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.

Musings from the CEO (Fall 2013)

Mike_Hoffman_17Here’s a dire prediction. You will remember 2013 as the year your taxes really went up! There has been a perfect storm of tax law changes that take effect in 2013, combined with the expiration of a number of recession tax relief measures, and the general prognosis that earnings and investment income are finally moving up in 2013 and into 2014.

In 2011 and 2012, those of you with earned income noticed a reduction in your Social Security withholding from 6.2% to 4.2%. That reduction is gone for 2013. You will also notice a Medicare tax increase of .9% that kicks in on earned income for those married taxpayers with modified adjusted gross income in excess of $200,000 for single taxpayers and $250,000 for married filing joint. This was part of Obamacare.

Also related to Medicare is a new Obamacare tax on net investment income, which includes capital gains (even taxable gain on the sale of a personal residence) of an additional 3.8% for those individual taxpayers with modified adjusted gross income of over $200,000 and married taxpayers with modified adjusted gross income of over $250,000.

The personal exemption phase outs (PEP) were eliminated during the recession over the last several years, but come back for 2013. This means that the deduction you would normally get for personal exemptions is phased out again, starting for those with adjusted gross income of over $250,000 for individual taxpayers or $300,000 for married taxpayers filing jointly.

Similarly, the limitations on itemized deductions, which had been suspended over the last several years, come back with a vengeance in 2013. These so-called Pease limitations reduce your itemized deductions up to 80% starting with individual taxpayers with adjusted gross income exceeding $250,000 or married taxpayers with adjusted gross income of over $300,000.

The threshold or floor for deducting medical expenses has been increased by 33 1/3% for 2013. In 2012, qualified medical expenses in excess of 7½% of adjusted gross income were deductible as an itemized deduction, and that threshold/floor has been increased to 10% for 2013.

Tax rates in general have gone up as a result of legislation taking effect in 2013. The top individual income tax rate has increased from 35% to 39.6%. The dividends and capital gains tax rate has increased by 1/3 from 15% in 2012 to 20% in 2013.

The Social Security wage base increased from 2012 to 2013 up to $113,700. That is the amount of earned income which is subject to the Social Security tax of 6.2% for an employee or 12.4% on earnings considered as from self employment.

What does all this mean? Tax rates on earned income have increased from potentially 52.1% (46.1% federal income tax, social security, Medicare, and 6% Georgia) to 61.8% (55.8% federal income tax, social security, Medicare, Obamacare and 6% Georgia). That’s 18.6% increase, and that’s the best scenario. Dividends and capital gains tax has increased 41.9%, from 21% (15% federal, 6% Georgia) to 29.8% (20% federal, 3.8% Obamacare, 6% Georgia).

Primarily, it means get your year-end planning done soon to mitigate any surprises. The need and the benefit of accelerating deductions or deferring income could be the most significant you have ever witnessed. Caution is advised to determine if you are in an alternative minimum tax situation, as this will have a significant effect on some year-end tax maneuvers that you might employ.

Examine your withholding and estimated payments to determine that you have eliminated or minimized any under-payment penalty. Explore the use of a plethora of state tax credits that are available, particularly in Georgia, to pay your state taxes. This could result in saving anywhere from 10% to 40% of your state tax liability, combined with the elimination of any potential under payment penalties.

Most tax preparers have software available to run a mock-up of your 2013 tax returns. This could come in handy to guide you as to whether it is advisable for you to accelerate certain deductions, harvest some capital losses to offset capital gains, convert traditional IRA assets to Roth IRAs, or confirm that your judgment to do nothing is rational.

In addition to being a full service law firm, Hoffman & Associates maintains a stand-alone tax practice area dedicated to the preparation and filing of all types of tax returns. Please do not hesitate to contact me or any of us if we can arrange to assist you in achieving some significant income tax savings for 2013.

For more information regarding this or any other estate or 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.

Legal Matters in Starting Your Business

Mike_Hoffman_17Join Mike Hoffman in this 74 minute audio as he hosts the 11th session of the 24 hour MBA in discussing how to get your business off the ground.  There are many different legal options in starting a business, and in this audio session, you will understand the best way to start your business and keep it successful for future generations.  24hrmba-11.mp3

 

The 2013 Medicare Surtax: What You Need to Know

The American Taxpayer Relief Act of 2012 and the Patient Protection and Affordable Care Act of 2010 have ushered in new income tax provisions which become effective in 2013.  One of the new provisions is the 3.8% Medicare surtax on an individual’s Net Investment Income.  This tax is one of the funding provisions for the new health care legislation, known as Obamacare.  The surtax will impact high income taxpayers who have a modified adjusted gross income in excess of specific thresholds.

FIRST OF ALL, WHO IS A “HIGH INCOME” INDIVIDUAL?  WILL I BE SUBJECT TO THIS TAX?

Individuals will be subject to the tax if they have any amount of net investment income and their modified adjusted gross income (“MAGI”) for the year is greater than the following threshold amounts:

  •   Married filing jointly                                              $250,000
  •   Married filing separately                                        $125,000
  •   Single or head of household                                   $200,000

HOW IS THE TAX CALCULATED?

The 3.8% tax is calculated on the lesser of (1) your net investment income or (2) your MAGI in excess of the threshold amount.  Some common types of investment income are: interest (excluding tax exempt interest), dividends, capital gains, rental income (if you are not a real estate professional) and passive income from partnership activities.

DOES THE TAX APPLY TO THE GAIN ON THE SALE OF MY PERSONAL RESIDENCE?  WHAT ABOUT A VACATION HOME OR INVESTMENT REAL ESTATE?

Net investment income only includes the net taxable gain from the sale of a personal residence, which is the gain in excess of $500,000 for married individuals and $250,000 for single individuals.    The entire net capital gain from the sale of a vacation home, investment property or rental real estate is included in investment income.

DOES THIS TAX APPLY TO TRUSTS?

The tax will apply to estates and trusts with undistributed net investment income and an adjusted gross income in the amount of $11,650 for 2013.

WHAT CAN I DO TO MINIMIZE THE IMPACT OF THE SURTAX?

The timing of transactions becomes a very important tax planning tool in avoiding or minimizing the impact of the 3.8% surtax.  This is especially true for sales transactions of stock, real estate and other investments.  The current year tax impact of net investment income and other gains and losses should be reviewed in order to minimize the tax.

Other potential opportunities to minimize the surtax impact are:

  • Consider converting traditional IRAs to Roth IRAs.  This would reduce the MAGI in future years when distributions are taken from the accounts.
  • Investing in tax exempt bonds instead of taxable bonds.  The interest from the tax exempt bonds is excludable.
  • Harvesting capital losses to offset capital losses to reduce net investment income and MAGI.
  • Managing retirement plan distribution to maintain MAGI under the threshold amounts.

IS THE 3.8% SURTAX ON NET INVESTMENT INCOME THE ONLY MEDICARE SURTAX?  WHAT ABOUT EARNED INCOME?

No, there is also a .9% Medicare surtax on the wages and self-employment income of high income taxpayers.  This tax applies to earned income in excess of $200,000 for single filers, $250,000 for married taxpayers filing joint returns and $125,000 for married taxpayers filing separately.

For more information regarding tax planning, tax compliance and controversy, estate planning, or business law,  please visit the Hoffman & Associates website at www.hoffmanestatelaw.com or 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.

Fiscal Cliff Avoidance Legislation

Pulling back from the “fiscal cliff” at the 13th hour, Congress on Tuesday preserved most of the George W. Bush-era tax cuts and extended many other lapsed tax provisions.
Shortly before 2 a.m. Tuesday, the Senate passed a bill that had been heralded and, in some quarters, groused about throughout the preceding day. By a vote of 89 to 8, the chamber approved the American Taxpayer Relief Act, H.R. 8, which embodied an agreement that had been hammered out on Sunday and Monday between Vice President Joe Biden and Senate Minority Leader Sen. Mitch McConnell, R-Ky. The House of Representatives approved the bill by a vote of 257–167 late on Tuesday evening, after plans to amend the bill to include spending cuts were abandoned. The bill now goes to President Barack Obama for his signature.

“The AICPA is pleased that Congress has reached an agreement,” said Edward Karl, vice president–Tax for the AICPA. “The uncertainty of the tax law has unnecessarily impeded the long-term tax and cash flow planning for businesses and prevented taxpayers from making informed decisions. The agreement should also allow the IRS and commercial software vendors to revise or issue new tax forms and update software, and allow tax season to begin with minimal delay.”

With some modifications targeting the wealthiest Americans with higher taxes, the act permanently extends provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, P.L. 107-16 (EGTRRA), and Jobs and Growth Tax Relief Reconciliation Act of 2003, P.L. 108-27 (JGTRRA). It also permanently takes care of Congress’s perennial job of “patching” the alternative minimum tax (AMT). It temporarily extends many other tax provisions that had lapsed at midnight on Dec. 31 and others that had expired a year earlier.

The act’s nontax features include one-year extensions of emergency unemployment insurance and agricultural programs and yet another “doc fix” postponement of automatic cuts in Medicare payments to physicians. In addition, it delays until March a broad range of automatic federal spending cuts known as sequestration that otherwise would have begun this month.
Among the tax items not addressed by the act was the temporary lower 4.2% rate for employees’ portion of the Social Security payroll tax, which was not extended and has reverted to 6.2%.
The legislation would allow tax rates to rise on the nation’s highest earners while also extending dozens of tax cuts for individuals and businesses. Major provisions of the bill include:

  • Raises the top tax rate to 39.6% for married couples earning $450,000; single taxpayers earning $400,000. These amounts will be indexed for inflation.
  • Raises long-term capital gains and qualifying dividends tax rate to 20% (from 15%) for taxpayers in the 39.6% tax bracket for regular and alternative minimum tax.
  • Permanently extends Bush-era tax cuts from 2001 and 2003 for all other taxpayers.
  • Reinstates phaseout of personal exemptions and overall limitation on itemized deductions for married couples filing jointly earning over $300,000 and single taxpayers earning over $250,000.
  • Raises the maximum estate tax rate to 40% but keeps the exemption amount at $5 million, adjusted for inflation.
  • Extends for 5 years (through 2018) the American Opportunity Tax Credit to pay for higher education, and special relief for families with 3 or more children for the refundable portion of the child tax credit and increased percentage for the earned income tax credit.
  • Patches the AMT for 2012 and adjusts the exemption amount for inflation going forward.
  • Extends through 2013 the following individual tax benefits: above the line deduction for teacher expenses, relief from cancellation of debt income for principal residences, parity for employer-provided mass transit benefits, deduction for mortgage insurance premiums as interest, election to deduct state and local sales taxes in   lieu of income taxes, above the line deduction for qualified education expenses, tax-free distributions from IRA accounts for charitable purposes.
  • Extends through 2013 certain business tax provisions that expired at the end of 2011 including: the research credit, the new markets tax credit, railroad track maintenance credit, mine rescue team training credit, work opportunity credit, the Section 179 asset expensing at $500,000, Section 1202 stock exclusion at 100%, and empowerment zone incentives.
  • Extends 50% bonus depreciation through 2013.
  • Extends through 2013 certain energy tax incentives that expired at the end of 2011 including: energy efficient credit for existing homes, alternative fuel vehicle refueling property credit, biodiesel and renewable diesel incentives, wind credit, energy efficient credit for new homes, and credit for manufacture of energy efficient appliances.

More detailed provisions of the Act are below:

Individual tax rates
All the individual marginal tax rates under EGTRRA and JGTRRA are retained (10%, 15%, 25%, 28%, 33%, and 35%). A new top rate of 39.6% is imposed on taxable income over $400,000 for single filers, $425,000 for head-of-household filers, and $450,000 for married taxpayers filing jointly ($225,000 for each married spouse filing separately).

Phaseout of itemized deductions and personal exemptions
The personal exemptions and itemized deductions phaseout is reinstated at a higher threshold of $250,000 for single taxpayers, $275,000 for heads of household, and $300,000 for married taxpayers filing jointly.

Capital gains and dividends
A 20% rate applies to capital gains and dividends for individuals above the top income tax bracket threshold; the 15% rate is retained for taxpayers in the middle brackets. The zero rate is retained for taxpayers in the 10% and 15% brackets.

Alternative minimum tax
The exemption amount for the AMT on individuals is permanently indexed for inflation. For 2012, the exemption amounts are $78,750 for married taxpayers filing jointly and $50,600 for single filers. Relief from AMT for nonrefundable credits is retained.

Estate and gift tax
The estate and gift tax exclusion amount is retained at $5 million indexed for inflation ($5.12 million in 2012), but the top tax rate increases from 35% to 40% effective Jan. 1, 2013. The estate tax “portability” election, under which, if an election is made, the surviving spouse’s exemption amount is increased by the deceased spouse’s unused exemption amount, was made permanent by the act.

Permanent extensions
Various temporary tax provisions enacted as part of EGTRRA were made permanent. These include:

  • Marriage penalty relief (i.e., the increased size of the 15% rate bracket (Sec. 1(f)(8)) and increased standard deduction for married taxpayers filing jointly (Sec. 63(c)(2));
  • The liberalized child and dependent care credit rules (allowing the credit to be calculated based on up to $3,000 of expenses for one dependent or up to $6,000 for more than one) (Sec. 21);
  • The exclusion for National Health Services Corps and Armed Forces Health Professions Scholarships (Sec. 117(c)(2));
  • The exclusion for employer-provided educational assistance (Sec. 127);
  • The enhanced rules for student loan deductions introduced by EGTRRA (Sec. 221);
  • The higher contribution amount and other EGTRRA changes to Coverdell education savings accounts (Sec. 530);
  • The employer-provided child care credit (Sec. 45F);
  • Special treatment of tax-exempt bonds for education facilities (Sec 142(a)(13));
  • Repeal of the collapsible corporation rules (Sec. 341);
  • Special rates for accumulated earnings tax and personal holding company tax (Secs. 531 and 541); and
  • Modified tax treatment for electing Alaska Native Settlement Trusts (Sec. 646).

Individual credits expired at the end of 2012
The American opportunity tax credit for qualified tuition and other expenses of higher education was extended through 2018. Other credits and items from the American Recovery and Reinvestment Act of 2009, P.L. 111-5, that were extended for the same five-year period include enhanced provisions of the child tax credit under Sec. 24(d) and the earned income tax credit under Sec. 32(b). In addition, the bill permanently extends a rule excluding from taxable income refunds from certain federal and federally assisted programs (Sec. 6409).

Individual provisions expired at the end of 2011
The act also extended through 2013 a number of temporary individual tax provisions, most of which expired at the end of 2011:

  • Deduction for certain expenses of elementary and secondary school teachers (Sec. 62);
  • Exclusion from gross income of discharge of qualified principal residence indebtedness (Sec. 108);
  • Parity for exclusion from income for employer-provided mass transit and parking benefits (Sec. 132(f));
  • Mortgage insurance premiums treated as qualified residence interest (Sec. 163(h));
  • Deduction of state and local general sales taxes (Sec. 164(b));
  • Special rule for contributions of capital gain real property made for conservation purposes (Sec. 170(b));
  • Above-the-line deduction for qualified tuition and related expenses (Sec. 222); and
  • Tax-free distributions from individual retirement plans for charitable purposes (Sec. 408(d)).

Business tax extenders
The act also extended many business tax credits and other provisions. Notably, it extended through 2013 and modified the Sec. 41 credit for increasing research and development activities, which expired at the end of 2011. The credit is modified to allow partial inclusion in qualified research expenses and gross receipts those of an acquired trade or business or major portion of one. The increased expensing amounts under Sec. 179 are extended through 2013. The availability of an additional 50% first-year bonus depreciation (Sec. 168(k)) was also extended for one year by the act. It now generally applies to property placed in service before Jan. 1, 2014 (Jan. 1, 2015, for certain property with longer production periods).
Other business provisions extended through 2013, and in some cases modified, are:

  • Temporary minimum low-income tax credit rate for non-federally subsidized new buildings (Sec. 42);
  • Housing allowance exclusion for determining area median gross income for qualified residential rental project exempt facility bonds (Section 3005 of the Housing Assistance Tax Act of 2008);
  • Indian employment tax credit (Sec. 45A);
  • New markets tax credit (Sec. 45D);
  • Railroad track maintenance credit (Sec. 45G);
  • Mine rescue team training credit (Sec. 45N);
  • Employer wage credit for employees who are active duty members of the uniformed services (Sec. 45P);
  • Work opportunity tax credit (Sec. 51);
  • Qualified zone academy bonds (Sec. 54E);
  • Fifteen-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements (Sec. 168(e));
  • Accelerated depreciation for business property on an Indian reservation (Sec. 168(j));
  • Enhanced charitable deduction for contributions of food inventory (Sec. 170(e));
  • Election to expense mine safety equipment (Sec. 179E);
  • Special expensing rules for certain film and television productions (Sec. 181);
  • Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico (Sec. 199(d));
  • Modification of tax treatment of certain payments to controlling exempt organizations (Sec. 512(b));
  • Treatment of certain dividends of regulated investment companies (Sec. 871(k));
  • Regulated investment company qualified investment entity treatment under the Foreign Investment in Real Property Act (Sec. 897(h));
  • Extension of subpart F exception for active financing income (Sec. 953(e));
  • Lookthrough treatment of payments between related controlled foreign corporations under foreign personal holding company rules (Sec. 954);
  • Temporary exclusion of 100% of gain on certain small business stock (Sec. 1202);
  • Basis adjustment to stock of S corporations making charitable contributions of property (Sec. 1367);
  • Reduction in S corporation recognition period for built-in gains tax (Sec. 1374(d));
  • Empowerment Zone tax incentives (Sec. 1391);
  • Tax-exempt financing for New York Liberty Zone (Sec. 1400L);
  • Temporary increase in limit on cover-over of rum excise taxes to Puerto Rico and the Virgin Islands (Sec. 7652(f)); and
  • American Samoa economic development credit (Section 119 of the Tax Relief and Health Care Act of 2006, P.L. 109-432, as modified).

Energy tax extenders
The act also extends through 2013, and in some cases modifies, a number of energy credits and provisions that expired at the end of 2011:

  • Credit for energy-efficient existing homes (Sec. 25C);
  • Credit for alternative fuel vehicle refueling property (Sec. 30C);
  • Credit for two- or three-wheeled plug-in electric vehicles (Sec. 30D);
  • Cellulosic biofuel producer credit (Sec. 40(b), as modified);
  • Incentives for biodiesel and renewable diesel (Sec. 40A);
  • Production credit for Indian coal facilities placed in service before 2009 (Sec. 45(e)) (extended to an eight-year period);
  • Credits with respect to facilities producing energy from certain renewable resources (Sec. 45(d), as modified);
  • Credit for energy-efficient new homes (Sec. 45L);
  • Credit for energy-efficient appliances (Sec. 45M);
  • Special allowance for cellulosic biofuel plant property (Sec. 168(l), as modified);
  • Special rule for sales or dispositions to implement Federal Energy
  • Regulatory Commission or state electric restructuring policy for qualified electric utilities (Sec. 451); and
  • Alternative fuels excise tax credits (Sec. 6426).

Foreign provisions
The IRS’s authority under Sec. 1445(e)(1) to apply a withholding tax to gains on the disposition of U.S. real property interests by partnerships, trusts, or estates that are passed through to partners or beneficiaries that are foreign persons is made permanent, and the amount is increased to 20%

New taxes
In addition to the various provisions discussed above, some new taxes also took effect Jan. 1 as a result of 2010’s health care reform legislation.

Additional hospital insurance tax on high-income taxpayers. The employee portion of the hospital insurance tax part of FICA, normally 1.45% of covered wages, is increased by 0.9% on wages that exceed a threshold amount. The additional tax is imposed on the combined wages of both the taxpayer and the taxpayer’s spouse, in the case of a joint return. The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case.
For self-employed taxpayers, the same additional hospital insurance tax applies to the hospital insurance portion of SECA tax on self-employment income in excess of the threshold amount.

Medicare tax on investment income. Starting Jan. 1, Sec. 1411 imposes a tax on individuals equal to 3.8% of the lesser of the individual’s net investment income for the year or the amount the individual’s modified adjusted gross income (AGI) exceeds a threshold amount. For estates and trusts, the tax equals 3.8% of the lesser of undistributed net investment income or AGI over the dollar amount at which the highest trust and estate tax bracket begins.
For married individuals filing a joint return and surviving spouses, the threshold amount is $250,000; for married taxpayers filing separately, it is $125,000; and for other individuals it is $200,000.
Net investment income means investment income reduced by deductions properly allocable to that income. Investment income includes income from interest, dividends, annuities, royalties, and rents, and net gain from disposition of property, other than such income derived in the ordinary course of a trade or business. However, income from a trade or business that is a passive activity and from a trade or business of trading in financial instruments or commodities is included in investment income.

Medical care itemized deduction threshold. The threshold for the itemized deduction for unreimbursed medical expenses has increased from 7.5% of AGI to 10% of AGI for regular income tax purposes. This is effective for all individuals, except, in the years 2013–2016, if either the taxpayer or the taxpayer’s spouse has turned 65 before the end of the tax year, the increased threshold does not apply and the threshold remains at 7.5% of AGI.

Flexible spending arrangement. Effective for cafeteria plan years beginning after Dec. 31, 2012, the maximum amount of salary reduction contributions that an employee may elect to have made to a flexible spending arrangement for any plan year is $2,500.

This news alert published by:  Marshall, Jones & Co., www.marshalljones.com

JIn 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.

 

Opportunities to Take Advantage of Before Its Too Late

Tax laws are changing at the end of this year.  Take advantage of these opportunities before it’s too late.

Estate Tax Savings’ Techniques:

Gifting:  Use your $5,120,000 gift tax exemption.  Next year, the exemption is scheduled to be reduced to $1,000,000.  If you don’t use the exemption, you could lose it, and there is little downside as long as you don’t need the assets for future sustenance.

Spousal Access Trusts: Create spousal access trusts to use all or a portion of your gift tax exemption.  Your gift tax exemption can be used in a way that still allows you to provide for your spouse.

Valuation Discounts: Utilize valuation discounts for lack of marketability and lack of control. Gift hard to value or fractional interests in property.  By doing so, you can leverage your $5.12 million dollar exemption to remove even more property from your estate.  These valuation discounts for family owned assets and businesses are under scrutiny by the IRS and Congress.  If you wait too long, the law might change and you may lose the opportunity to leave more to your children and grandchildren.

Intra-Family Loans: Make intra-family loans. Interest rates are at all time lows.  By loaning money to trusts for the benefit of your children and grandchildren, you can remove virtually all of the appreciation on the loaned funds from your taxable estate, while knowing the principal is still there and can be paid back should you end up needing it.

Income Tax Savings’ Strategies:

Make Distributions: Make dividend payments from C corporations to take advantage of the current 15% tax rate. Next year, the rate is scheduled to go back up to ordinary income tax rates, and the new Healthcare Surtax could apply in certain circumstances making the highest effective tax rate on dividends 43.4%. That is almost a 200% increase in the tax rate on dividends.

Harvest Capital Gains: Sell appreciated assets now rather than next year.  The current capital gains rate of 15% is scheduled to rise to 20% next year and with the Healthcare Surtax, the highest effective tax rate on capital gains will be 23.8% in 2013.  That’s almost a 60% increase in the tax rate.

Charitable Deductions: Contribute to charities now, when the benefit is 35 cents on the dollar. Proposed legislation will reduce the deduction to 28 cents on the dollar next year.  Consider donor advised funds and private foundations that will allow you to have some control after the gift is made.

Fund 529 Plans: 529 plans are a great way to save for college.  Growth is tax free, and distributions are tax free if used to pay for qualified tuition and living expenses.  You can use up to 5 years worth of annual exclusion gifts in one year – that’s $65,000 per child in one year ($130,000 from a married couple), without using any of your lifetime gift exemption.  Act now because Congress may act to curb, reduce, or make the requirements more restrictive.

 

For more information regarding estate planning, business law or tax controversy and  compliance, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com or call us at 404-255-7400.

 

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.