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Tax law-snapshot-year-end-issues-powerpoint (1)
The document summarizes key tax law provisions for individuals and small businesses from the Tax Increase Prevention Act of 2014. It outlines changes to income tax rates, capital gains taxes, the additional net investment tax, alternative minimum tax exemptions, itemized deductions limits, estate tax exemptions, education credits, and the small business health care tax credit. It provides examples to illustrate how the new laws may impact taxpayers.
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Tax law-snapshot-year-end-issues-powerpoint (1)
- 1. TAX LAW SNAPSHOT KeyProvisions for Individuals and Small Businesses Updated Dec. 17, 2014
- 2. What Sweeping TaxChanges Mean to You • Affordable Care Act - New health care coverage reporting • High-income taxpayers need to consider tax-deferral options due to: - Higher rates - Additional investment taxes - Curtailed deductions 2
- 3. Tax Rates onOrdinary Income and Capital Gains • The top tax bracket personal income tax rate is 39.6%. • The top tax bracket for qualified dividend income and long-term capital gains tax rate is 20% (23.8% if the net investment income applies) with the breakout below: 3 0% rate Taxpayers in lower income tax brackets ($36,250 or less) 15% rate Taxpayers in middle income tax brackets ($36,251–$400,000) 20% rate Taxpayers in highest tax bracket ($400,001 and over)
- 4. 20% Capital GainsRate — Example • Facts: Single taxpayer with $420,000 in taxable income ($100,000 from capital gains) $89,458 Tax on ordinary income (per tax tables) • Calculating the tax on capital gains: $ 2,650 (20% on the income in excess of $406,750) 13,013 (15% on the remaining capital gains income) $15,663 Tax on capital gains • $105,121 Total Tax (before 0.9% HI and 3.8% Net Investment Income Tax) 4
- 5. Tax on NetInvestment Income (NIIT) • Affects individuals with income above certain thresholds • Applies to capital gains, interest and dividend income from investment assets • May also apply to rental and royalty income • Provides for an additional 3.8% tax on qualified investment income • Medicare surcharge of .9% may also apply to earnings 5
- 6. Alternative Minimum Tax(AMT) • Created to prevent the wealthy from using tax loopholes to avoid paying income tax • How does it work? - Re-computes taxable income by adding back certain non-taxable income and removing some deductions - Re-computed income is then multiplied by a flat rate = AMT • AMT is compared to regular tax and whichever results in the higher tax is the amount owed • Can be very complex to calculate 6
- 7. AMT – Goodand Bad News • Good news: - A higher AMT exemption - AMT now indexed for inflation • Bad news: - The income levels at which the exemption level phases out were not increased • Possible pitfall: - Triggering the AMT when taking certain tax breaks • AMT Exemption Amount for Tax Year 2014: - $52,800 (Single/head of household) - $82,100 (Married filing jointly) 7
- 8. Personal Exemptions • Exemptionfor 2014 is $3,950 per eligible person • Phase-out of personal exemptions for higher income taxpayers • Total amount of personal exemptions for taxpayers and dependents is reduced if the taxpayer’s adjusted gross income is greater than: - $305,050 for married couples - $254,200 for single taxpayers - $279,650 head of household - $152,525 married filing separately 8
- 9. Itemized Deductions 9 • Thereis a limitation on itemized deductions for high-income taxpayers • Deductions reduced by 3% of amount by which taxpayer’s AGI exceeds threshold • Reduction is limited to 80% of otherwise allowable deduction (i.e., taxpayers will receive at least 20% of itemized deductions) • Exception for certain itemized deductions: - Medical expenses - Investment interest expense - Casualty or theft losses
- 10. Tax Benefits Revived •Deductions and credits include: - Deduction for state and local sales taxes - Exemption for cancellation of debt on a principal residence - Deductions for premiums of mortgage insurance - Tax credits for making qualified energy-saving improvements to a personal residence • Unclear if these benefits will be extended again 10
- 11. Retirement Planning • Contributionlimits for 401(k)s: - Up to $17,500 ($23,000 if you are age 50 or older); possible to qualify for an employer match for some or all contributions • All assets in non-Roth retirement accounts can be converted to a Roth IRA or Roth 401(k). 11
- 12. Estate and GiftTaxes • Estates up to $5 million now permanently exempt from estate tax and indexed for inflation in future years. For 2014, the exemption is $5.34 million. • Estate tax rate raised to 40%. • The “portability” law enabling a surviving spouse to make use of a deceased spouse’s unused exclusion has been made permanent. - Example: If husband dies with estate worth $3 million, his unused exemption amount of $2.34 million will not be lost; wife will have new exemption amount of $7.68 million. 12
- 13. Higher Education Incentives •American Opportunity Tax Credit - Extended through 2017 - Provides up to $2,500 for qualified post-secondary education expenses • Lifetime Learning Credit - Provides up to $2,000 for qualified college or graduate expenses • Above-the-line deduction for qualified tuition and expenses 13
- 14. Higher Education Incentives •Permanent extensions of: - $5,250 exclusion for employer-provided educational assistance - $2,500 deduction for student loan interest (without a 5-year limitation) - $2,000 maximum contribution for education savings accounts 14
- 15. Health Care Timeline •Open enrollment in the newly created Health Insurance Marketplace began Fall 2013 • Coverage started Jan. 1, 2014 • Open enrollment period reopened October 2014 • Self-reporting of minimal essential coverage for individuals begins on 2014 tax returns - Must provide proof of coverage - Penalties assessed if not covered 15
- 16. TOP TAX ISSUESFOR SMALL BUSINESS
- 17. Business Expenses —Part 1 Tangible Property Changes • New rules take effect that: - Affect businesses that acquire, produce, or improve tangible property - Apply to all businesses regardless of the size - Provide a higher de minimis safe harbor limit for taxpayers who file an applicable financial statement What does this mean for you? • Review your overall accounting procedures for compliance. If you are not in compliance with the new rules, you must file a change in method of accounting (Form 3115). 17
- 18. Business Expenses —Part 2 Expired/Expiring Tax Breaks Expensing of first-year purchases under Section 179 - Until Dec. 31, 2014: Immediately deduct up to $500,000 of eligible tangible business property - If not extended: Maximum deduction plunges to $25,000 Additional first-year bonus depreciation for business assets - Extended through 2014 18
- 19. Small Business HealthCare Tax Credit • Small businesses can qualify for a credit based on health insurance premiums paid if they: - Have fewer than 25 FTE employees - Pay an average annual wage of less than $50,000 - Contribute 50% or more to employee health insurance premiums
- 20. Small Business HealthCare Tax Credit • For tax years beginning in 2014, the credit is 50% of premiums paid (35% for small tax-exempt employers) • Credit will apply only to participants in the Small Business Health Options Program (SHOP) Marketplace • SHOP opens to companies with up to 50 employees; expected to expand in 2016
- 21. Home Office Deduction •Part of a business owner’s personal residence must be used regularly and exclusively as either the principal place of business or as a place to meet with patients, customers or clients. • Using an optional, new safe harbor method (effective for tax years beginning in 2013), taxpayers can deduct $5 per square foot of home office space (up to 300 square feet).
- 22. Saving for Retirement Optionsinclude: • IRA-based plans such as - Savings Incentive Match for Employees (SIMPLE) - Simplified Employee Pension (SEP) plans • Profit sharing plans • A variety of 401(k) plans
- 23. State and LocalTax Concerns • Businesses that provide services or products in more than one state may be subject to requirements for: - tax withholding - filing - payment in many of those states. • Sales tax rules vary widely state to state and there may be differences on the types of products or services to which they apply.
- 24. Planning Opportunities • Althoughnew tax laws add complexity, they also often open up new opportunities. • We can help you understand your tax situation and determine the best steps to address your tax challenges and any other financial concerns.
- 25. Copyright © 2011American Institute of CPAs Copyright © 2013 American Institute of CPAs Questions
Editor's Notes
- #2 Good [morning/afternoon]. My name is [name] and I’m with [name of firm]. I want to thank you for the opportunity to speak with you today/this morning/this afternoon.
- #3 First, we have the new health care reporting. While talk of the Affordable Care Act is not new, this year will be the first where taxpayers actually have to include health care coverage information on their tax returns. In additional to meeting the requirements for minimum coverage, taxpayers must be able to substantiate the coverage for themselves and their dependents or face penalties. Additionally, the changes made to the tax law last year still have a profound effect on higher income earners so planning (preferably year round) is essential to minimize income. It’s always nice to have good news about taxes – in this case, the good news is that several tax benefits were extended through Dec. 31, 2014 so they can be claimed for the current return. Two of the more popular benefits restored for individuals are the deduction for state and local sales tax and the deduction of up to $4,000 for qualified tuition and related expenses paid for yourself, your spouse, or a dependent — this was above the line so it was good for reducing AGI, which might make the taxpayer eligible for other tax benefits that phase out.
- #4 Income tax rates stayed the same as last year, except this year saw the addition of one more tax bracket for the highest income earners. The 10%, 15%, 25%, 28% and 33% rates from the Bush era, and the newer 35% rate, remain the same. Anyone with income over $400,000 (or $450,000 if you’re married) will pay 39.6% on that additional income. Capital gains rates also stay the same, but again, there’s a new top rate that will apply to those taxpayers in the 39.6% bracket — those taxpayers will pay 20% on capital gains and also face the new net investment income tax of 3.8% on top of that. If you’re planning to sell stocks or you earn dividends, this could affect you.
- #5 Here’s an example of a high-income taxpayer whose investment income has become subject to the higher capital gains tax rate. Note that the top 20% rate only applies to the capital gains income in excess of $406,750 or $13,250 in this case. The remainder of the capital gains income is taxed at the 15% rate. In 2014, top individual and capital gains rates may be also be impacted by the 3.8% net investment income tax. The bottom line is, if your taxable income is more than $400,000, prepare to see your taxes increase this year.
- #6 Higher income taxpayers will also be feeling the effects of two other taxes that are not part of the new law including a surtax on net investment income. The income thresholds are: $250,000 for married couples filing jointly and $200,000 for single taxpayers. If your income exceeds those amounts AND you have investment income, you could be paying an additional 3.8% on the overage. Assets that are subject to the tax include stocks and bonds, certificates of deposit and mutual funds — both capital gains from the sale of these assets and any earnings (interest or dividends) from them. The 0.9% Medicare surcharge is added to any earnings, regardless of whether it is earned (wages) or unearned (investment) income, that exceeds the thresholds. Once again, planning can play a critical role in minimizing the tax.
- #7 Although the AMT was originally aimed at high-income taxpayers, due to a lack of sufficient indexing for inflation, it has increasingly affected more and more middle-income taxpayers over the years. Basically if your income exceeds a certain amount, you may have to add back certain deductions, then recalculate your tax according to AMT rules. You’ll pay whichever amount is higher. The only good news is that if your income drops in a future year to below the AMT threshold, you can apply previously paid AMT as a credit.
- #8 Despite a lack of indexing for inflation for many years, the AMT exemption is now being indexed annually. This change, which was part of the American Taxpayer Relief Act of 2012, is intended to reduce the number of taxpayers affected, but taxpayers still need to engage in careful tax planning to avoid triggering the AMT when taking some tax breaks. What was once thought to be a tax on the wealthy surprises more and more average taxpayers even with increased exemption amounts.
- #9 The personal exemption is provided for the taxpayer, spouse and all eligible dependents, with no limit to the number of dependents you can claim and regardless of whether you itemize deductions. However, it is key to note that these exemptions do phase out for higher-income taxpayers so if your income exceeds the amounts shown here, you won’t be able to take these exemptions. This is based on your adjusted gross income, so the amount isn’t affected by deductions such as charitable contributions or mortgage interest, but could be reduced by self-employed health insurance premiums, student loan interest or certain other “above the line” deductions.
- #10 The use of itemizing allowable tax deductions can be a core tax strategy, however not all deductions are treated the same. For example, medical expenses must exceed 10% of your adjusted gross income before you receive any deduction and investment interest, legal fees or even tax preparation fees must equal more than 2% of your AGI to be deducted. And high-income taxpayers could have their itemized deductions limited, which negates the benefit of some tax-reduction strategies. It is important to plan ahead and speak to your adviser before making any big decisions. There may be alternatives which will provide a better tax outcome, but cannot be undone. It also is important to ensure that all criteria is met for deducting items, such as proper documentation, rights of ownership, etc.
- #11 As has been the case too often, many tax provisions expired and after an anxious wait for taxpayers, most were renewed through Dec. 31, 2014, so they can be claimed on returns filed in 2015. The most popular provisions include the option to deduct state and local sales tax instead of income tax, which is a key provision for those living in states without an income tax, and the deduction for mortgage insurance premiums, also called “PMI.”
- #12 The contribution limits for IRAs and 401(k)s remained the same for 2014. Remember that once you place an asset into a Roth IRA, it will grow tax-free and qualified distributions will not be subject to tax. If you roll a traditional IRA or other pre-tax retirement account into a Roth, income taxes must be paid on the assets when you file your return for that year. There is no limit to the amount of assets you can roll, even though not everyone is able to contribute to a Roth due to income limitations. Remember that the decision to convert traditional retirement accounts to Roth accounts is complex. Factors to consider include age, years to retirement and current and projected tax rates. You should also be sure you can afford to pay the additional tax due without having to take money out of the IRA.
- #13 Effective estate tax planning should begin long before a taxpayer’s death and must consider income tax as well as estate and gift tax consequences. The exclusion amount that an heir can inherit without owing estate tax rose to more than $5 million under the ATRA. Even those whose estates don’t reach the $5 million threshold today should engage in effective planning to maximize the assets passed to their heirs, particularly considering different state rules.
- #14 The ATRA extended several education-related incentives for taxpayers who are in college or have children in college. For example, the American Opportunity Tax Credit was extended through 2017 and allows eligible taxpayers to claim a tax credit for qualified post-secondary education expenses in the first four years of undergrad. The Lifetime Learning Credit is a broader credit that also covers professional degree courses -including those to acquire or improve job skills. And good news, Congress extended the above-the-line deduction for qualified tuition and related post-secondary education expenses so it can be used for the 2014 return. Whether it will be around next year remains to be seen.
- #15 If your employer helps you pay for schooling, up to $5,250 is excluded from income. The student loan interest deduction also is now permanent (up to $2,500 of interest paid per year) and there is no limitation on the number of years you can take this deduction. Finally, the $2,000 maximum contribution for education savings accounts, which allow expenditures for elementary, secondary and post-secondary education is also a permanent benefit.
- #16 In addition to the American Taxpayer Relief Act, another significant law I’m sure you’ve heard a lot about lately is the Affordable Care Act. Taxpayers should be aware of the Health Insurance Marketplace enrollment window. Those who do buy their insurance in the marketplace should carefully evaluate their options and make sure they’re making apples-to-apples comparisons of different plans, since coverage may vary. 2015 is also the first year you could face penalties if you did not have qualified coverage for all of 2014. You should be prepared to provide substantiation of your coverage to avoid penalties.
- #18 There are new regulations that affect how businesses deduct or capitalize expenditures related to tangible property and they are important to pay attention to as they cast a wide net. For example, they can affect the tax treatment of common expenses like replacing or buying office equipment or repairing a heating system. The rules also cover disposition of property such as sales or exchanges, retirement and abandonment. The good news is that the regulations offer some taxpayers a higher safe harbor threshold. What the safe harbor means is that expenditures up to a certain limit can be deducted and will not be subject to IRS scrutiny. The taxpayer does have to have some policies in place to use this election and we can help you with that. The regulations vary depending on the type of property (real estate has different rules than equipment, for example) and are very complex, but know that they can be retroactive to Jan. 1, 2012, and a special filing with the IRS may be necessary. Your CPA can advise you on the details and requirements.
- #19 The stimulus acts over the past several years have generously increased the limits of the Section 179 deduction and also added a one-time “bonus depreciation” on equipment that exceeded the deduction limit. At the end of 2014, the Section 179 expensing limits are set to drop to their previous limits of $25,000 while investment limits fall to $200,000. This is a significant retreat in comparison to the $500,000 expensing limit and $2,000,000 investment limit that taxpayers have had available in recent years. In July (2014), the U.S. House of Representatives passed a bill to renew bonus depreciation and make the provision permanent. This would allow businesses to write off 50 percent of a qualified investment's value in the year in which it was acquired. However, the final action only extended it through December 31, 2014.
- #20 Health care reform has been a hot topic for small businesses, as the new requirements have the possibility of adding significant costs to small business owners’ insurance costs. Small businesses that have less than 25 “full-time equivalent” employees, pay average salaries of less than $50,000 per year or contribute more than 50% toward employees’ health insurance premiums not only avoid penalty, but may qualify for a credit.
- #21 An enhanced version of the Small Business Health Care Tax Credit increased to 50% of health insurance premiums, for qualified small employers that participate in the Small Business Health Options Program (SHOP). The credit can be claimed for any two consecutive taxable years through the SHOP beginning in 2014. Note: This is a federal credit and some states may also have additional tax credits available Self-employed taxpayers are not required to participate in the Health Options program (aka SHOP) and can use the individual Health Insurance Marketplace.
- #22 Many taxpayers are fearful of taking the home office deduction as it has developed a reputation for being a "red flag" for an audit. While you need to be careful to understand and comply with the IRS rules for deductibility, this deduction can be a substantial tax savings vehicle for both regular and self employment income if you are eligible and should not be overlooked. The safe-harbor method of calculating the deduction, introduced in 2013, is an optional easier way to figure the deduction without the record-keeping requirement of the total-expense method. Mortgage interest and property taxes allocable to the home office are still permitted as an itemized deduction for those who use the new safe harbor. However, the rules for determining what space qualifies as a home office still apply to both methods.
- #23 Qualified retirement plans offer many tax benefits to both employers and employees. With traditional plans, employers get a tax deduction for contributions, and employees may be allowed to make pre-tax contributions and defer taxes on income until distribution. In Roth plans, employees do not get tax deductions for contributions, but qualified distributions and withdrawals are tax-free. In addition, assets held in qualified plans generally are protected from creditors of both employees and employers. However, these plans are heavily regulated and include different contribution limits and matching requirements. Plans may have nondiscrimination requirements and top-heavy rules, which require their own tax-filing obligations. It’s also important to consider whether your business will grow to include more employees when you select your plan.
- #24 Many states disallow deductions that can be taken on a federal return and may tax income that is exempt from federal tax. For example, some states have more restrictive net operating loss carryover rules than the federal government and do not allow favorable tax treatment for long-term capital gains. At the same time, states also have their own set of credits and deductions that can help lower taxes.
- #25 Before we move on to Q&A, I just want to provide some context. So many things have a tax consequence — changing jobs, having children, planning for retirement, exercising stock options, a promotion with a nice raise, opting into an employer-provided retirement plan like a 401(k), transitioning parents into long term care — I could go on, but you get the idea. Today, we touched on the major topics at a very high level, but with ever-changing tax laws and changes to your particular situation, it is always a good idea to review how the tax laws affect you. That is where we can help. It is what we do year-round. We can answer quick questions or provide an in-depth tax projection to help you anticipate how these new tax laws will affect your returns. So, don’t hesitate to reach out to us after today’s presentation if you’d like to discuss something in more detail that we were able to cover with you today. And with that, we’ll move on to Q&A and take any questions you have (Note to Presenter: After this last statement, move forward to the next slide and open up the floor for participant questions).
- #26 Thank you! It was a pleasure being with you today and I welcome you to contact me with questions anytime! We would love the opportunity to talk with you about how we can be of service.