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©2012 CliftonLarsonAllen LLP Tax Policy Outlook for 2013 Marni J. Spence, CPA
©2012 CliftonLarsonAllen LLP 2 The Fiscal Cliff Federal taxes are scheduled to rise in 2013 for six reasons: 1.Expiration of Bush-era tax cuts from 2001 and Expiration of Obama tax cuts from the 2009 and 2010 Tax Acts. 3.Many short-term tax breaks are set to expire if not extended by Congress. 4.Expiration of the payroll tax cut. 5.New taxes from the Affordable Care Act 6.Alternative Minimum Tax (AMT) more prevalent due to the above changes and the expiration of the patch in 2011.
©2012 CliftonLarsonAllen LLP 3 AMERICAN TAX RELIEF ACT OF 2012 Passed on January 1, 2013
©2012 CliftonLarsonAllen LLP 4 2% Payroll Tax Cut Employee share of OASDI cut from 6.2% to 4.2% for 2011 and 2012 SE tax rate also cut (12.4% to 10.4%) No high income phase-out; 2012 max savings of $2,202 (2% x $110,100) Income tax deduction of 50% of SE tax unchanged at full 6.2% (= employer share) 2012 ATRA did not extend this for 2013
©2012 CliftonLarsonAllen LLP 5 Rate Brackets Brackets and rates continued from 2012 –No expiration date –15% bracket of MFJ is double that of a single person Added 39.6% bracket, effective on taxable income above –$450,000 (MFJ and Surviving Spouse) –$425,000 (H of H) –$400,000 (Single) –$225,000 (MFS)
©2012 CliftonLarsonAllen LLP 6 Pease Reinstated 3% of overall itemized deduction phase-out Reduces itemized deductions by 3% of AGI in excess of threshold levels –$300,000 MFJ –$275,000 H of H –$250,000 Single –$150,000 MFS Does not include itemized deductions for investment interest, medical, casualty or theft losses and gambling losses Cannot reduce itemized deductions by more than 80% Effective rate increase is 3% of stated tax rate –1.188% for those in the 39.6% bracket
©2012 CliftonLarsonAllen LLP 7 PEP Reinstated Phase-out of personal exemption deductions for taxpayers with AGI above the same threshold level as the Pease reduction –Reduces personal exemption by 2% for each $2,500 (or portion thereof) by which AGI exceeds the threshold Effective increase in tax rate varies based upon number of personal exemptions –4.37% for four exemptions in the 35% bracket –Note that MFJ are fully phased out before being subject to the 39.6% bracket
©2012 CliftonLarsonAllen LLP 8 Capital Gains and Qualified Dividends Continued at 0% and 15% levels Increased to 20% for taxpayers in the 39.6% bracket –Only to the extent that ordinary income would have been taxed in the 39.6% bracket Stated capital gain rates (ignoring 3.8% NIIT): –0% for taxpayers in 10% and 15% brackets –15% for taxpayers in 25% to 35% brackets –20% for taxpayers in 39.6% bracket –25% for “unrecaptured” Section 1250 depreciation –28% for gains on collectibles
©2012 CliftonLarsonAllen LLP 9 New Marginal Tax Rates Taking into account the 3.8% net investment income tax, personal exemption and overall itemized deduction phase-outs
©2012 CliftonLarsonAllen LLP 10 Alternative Minimum Tax Rates unchanged at 26% and 28% Exemption increased for 2012 –$78,750 MFJ –$50,600 for unmarried (i.e., Single and H of H status) –$39,375 for MFS –Phases out at 25% beginning at AMTI of $150,000 ◊ Thus, MFJ is fully phased-out at $465,000 –Indexed for inflation after 2012 –No sunset clause
©2012 CliftonLarsonAllen LLP 11 IRA to Charity Relief Extension Had expired at end of 2011 Allows for direct distribution of IRA to qualified charity for IRA owner over age 70½ –Avoids AGI, so that phase-outs aren’t affected –Benefit for those who don’t itemize Extended for 2012 and 2013, important due to –Pease and PEP phase-outs –3.8% NIIT trigger based upon MAGI
©2012 CliftonLarsonAllen LLP 12 Tax Breaks for Businesses Bonus depreciation extension Section 179 increase 15-year property Business credits Energy credits
©2012 CliftonLarsonAllen LLP 13 Bonus Depreciation 2012’s 50% bonus depreciation extended to assets placed in service prior to 2014 –Calendar year provision –Extension to 2014 for certain long-production assets and aircraft Applies to “new” (i.e., original use) property only Cost recovery periods 20 years and shorter
©2012 CliftonLarsonAllen LLP 14 Bonus Depreciation: Bouncing % Acquired & Placed in Service Bonus % 1/1/08 – 9/8/10 50% 9/9/10 – 12/31/11 100% 1/1/12 – 12/31/12 50% 1/1/13 – 12/31/13 50% 2014 and after 0% Qualified leasehold improvement –Interior improvements, lease arrangement, >3 yrs. in service, not an enlargement, no related parties (but using 80% or more definition) –Eligible for 50%
©2012 CliftonLarsonAllen LLP 15 Bonus Depreciation for Autos and Trucks The $8,000 deduction allowed for the placing in service of a new autos is extended through December 31, 2013 –Previously was to expire December 31, 2012 Applies to light trucks or vans, including SUVs, built on a truck chassis if rated 6,000# loaded vehicle weight or less
©2012 CliftonLarsonAllen LLP 16 Section 179 for 2012 and 2013 Retroactively increased for tax years beginning in 2012 and 2013 to $500,000 –Maximum applies unless taxpayer places in service more than $2 million of qualifying Section 179 property –No provision for tax years beginning after 2013 ◊ “Permanent” law lowers Section 179 deduction to $25,000 Extends off-the-shelf computer software as eligible Extends ability to amend or change specification of property to be expensed Extends “qualified real property” provision
©2012 CliftonLarsonAllen LLP 17 Section 179 Amounts Sec. 179 Asset Addn. Tax yr. beginning in Limit Phase-out Range 2009$250,000$800K - $1.05M 2010$500,000$2M - $2.5M 2011$500,000$2M - $2.5M prior$139,000$560K - $699K 2012 & 2013 ATRA$500,000 $2M - $2.5M
©2012 CliftonLarsonAllen LLP 18 Section 179 and Qualified Real Property Up to $250,000 of qualified real property may be expensed –Qualified leasehold improvement –Qualified restaurant –Qualified retail improvement SL 15 year writeoff continues for assets placed in service before January 1, 2014
©2012 CliftonLarsonAllen LLP 19 Research Credit Extended Credit had expired for amounts paid or accrued after December 31, 2011 Credit extended for amounts paid or accrued through 2013
©2012 CliftonLarsonAllen LLP 20 Work Opportunity Tax Credit Was to expire at end of 2012 for the hiring of qualified veterans –Requires submitting Form 8850 to the appropriate state agency within 28 days of hire Had expired for all other categories at end of 2011 WOTC extended through 2013 for all categories retroactive to January 1, 2012 –No guidance on certification issue
©2012 CliftonLarsonAllen LLP 21 S Corporation Built-In Gain C corporations electing S status are subject to 35% tax on built-in gains recognized during the “recognition period” –Recognition period is normally 10-years For years beginning in 2012 and 2013, the recognition period is 5-years (i.e., 60 months) beginning with the first day of S status –For 2012, if the S election was effective January 1, 2007 or earlier, gains recognized are not subject to the BIG tax
©2012 CliftonLarsonAllen LLP 22 Planning Opportunities Increasing qualified dividends in 2012 –Applies to S corporations which have C corporation accumulated earnings and profits –Elect a deemed dividend of a specific amount for 2012 ◊ Changes all 2012 distributions from AAA to be qualified dividends –Especially useful if shareholders plan to sell soon –Requires consent of all shareholders Elect out of 2012 installment sales IRA to charity for January 2013, to be treated as a 2012 IRA distribution
©2012 CliftonLarsonAllen LLP 23 Estate and Gifts Estate exemption $5.12M $5.25M Top rate 35% 40% Gift exemption $5.12M $5.25M [All made permanent] Gift annual exclusion $13,000 $14,000
©2012 CliftonLarsonAllen LLP 24 Portability Portability provisions no longer expire –Decedent spouse’s unused exemption amount may be transferred to surviving spouse ◊ Requires Form 706 to be filed, even though not otherwise required ◊ Applies only to unused exemption of the last decedent spouse of the surviving spouse
©2012 CliftonLarsonAllen LLP 25 Other Extenders Temporarily Extended Retroactive for 2012, and through 2013 –State and local sales tax deduction –Teacher’s classroom expense deduction ($250 of supplies) –Qualified tuition and related expenses –Deductibility of mortgage insurance premiums –Contribution of capital gain real property for conservation allowed against 50% of AGI –Parity in transit fringe benefits One year extension through 2013 –Exclusion of cancellation of indebtedness on principal residence
©2012 CliftonLarsonAllen LLP 26 Five-Year Extenders, Through 2017 American Opportunity Tax Credit (enhancement to the Hope Credit) –First $2,000 of qualified tuition and related expenses plus –25% of the next $2,000 Enhancements to Earned Income Tax Credit –Other aspects have been extended permanently
©2012 CliftonLarsonAllen LLP 27 Permanent Changes of Extender Items $1,000 child tax credit (will not drop to $500) Adoption credit and income exclusion for employer- paid or reimbursed adoption expenses up to $10,000 (indexed) Child and dependent care credit ($3,000/$6,000 cap) Deductibility of student loan interest no longer stops after 60 months Coverdell Education Savings Accounts fixed at $2,000 Employer-provided education assistance < $5,250
©2012 CliftonLarsonAllen LLP 28 NET INVESTMENT INCOME TAX Section 1411
©2012 CliftonLarsonAllen LLP 29 Net Investment Income Tax Starting January 1, % tax rate on net investment income Modified AGI exceeds a threshold amount Marginal tax rate ̶Thus, a taxpayer in the 39.6% tax bracket (i.e. the highest marginal income tax rate in 2013) will have a federal marginal rate of 43.4% on NII
©2012 CliftonLarsonAllen LLP 30 Net Investment Income--Buckets Investment Trade or business Net gain on disposition of property
©2012 CliftonLarsonAllen LLP 31 Applicable Threshold Amounts Individuals, Modified AGI –Married taxpayers filing jointly - $250,000 –Married taxpayers filing separately - $125,000 –All other individual taxpayers - $200,000 –Nonresident aliens are not subject to the tax ◊ Special rules if married to US citizen and election is made to be treated as a resident alien
©2012 CliftonLarsonAllen LLP 32 Example Warren, a single taxpayer, has $170,000 of investment income and received a $65,000 required minimum distribution (RMD) from his traditional IRA in The RMD is not “net investment income,” but it is included in MAGI, increasing MAGI to $235,000 The surtax applies to the lesser of: (1) “net investment income” (i.e., $170,000) or (2) the excess of MAGI over the $200,000 threshold amount for single taxpayers (i.e., $235,000 - $200,000 or $35,000) Thus, $35,000 is subject to the surtax and the amount payable is $1,330 (.038 x $35,000).
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