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Presentation on theme: " B.O.S.S. Workshops (Business Owner Strategy Sessions) Yearend Tax Strategy Speaker: Chad W. Frush, CPA - Principal Frush & Associates."— Presentation transcript:

1 B.O.S.S. Workshops (Business Owner Strategy Sessions) Yearend Tax Strategy Speaker: Chad W. Frush, CPA - Principal Frush & Associates Dec 13 th Special thanks to our Sponsors: ™

2 OVERVIEW The Fiscal Cliff Where Are We Now? Where Are We Scheduled to Go? What Can Be Done? New Taxes From Health Care Reform Year-End Planning Tips FRUSH & ASSOCIATES, INC.

3 Circular 230 Disclosure Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, nothing contained in this communication was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting, marketing, or recommending a partnership or other entity, investment plan or arrangement to any other party. For discussion purposes only. This work is intended to provide general information about the tax and other laws applicable to retirement benefits. The author, his firm or anyone forwarding or reproducing this work shall have neither liability nor responsibility to any person or entity with respect to any loss or damage caused, or alleged to be caused, directly or indirectly by the information contained in this work. This work does not represent tax, accounting, or legal advice. The individual taxpayer is advised to and should rely on their own advisors

4 The Fiscal Cliff O The potential onset of federal tax increases and spending cuts (scheduled to take effect January 1, 2013) that could have a substantial impact on the economy. O Estimated up to 90% of Americans could see a tax increase. O We’ll focus on expiring tax provisions and new AHCA provision.

5 Where Are We Now?  Bush-era tax rates are 10%-35%  Dividends (qualified) are taxed from 0%-15%  Long-term capital gains are taxed from 0%- 15%  Estate tax – higher exemption/ lower rate  No marriage penalty  Tax-advantaged depreciation options  Phase-outs and credits

6 Bush Tax Cuts May Expire 2012 Brackets 2013 Brackets 10% 15% 25% 28% 33% 35% 15% 28% 31%* 36%* 39.6%*

7 Dividends 2012 2013 Projected Ordinary: Up to 35% Qualified: 0% 15% Ordinary: Up to 39.6%* Qualified: Up to 39.6%*

8 Capital Gains 2012 2013 Projected Short-Term: Up to 35% Long-Term: 0% 15% Short-Term: Up to 39.6%* Long-Term: 10% 20%*

9 What Can We Do?  Accelerate ordinary income into 2012:  Bond interest  Annuity income  Traditional IRA income  Compensation income*  Roth IRA conversions  Cash basis taxpayers/businesses – accelerate billings

10 What Can We Do?  Gain harvesting  Sell long-term capital gains in 2012  Take advantage of low rates (lower rates but paying the tax sooner)  Use the proceeds to repurchase same or similar assets  Paying the tax now could be thought of as an investment to avoid paying larger amount of tax in the future

11 What Can We Do?  Gain harvesting – should you?  Short-term planning – favorable because the benefit of tax deferral is small  Long-term planning – unfavorable because the benefit of tax deferral is substantial  Taxpayers in the 0% tax bracket – Yes!  Taxpayers with loss carryovers – could be better used to offset gains in years with higher long-term capital gains rates  Accelerate installment payments

12 What Can We Do?  Loss harvesting – “Wash Sale” Rule (IRC 1091)  Capital losses are denied to the extent that the taxpayer has acquired a “substantially identical” stock or security within a period beginning 30 days before & after the sale of a stock sold at a loss  Disallowed loss is added to basis in new stock  Holding period is carried over

13 What Can We Do?  Roth IRA Conversions - Benefits  Lowers overall taxable income in the long- term  Tax-free compounding  No RMDs at age 70½  C Corporations  Consider paying or declaring dividends before the end of 2012

14 Estate and Gift Taxes 2012 2013 Projected Exemption: $5.12 Million Maximum Tax Rate: 35% Portability of Exemption: Yes Exemption: $1 Million Maximum Tax Rate: 55% Portability of Exemption: No

15 What Can We Do?  Portability Election – 2011 and 2012  Deceased Spousal Unused Exclusion Amount (DSUEA) allows married couples to fully utilize both spouses’ exclusion amounts  If first spouse dies with unused exclusion amount, the second spouse to die can add that unused exclusion to their remaining exclusion amount  Increases amount of property that could pass tax-free to beneficiaries upon 2 nd ’s death

16 What Can We Do?  Portability Election – 2011 and 2012  Available for decedents dying after 12/31/10 and before 1/1/13  Must elect portability in a timely manner (nine months + six-month extension with tax paid)  Must file Form 706 even if not required to file to make election

17 What Can We Do?  Maximize Gifting in 2012  Annual gift exclusion for 2012 - $13,000  Lifetime gift tax exemption is $5.12 million for 2012  Gifting now could:  Save estate tax (rate could jump 20%)  Asset protection  Lock in discounts  Remove appreciation from estate

18 What Can We Do?  Maximize Gifting in 2012  Keep in mind that property transferred by gift requires a carryover of the donor’s basis to the donee, whereas property transferred at death permits a stepped-up basis to date of death value  Consider gifting low basis and/or dividend property to persons in lower tax brackets (who are not subject to kiddie tax)

19 What Can We Do?  Maximize Gifting in 2012  Payments of tuition directly to an education provider are not considered gifts  Same with payments of medical expenses  Loans to one’s children or grandchildren – could make sense with low interest rates

20 Depreciation Changes  Section 179  Allows purchasers to “expense” certain amounts which normally would be capitalized and depreciated  Equipment, furniture, off-the-shelf software  May be new or used  Section 179 can not create or increase a loss, but excess may be carried over to future years

21 Section 179 2012 2013 Projected Max Deduction: $139,000 Max Purchases: $560,000 Phaseout: $ for $ Max Deduction: $25,000 Max Purchases: $200,000 Phaseout: $ for $

22 Depreciation Changes  Bonus Depreciation  Allows purchasers to deduct 50% of most new equipment in 2012  The remaining 50% of the cost is depreciated as normal  Bonus depreciation can create or increase a loss  Expires in 2012

23 What Can We Do?  Accelerate equipment purchases to take advantage of higher expensing amounts  Make sure the purchases tie in to your budget and cash flow projections  Evaluate whether regular depreciation is more beneficial

24 Phaseouts and Credits  Phaseout of personal exemptions in 2013  Itemized deductions  No phaseout in 2012  Phaseout returns in 2013  Evaluate whether to accelerate deductions  Child Tax Credit  $1,000 per qualifying child in 2012  $500 per qualifying child in 2013

25 Alternative Minimum Tax (AMT)  Parallel tax with its own definitions of income and expenses, rates (26-28%), etc.  If AMT is higher than regular tax, the difference is added to your regular tax on Form 1040.  Triggers: high gross income, large number of dependents, stock options, long-term capital gains, large tax deductions (itemized), tax- exempt interest

26 Alternative Minimum Tax (AMT)  The AMT has slowly creeped downward and has subjected more “lower income” taxpayers to the AMT  Congress created a “patch” with higher AMT exemptions – expired in 2011  Exemption for 2012 will be lower for singles and MFJ  2011 – 4 million taxpayers paid AMT  2012 – 32 million taxpayers will pay AMT

27 Alternative Minimum Tax (AMT)  AMT patch has been reinstated retroactively twice – so IRS decided to go forward as if another patch will be enacted  If no patch is enacted – potentially 60 million taxpayers will be notified that they may not file their 2012 returns until late March or after

28 AHCA Provisions

29 Schedule of New Health Care Provisions YearProvision 2013 Flexible spending arrangement the maximum drops to $2,500 per plan year New “HI” (hospital insurance tax) on high-income taxpayers New 3.8% Medicare tax on investment income Medical care itemized deduction threshold increases to 10% of AGI starting in 2013 (except from 2015–2016) 2014 States will be required to provide federally approved insurance plans Premium assistance credit Excise tax on uninsured individuals Excise tax on applicable large employers Insurer reporting requirements Eligible premiums included in cafeteria plans 2017Increase in medical deduction threshold for taxpayers age 65 and over 2018Excise tax on high-cost employer plans 29

30 Medicare “Surtax”  Beginning with 2013 tax year, imposes a 3.8% “surtax” to all taxpayers whose income exceeds a certain “threshhold amount”  Theoretically a taxpayer in the 39.6% tax bracket could have a marginal rate of 43.4%

31 Medicare “Surtax”  The “surtax” applies to the lesser of:  Net investment income - or -  Excess of Adjusted Gross Income over applicable threshold amount  Threshold amounts:  Single - $200,000  MFJ - $250,000  Trusts/Estates - $11,650 (top bracket)

32 Medicare “Surtax”  Net Investment Income (NII) includes:  Interest  Dividends  Annuity Distributions  Rents  Royalties  Income from Passive activities  Capital Gains

33 Medicare “Surtax”  Net Investment Income (NII) does not include:  Salaries and Wages  Active business income  IRA Distributions. 401(k) Distributions  Self-Employment income  Gain on sale of active partnership or S Corporation interest  Tax-exempt interest  Social Security and Veterans benefits

34 Medicare “Surtax”  Example:  John is single and has an AGI of $220,000. He has NII of $40,000.  John’s “surtax” base is the lesser of:  NII - $40,000  AGI over threshold - $220,000-200,000 = $20,000  John pays a surtax of $760 ($20,000 x 3.8%)

35 Minimizing the “Surtax”  Need to evaluate ways to minimize both NII and AGI in order to minimize the “surtax”  Shift taxable investment income into tax- exempt bonds  Harvest capital losses to offset future gains  Delay social security benefits  Convert TIRA to RIRA in 2012 to avoid future RMDs

36 Minimizing the “Surtax”  Rents received by “Real Estate Professional” who materially participate in the rental activities are not part of NII  Evaluate passive business interests that are subject to the “surtax”  Installment sales  Above-the-line deductions

37 Medicare “HI” Tax  Under current law, all workers pay 1.45% of their wages to the Medicare hospital insurance program (employers match)  Self-employed taxpayers pay both  Starting in 2013, high income taxpayers will owe an additional.9% on wages or self- employment income  Employers do not match the additional.9%

38 Medicare “HI” Tax  Tax applies to:  Married filing joint – wages or self- employment income over $250,000  Single, HOH - $200,000

39 Medicare “HI” Tax  Self-employed taxpayers  Pay the additional.9% over threshold  Since the.9% is technically the “employee’s portion”, the additional tax in not an above- the-line deduction on Form 1040

40 Medicare “HI” Tax  Married taxpayers  Employers have no way of knowing the wages or income of an employee’s spouse, so most employers will begin withholding as if their employee is single (after reaching $200,000)  If both spouses are high income earners but under $200,000 each, may need to make estimated payments due to no withholdings  Excess withholdings are considered surplus withholding

41 Minimizing Medicare “HI” Tax  Accelerate bonuses and other compensation into 2012 (if your employer agrees)  Maximize deferrals to employer plans (reduces federal taxable wages)

42 THANK YOU!  Chad W. Frush, CPA  Office (614) 445-7217  Cell (614) 203-2380    Follow us on Twitter @CBusCPAs

43 B.O.S.S. Workshops (Business Owner Strategy Sessions) Q & A Special thanks to our Sponsors: ™

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