of the Bush-era tax cuts. For more than 10 years, individuals had enjoyed lower income tax rates, but these rates were scheduled to expire after 2012. Moreover, many tax credits and deductions that had been made more generous were also set to expire after 2012. In January 2013, Congress passed the American Taxpayer Relief Act of 2012, which made permanent many, but not all, of the Bush-era tax cuts and also some tax benefits enacted during the Obama administration. Congress also permanently “patched” the alternative minimum tax (AMT) to prevent its encroachment on middle income taxpayers. The result is much greater certainty in year-end tax planning for 2013 because we know what the individual tax rates are in 2014, how many tax credits and deductions are structured, and much more.

Of course, there are always complexities in the Tax Code. In 2013, two new Medicare taxes kicked-in (3.8-percent net investment income (NII) surtax and a 0.9-percent Additional Medicare Tax). In addition, the U.S. Supreme Court ruled that the federal government’s denial of recognition of same-sex marriage was unconstitutional, opening the door to allowing married same-sex couples to file joint federal tax returns and take advantage of other tax benefits available to married couples. Beginning in 2014, some of the most far reaching provisions of the Affordable Care Act will become effective: the individual mandate, the start of Marketplaces to obtain insurance and a special tax credit to help offset the cost of insurance.

Planning for expiring tax incentives

First, do not lose the benefit of some generous, but temporary tax incentives that are available in 2013 but may not be in 2014. Are you planning to purchase a big-ticket item such as a new car or boat? The state and local sales tax deduction (available in lieu of the deduction for state and local income taxes) is scheduled to expire after 2013, and you may want to accelerate that purchase to take advantage of the tax break. A valuable tax credit for making certain energy efficient home improvements, including windows and heating and cooling systems, and a deduction for teachers’ classroom expenses are also scheduled to expire after 2013. These are just some of many incentives that will sunset after 2013 unless extended by Congress. The window for maximizing your tax savings for 2013 is closing. Please contact our office for more details.

Planning for new taxes and rates

Some individuals may be surprised that they owe additional taxes in 2013, even with the extension of the Bush-era tax cuts. Three new taxes are in effect for 2013: the NII surtax, the Additional Medicare Tax and a revived 39.6 percent tax bracket for higher income individuals. The 3.8-percent NII surtax very broadly applies to individuals, estates and trusts that have certain investment income above set threshold amounts. These amounts include a $250,000 threshold for married couples filing jointly; $200,000 for single filers. It should also be noted that trusts will hit the highest tax rate with only $11,950 of retained taxable income.  One strategy to consider is to keep, if possible, income below the threshold levels for the NII surtax by spreading income out over a number of years or finding offsetting above-the-line deductions. If you are considering the sale of your home, and the gain will exceed the home sale exclusion, please contact our office so we can discuss any possible NII surtax.

The Additional Medicare Tax applies to wages and self-employment income above threshold amounts including $250,000 for married couples filing joint returns and $200,000 for single individuals. If you have not already reviewed your income tax withholding for 2013, now is the time to do it. One way to reduce the sting of any Additional Medicare Tax liability is to withhold an additional amount of income tax.

As discussed, ATRA extended the Bush-era tax rates for middle and lower income individuals. ATRA also revived the 39.6 percent top tax rate. For 2013, the starting points for the 39.6 percent bracket are 450,000 for married couples filing jointly and surviving spouses, $425,000 for heads of households, $400,000 for single filers, and $225,000 for married couples filing separately. ATRA also revived the personal exemption phaseout and the limitation on itemized deductions for higher income individuals.

Starting in 2013, ATRA also sets the top rate for capital gains and dividends to 20 percent. This top rate aligns itself with the levels at with the new 39.6 percent income tax rate bracket starts: capital gains and dividends to the extent they would be otherwise taxed at the 39.6 percent rate as marginal ordinary income will be taxed at the 20 percent rate. ATRA did not change the application of ordinary income rates to short-term capital gains. However, individuals should plan for the possibility of being subject to a higher top rate (39.6 percent).

Planning for health care changes

Before year-end, individuals need to review how the Affordable Care Act will impact them. The Affordable Care Act brings a sea-change to our traditional image of health insurance. The law requires individuals, unless exempt, to either carry minimum essential health care coverage or make a shared responsibility payment (also known as a penalty). Most employer-sponsored health insurance is deemed to be minimum essential coverage, as is coverage provided by Medicare, Medicaid, and other government programs. Self-employed individuals and small business owners should revisit their health insurance coverage, if they have coverage, before year-end and weigh the benefits and costs of obtaining coverage in a public Marketplace (or a private insurance exchange) for themselves and their employees. Small businesses may be eligible for a tax credit to help pay for health insurance. Individuals may qualify for a premium assistance tax credit, which is refundable and payable in advance, to offset the cost of coverage. Please contact our office for more details about the Marketplaces, and health insurance coverage for small businesses and individuals.

Individuals with health flexible spending accounts (FSAs) and similar arrangements should take a look at their spending habits for 2013 and predict how they will use these tax-favored funds in the future. In 2013, the maximum salary-reduction contribution to a health FSA is $2,500. Remember that health FSAs have strict “use it or lose it” rules, and the cost of over-the-counter drugs cannot be reimbursed with health FSA dollars unless you obtain a prescription (there are some exceptions).

Individuals who itemize their deductions also need to keep in mind the 10 percent floor for qualified medical expenses. This change took effect at the beginning of 2013. It means that you can only claim deductions for medical expenses when they reach 10 percent of adjusted gross income (for regular tax purposes and for alternative minimum tax purposes). There is a temporary exception for individuals over age 65 for regular tax purposes.

Planning for gifts

Gift-giving is often overlooked as a year-end planning strategy. For 2013, individuals can make tax-free gifts (no tax consequences for the giver or the recipient) of up to $14,000 to any individual. Married couples may “split” their gifts to each recipient, which effectively raises the tax-free gift to $28,000. Gifts between spouses are always tax-free unless one spouse is not a U.S. citizen. In that case, the first $143,000 in gifts made in 2013 is tax-free.

There are special rules for gifts made for medical care and education that can be a valuable component of a year-end tax strategy, especially for individuals who want to help a family member or friend. Monetary gifts given directly to a college to pay tuition or to a medical service provider are tax-free to the person making the gift and the person benefitting from education or medical care.

Gifts to charity also are frequently made at year-end. Through the end of 2013, taxpayers age 70 ½ and older can make a tax-free distribution from individual retirement accounts directly to a charity. The maximum distribution is $100,000. Individuals taking this option cannot claim a deduction for the charitable gift.

Planning for retirement savings

Year-end is a good time to review if your retirement savings plans and tax strategies complement each other. For 2013, the maximum amount of contributions that can be made to an IRA is $5,500, with a $1,000 catch-up amount allowed for individuals over age 50. Keep in mind that the maximum amount that can be contributed to a Roth IRA begins to decrease once a taxpayer’s adjusted gross income crosses a certain threshold. For example, married couples filing jointly will begin to see their contributions begin to phase out when their AGI is $178,000. Once their AGI reaches $188,000 or more, they can no longer contribute to a Roth IRA. For single filers the corresponding income thresholds for 2013 are $112,000 and $127,000. Please note that 2013 contributions, for tax purposes, may be made until April 15, 2014.

Traditional IRAs and Roth IRAs are very different savings vehicles. A traditional IRA or Roth IRA set up years ago may not be the best savings vehicle today or for the immediate future if employment and other personal circumstances have changed. Some individuals may be contemplating rolling over a workplace retirement plan into an IRA. Very complex rules apply in these situations and rollovers should be carefully planned. The same is true in converting a traditional IRA to a Roth IRA and vice-versa. Every individual has unique goals for retirement savings and no one size fits all. Please contact our office for a more detailed discussion of your retirement plans.

Planning for Small Businesses

There are also strategies available for small businesses seeking to maximize tax benefits in 2013.  Two of the business incentives scheduled to end or significantly change after 2013 are the bonus depreciation allowance and the enhanced section 179 expensing provisions.

Bonus depreciation is scheduled to end after 2013 if not renewed by Congress. Additional 50-percent bonus depreciation was extended by the American Taxpayer Relief Act of 2012 (ATRA, signed into law on January 2, 2013) for one-year only and applies to qualifying property placed in service before January 1, 2014. In the case of property with a longer production period and certain non-commercial aircraft, the extension also applies to property acquired before January 1, 2014 and placed in service before January 1, 2015.

Unlike regular depreciation, under which half- or quarter-year conventions may be required, a taxpayer is entitled to the full, 50-percent bonus depreciation irrespective of when during the year the asset is purchased. Therefore, year-end placed-in-service strategies can provide an almost immediate “cash discount” from qualifying purchases, even when factoring in the cost of business loans to finance a portion of those purchases.

An enhanced section 179 expense deduction is available until 2014 for taxpayers (other than estates, trusts or certain non-corporate lessors) that elect to treat the cost of qualifying property (so called section 179 property) as an expense rather than a capital expenditure. The current section 179 dollar cap for 2013 is $500,000. For tax years beginning after 2013, that dollar limit is officially scheduled to plunge to $25,000 unless otherwise extended by Congress. For tax years beginning in 2013, the overall investment limitation is $2 million. That level is also scheduled to fall to $200,000 in 2014. Please contact our office regarding how to best benefit from these provisions in 2013.

Georgia Tax Credits

The State of Georgia has several state specific credits against Georgia income taxes.  Many of you may be aware of or have utilized the Georgia Private School Credit.  Each year Georgia sets aside an amount of money which is available to taxpayers who qualify in advance for the benefit.  Married taxpayers can claim up to $2500 and single taxpayers up to $1000.  Since there is a finite amount available, the fund will be fully utilized well before the end of 2014.  If you wish to claim this credit, you should make it a New Year’s resolution and apply for qualification at the beginning of 2014.  You can get more specific information at http://www.gadoe.org/External-Affairs-and-Policy/Policy/Pages/Tax-Credit-Program.aspx or talk directly with your private school.  This credit is a win/win since you get every dollar up to the limit back on your tax return and you also get a federal income tax deduction on Schedule A if you itemize. 

The film industry in Georgia is entitled to tax credits.  The law allows these credits to be transferred to other taxpayers.  As a result, unused credits are being sold at a discount and you can purchase them to satisfy your Georgia tax liability.  Additionally, you get a full itemized deduction for the amount of the credit but you must report the discount as a short-term capital gain on Schedule D.  An additional benefit is that the credit is treated like withholding and can minimize or eliminate the need for estimated payments and possibly withholding.

A small but frequently overlooked credit is the $150 Driver Education Credit.  If you pay for your child to take a driver’s education course and get a certificate of completion, you are entitled to a credit of the amount spent up to $150.

It should also be noted that the income tax exclusion on retirement income, for taxpayers who are 65 and older, will increase from $100,000 in 2013 to $150,000 in 2014, $200,000 in 2015, and to an unlimited retirement income exclusion effective in 2016.

We have reviewed only some of the many year-end tax planning strategies that could help you minimize your 2013 tax bill and maximize savings.  Please contact our office to schedule an appointment to personalize your 2013 year-end tax planning.

For more information regarding this or any other tax planning concern, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com, call us at 404-255-7400 or send us an email.

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose. The information contained herein is provided “as is” for general guidance on matters of interest only. Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. Before making any decision or taking any action, you should consult a competent professional advisor.

Obamacare Delay of Employer Mandate Provisions

Have over 50 employees and worried about providing healthcare by 2014?  You’ll have some extra time.

Last Tuesday, the Obama administration announced that it will delay implementation of the employer mandate provisions of the Affordable Care Act (the “ACA”, also known as “Obamacare”) until January 1, 2015.

The requirement would have required any employer with more than 50 employees to provide health insurance with a minimum level of benefits to all of its employees by January 1, 2014 or face a penalty of $2,000 per employee.  The Administration announced the delay because of the complexity of the law.

“We have heard concerns about the complexity of the requirements and the need for more time to implement them effectively,” Treasury Assistant Secretary Mark Mazur said in a blog post. “We have listened to your feedback and we are taking action.”

 

If you are concerned about implementation of the ACA and would like assistance with planning for it, please contact us at (404) 255-7400 or email us.

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose. The information contained herein is provided “as is” for general guidance on matters of interest only. Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. Before making any decision or taking any action, you should consult a competent professional advisor.