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Tax Changes 2013 / 2014 and Their Impact
The document outlines various tax changes and provisions effective as of December 31, 2013, including adjustments to bonus depreciation, individual tax rates, and deductions. Key highlights include the introduction of a new 39.6% tax bracket, capital gains tax rates increase, and the perpetual extension of specific tax credits. It also discusses implications of the Affordable Care Act on Medicare taxes and estate tax considerations, specifically exemptions and planning strategies.
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Tax Changes 2013 / 2014 and Their Impact
- 1. LONG-TERM RELATIONSHIPS AREALL ABOUT DEDICATION Tax Changes and Their Affect October 22, 2013
- 2. Expiring Provisions At December31, 2013 Businesses: 50% Bonus depreciation on asset purchases Section 179 Expense reverts to $125K from $500K of asset purchases S Corporation built-in-gain tax recognition period current 5 years reverts to 10 years
- 3. Expiring Provisions at December31, 2013 (Continued) Individual: Elementary and Secondary School Teacher Expense $250 Qualified Tuition Deduction
- 4. Expiring Provisions at December31, 2013 (Continued) Individual: Sales Tax Deduction Tax Free Distributions to IRA for Charitable purposes
- 5. American Taxpayer ReliefAct of 2012 (Passed January 1, 2013)
- 6. American Taxpayer ReliefAct of 2012 (Continued) Highest Tax Bracket increased to 39.6% Increased Capital Gain Rate to 20% (still some at 15%) Qualified Dividends remain at 15% for all taxpayers
- 7. American Taxpayer ReliefAct of 2012 (Continued) Alternative Minimum Tax Exemption made permanent Revival of Itemized Deduction Phaseout Revival of Personal Exemption Phaseout
- 8.
- 9. Tax Brackets (Continued) The10, 15, 25, 28, 33, and 35% brackets remain after 2012.
- 10. Tax Brackets (Continued) Anadditional 39.6% bracket began in 2013
- 11. Single Individuals If taxableincome is: The tax will be: Not over $8,925 10% of taxable income Over $8,925 but not over $36,250 $892.50 plus 15% of the excess over $8,925 Over $36,250 but not over $87,850 $4,991.25 plus 25% of the excess over $36,250 Over $87,850 but not over $183,250 $17,891.25 plus 28% of the excess over $87,850 Over $183,250 to $398,350 $44,603.25 plus 33% of the excess over $398,350 Over $398,350 to $400,000 $115,586.25 plus 35% of the excess over $398,350 Over $400,000 $116,163.75 plus 39.6% of the excess over $400,000 Married Couples Filing Jointly If taxable income is: The tax will be: Not over $17,850 10% of taxable income Over $17,850 but not over $72,500 $1,785 plus 15% of the excess over $17,850 Over $72,500 but not over $146,400 $9,982.50 plus 25% of the excess over $72,500 Over $146,400 but not over $223,050 $28,457.50 plus 28% of the excess over $146,400 Over $223,050 but not over $398,350 $49,919.50 plus 33% of the excess over $223,050 Over $398,350 but not over $450,000 $107,768.50 plus 35% of the excess over $398,350 Over $450,000 $125,846 plus 39.6% over $450,000
- 12. Capital Gain Rates The20% rate will apply to the extent that income exceeds the thresholds set for the 39.6% bracket $400K $450K Single Married - Joint
- 13. Capital Gain Rates(Continued) Threshold The 15% rate applies for taxable incomes below the 39.6% threshold. A 0% rate remains to the extent taxable income remains below the 15% bracket.
- 14. Joe and JaneTaxpayer Capital Gain Tax Example
- 15. Alternative Minimum Tax(AMT) Exemptions made permanent 2013 2013 Exemptions $51,900 for Single Individuals $80,750 for Married filing Jointly Adjusted each year for Inflation
- 16. Itemized Deduction Phaseout Beginsat certain levels of Adjusted Gross Income $300K Married Filing Jointly $275K Head of Household $250K Single Individuals
- 17. Itemized Deduction Phaseout (Continued) Phaseoutreduces itemized deductions by 3% of the excess over the threshold Itemized Deductions lost CANNOT be more than 80% Deductible medical expense, investment interest, and casualty losses are excluded
- 18. Personal Exemption Phaseout Beginsat certain levels of adjusted gross income $300K $275K $250K Married Filing Jointly Head of Household Single Individuals Exemptions reduced by 2% for each $2,500 in excess of the threshold
- 19. Other Notable Items Child Tax Credit: For dependents under age 17 at the end of the year $1,000 Credit Extended Permanently Income has to be below certain threshold to obtain
- 20. Education Credits • EnhancedHOPE education credit continues through 2017 (American Opportunity Credit). • $2,500 credit per year per student (100% of first $2k paid; 25% of next $2k paid). • Covers all four years of college. • After four years, Lifetime Learning Credit applies. • Credit phase-outs: – Joint filers – adjusted gross income between $160k and $180k. – Other filers – adjusted gross income between $80k and $90k.
- 21. Education Credits (Continued) •Planning Tip – Pay $4k of tuition from non-529 Plan accounts in order to maximize credit (no payments from 529 Plans can be used for the credit)
- 22. Basis Reporting Effective 2011 Forevery broker that files a 1099B for gross proceeds: Must include cost basis of security sold Covers purchases beginning 2011 What about prior years? All reporting on IRS Form 8949
- 23. 1099 Reporting forall vendors paid > $600 repealed April 2011 Still Required to be issued for services paid > $600 Questions on tax returns Reporting Trap
- 24. New Jersey TaxRates 2009 Since 2010 $150K - $500K 6.37% 6.37% $400K - $500K 8.00% 6.37% $500K - $1 Million 10.25% 8.97% >$1 Million 10.75% 8.97% Taxable Incomes: Note: Below $150k - various rates ranging from 1.4% - 5.525%
- 25. New Jersey Items AlternativeBusiness Loss Carry forward Categories: • Net Loss from Business (Schedule C) • Net Loss from Rental, Royalty, Patent and Copyrights • Net Loss from Partnerships • Net Loss from S Corporations
- 26. New Jersey Items(Continued) • Began with 2012 tax year - Separate calculation • Calculated by netting income/loss in each category • Net result from each category is netted to determine Alternative Business Loss • Losses carried forward 20 years following the taxable year of the loss • Loss carried forward offsets future income from the category created • Tax still paid with categories of net income each year
- 27. Alternative Business LossCarry Forward Losses phase-in to a maximum of 50% YEAR AMOUNT 2012 10% 2013 20% 2014 30% 2015 40% 2016 and after 50%
- 28. 1031 Exchanges No gainor loss on trade; business or investment property exchanged for like-kind property, not just real estate Not available for primary residences
- 29. 1031 Exchanges (Continued) LIKE-KINDEXAMPLES • Apartment for Office - Yes • Land for Building - Yes • Domestic - Yes • Foreign - No • Partnership Shares - No • Stocks - No
- 30. 1031 Exchanges (Continued) 1031PROCEDURE • Selling Contract: – “Seller intends to utilize IRC 1031 to defer gain on sale and has engaged Curchin 1031 Exchange as qualified intermediary” • At Closing: Proceeds (including deposit) – To independent intermediary within five days
- 31. 1031 Exchanges (Continued) Independentintermediary cannot be: Lawyer Accountant Realtor Within 2 years prior to closing
- 32. 1031 Exchanges (Continued) 45-dayidentification period: Letter, e-mail or fax to qualified intermediary Up to 3 properties Up to 200% of sale price of property sold 200%
- 33. 1031 Exchanges (Continued) 180-daytitle closing deadline – no exceptions – or filing date of tax return (if prior to 180 days)
- 34.
- 35. Medicare Contribution Tax •Begins in 2013 • Additional 3.8% tax on Net Investment Income (NII) • Adjusted gross income thresholds: – MFJ - $250k – Others - $200k
- 36. Medicare Contribution Tax(Continued) Effect on tax rates: 2013 Including Medicare Tax* Ordinary Income 39.6% 43.4% Qualified Dividends 15.0% 18.8% Capital Gains 20.0% 23.8% * AGI >$250K MFJ/$200K others
- 37. Medicare Contribution Tax(Continued) Net investment income includes: • Interest, dividend, annuity, royalty and rent income. • Capital gains/losses. • Allowable deductions against income items/net gains. • Taxable gain on sale of primary residence. • Net gains from passive activities.
- 38. Medicare Contribution Tax(Continued) Net investment income - not included: • Taxable retirement plan distributions • Gain excluded on sale of primary residence • Tradebusiness income • Tax-exempt income
- 39. Medicare Contribution Tax(Continued) Other issues/planning: • Estates and trusts are subject to 3.8% tax. • Invest more in tax-exempt bonds? • Convert traditional IRA to Roth IRA?
- 40. Medicare Contribution Tax(Continued) Examples: • For 2013, a single taxpayer has NII of $50k and MAGI of $220k. Medicare tax paid on $20k (amount in excess of threshold). Tax would be $760 ($20k x 3.8%). • For 2013, married taxpayers have NII of $75k and MAGI of $230k. No Medicare tax since the MAGI does not exceed the threshold. • NII will be taxed on the full amount if MAGI exceeds the threshold amount by at least the amount of NII.
- 41. Medicare Tax onEarned Income • Also begins in 2013 • Imposes tax of .9% of wages in excess: • $250K MFJ • $200K Others • $125K MFS • Employers are required to withhold • Withholding begins at $200K for all taxpayers • Individuals responsible if tax not withheld
- 42. Medicare Tax onEarned Income (Continued) • Net Earnings from SelfEmployment also subject to tax • S Corporation income is not earned income-not subject to tax • Calculation of additional tax/refund on personal tax return • Focus of the tax is on Earned Income not AGI
- 43. Medicare Tax onEarned Income (Continued) Examples: • Taxpayer wages = $300k • Employer withholds .9% on excess over $250k or $450 • If married and spouse has additional earned income, it would be paid with the tax return filing • If married and spouse has negative earned income, a refund results
- 44. Medicare Tax onEarned Income (Continued) • Taxpayer has K-1 Partnership income of $300k • Taxpayer has ($50k) loss from sole -proprietorship • Not subject to .9% not in excess of $250k
- 45. Increased AGI thresholdfor claiming medical on Schedule A From 7.5% to 10% Remains at 7.5% for those age 65 and older until 2016 New Jersey threshold remains at 2%
- 46. Mr. and Mrs.Big 2012 vs. 2013 Tax Impact
- 47. Tax Planning GoingForward
- 48. Income and ExpenseShifting Usually Defer Income Capital Gains Bonuses Installment Sales Other Income
- 49. Income and ExpenseShifting (Continued) Usually accelerate expenses: Medical State Estimated Payments Real Estate taxes Misc. Itemized deductions
- 50. Income and ExpenseShifting (Continued) Maybe the “Usual” doesn’t work with many variables to consider: 3.8% Medicare Contribution Tax 10% AGI Limitation for medical expenses Alternative Minimum Tax 0%, 15%, or 20% Capital Gains Rates New Jersey Tax Impact
- 51. Roth IRA Conversion •Beginning in 2010, conversions allowed with no income limits. • For 2010 only, conversions were recognized ratably in 2011 and 2012 unless election made to recognize in 2010. • For 2011 and after, tax paid in year of conversion • Low values spurred conversion opportunity.
- 52. Roth IRA Benefits •Value not included in required minimum distribution calculation. • Not taxed when distributed as long as held for five years. • Establishes a legacy for future beneficiary. • Downside: Paying tax on value upon conversion.
- 53. Roth IRA LegacyExample • Husband converts regular IRA to Roth at age 65. • His death occurs at age 73 (Roth held 8 yrs.). • Wife inherits at age 70 and dies at age 86 (Roth held 16 yrs.). • Daughter inherits at age 55 and must begin minimum distributions. • Daughter life expectancy is 29 yrs. • Roth legacy potential = 53 years (8 + 16 + 29).
- 54. Estates Federal Estate Exemptionfor 2013 $5,250,000 SAME AMOUNT Lifetime gift exemption Top tax rate 40% $14,000 Yearly gift allowance for 2013 See Handout of Historical Exemptions and Rates
- 55. Lifetime Gifts • Removesgifted assets from estate now • Removes future growth and income associated with those assets • Minimizes estate taxes • Shifts income tax associated with the gifted asset to the donee
- 56. Other Gift Considerations Donor should make sure they have enough assets to live on Annual gift exclusion excludes payments made directly to qualifying educational organizations for tuition and medical expenses paid directly to providers
- 57. Exemption Portability Allowsunused exemption of first spouse to die to be passed to survivor
- 58. Exemption Portability (Continued) Regardless of estate value, an estate return MUST be filed to elect portability of the unused exemption This means $10.5 Million of assets can move to heirs Federal Estate TAX FREE
- 59.
- 60. Federal vs. NewJersey Estates • Difference in Exemptions • Possibility exists to pay NJ Estate Tax and zero Federal Estate Tax
- 61. What to Do??? •Reduce Estate size • Move out of New Jersey • See Attachment titled “Florida Residency Checklist”
- 62. DISCUSSIONS AND QUESTIONS LONG-TERMRELATIONSHIPS ARE ALL ABOUT DEDICATION