Leek & Associates, PLLC
November 20, 2013
Tax Law Changes
Year-end tax planning is a bigger challenge this year than in years past because tax rates have gone up, many individuals will be snared by the alternative minimum tax (AMT) for 2013 and beyond, and various deductions and other tax breaks will become unavailable. To be more specific:
• After the permanent extension of Bush-era tax cuts, individuals will face higher tax rates in 2013 on their income, including bracketed rates for capital gains and dividends, and ordinary rates have now bracketed up to 39.6%.
• The AMT has been permanently patched for 2013. AMT exemptions are inflation increased but fewer personal credits can be used to offset the AMT. Keep in mind the AMT is a flat tax, and those that have to pay it don’t like it.
• A number of tax provisions will expire this year-end. Some important rules that expire at the end of 2013 include:
o The residential energy credit expires but there is a new Residential Energy Efficient Property credit for solar and wind power usage.
o The above-the-line deduction for qualified tuition expenses expires.
o Certain generous bonus depreciation allowances and expensing allowances for business expires (see more following).
o Higher education tuition expenses expired but the Hope Tax Credit was extended and the Lifetime Learning Tax Credit is indefinite.
The Affordable Care Act (ACA) has received much media coverage, but is still rolling out and is quite confusing. Please call us if any of the following ACA highlights impact you:
• Beginning in 2014, individuals not on Medicare, covered by their employer, or meeting certain exemptions are required to have minimum health insurance for at least one day in a month, qualify for an exemption, or make a “shared responsibility payment” [penalty] when filing their federal tax return. This is the individual mandate that is effectively a new tax.
• Exchange health plans “offered” by state and federal exchanges will offer several types of health plans, with a comprehensive set of covered benefits (the essential health benefits).
• The ACA includes two incentives for employers to expand health coverage for their employees:
1) Starting back in March 2010, qualified businesses who provide health coverage to employees received a credit of up to 35% (increasing to 50% in 2014) of their health insurance premiums.
2) Beginning in 2015, ACA imposes a shared responsibility payment (penalty or tax) on large employers (50 and over FTE employees) that fail to offer affordable minimum health coverage to 95% of its full-time employees.
• Under ACA, neither minimum insurance coverage nor reporting is required by employers with 49 or less FTE employees.
• Reporting of employees’ insurance premiums paid to the IRS for each employee on Form 1099HC by large employers has been delayed until 2015.
• Also, reporting to IRS and its employees has been delayed for large employers until 2015 for specific coverage information about employees and plans.
• There is minimal required model language to be reported by all employers (with over $500,000 in annual volume and with one or more employees) to its employees about its health plan offered or lack thereof beginning October 1, 2013.
• For all employers issuing more than 250 W-2s, certain aggregate cost of health plan coverage was required beginning with 2012 W-2s.
These changes make year-end tax planning more challenging than in prior years, and we have compiled a checklist of actions that can help you save tax dollars if you act before year-end. Please review the following and contact us at your earliest convenience so we can advise you on which tax-saving moves to make.
Year-End Tax Planning Moves for Individuals:
• If you become eligible to make health savings account (HSA) contributions late this year, you can make a full year’s worth of deductible HSA contributions even if you were not eligible to make HSA contributions for the entire year.
• You may own appreciated-in-value stock and you want to lock in a lower tax rate on the gain, but you think the stock still has plenty of room to grow. In this situation, consider selling the stock and then repurchasing it.
• Consider making contributions to Roth IRAs instead of traditional IRAs.
• If you believe a Roth IRA is better than a traditional IRA, consider converting traditional IRAs to Roth IRAs this year to avoid a possible hike in tax rates next year.
• Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan) if you have reached age 70-1/2.
• For taxpayers under 65, unreimbursed medical expenses are now deductible only to the extent they exceed 10.0% of your AGI. For individuals age 65 or older, these expenses will be deductible to the extent they exceed 7.5% of AGI until 2017.
• Consider using a credit card to prepay expenses that can generate deductions for this year.
• Increase your withholding if you are facing a penalty for underpayment of federal estimated tax.
• If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or make estimated tax payments for state and local taxes) before year-end.
• Take an eligible rollover distribution from a qualified retirement plan before the end of 2013 if you are facing a penalty for underpayment of estimated tax and the increased withholding option is unavailable or won’t sufficiently address the problem.
• Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes.
Year-End Moves for Business Owners:
• If you are thinking of adding to payroll, consider hiring a qualifying veteran before year-end to qualify for a work opportunity tax credit (WOTC).
• Put new business equipment and machinery in service before year-end to qualify for the 50% bonus and section 179 first-year depreciation allowance up to $500,000. The limit is currently set to drop to $25,000 for 2014.
• If you are in the market for a business vehicle, and you have need for an SUV (those built on a truck chassis and rated at more than 6,000 pounds gross (loaded) vehicle weight), consider buying an SUV in 2013.
• Increase your basis in a partnership or S corporation if doing so will enable you to deduct a loss from it for this year.
• Create an entity to operate a business. It is a good idea to create a separate entity to own your business assets and operate the business, and in many cases to have another separate entity to own and lease back your real estate. The two available options are an S corporation and a limited liability company (LLC). There are advantages and disadvantages to both. We will analyze your situation and give you the best option for your set of circumstances.
• Establish and/or fund a retirement plan. SEPs are effective up to $51,000 for 2013. With 401(k) plans, you can defer up to $17,500 of wages ($23,000 for age 50 or older). Also the company may be able to make up to an additional $33,000 contribution on the owner’s behalf.
• Here are some other areas from recent years’ laws that could still reduce your taxes in 2013:
o Cost segregation of real estate purchased in 2013 or prior for fast write off.
o U.S. Production Activities deduction.
o Real estate investments and deferred exchanges.
These are just some of the year-end steps that can be taken to save taxes. Again, if you will contact us, we can tailor a particular plan that will work best for you.