2013 Year-End Tax Planning
With fall coming to a close, we are in the home stretch of 2013 and now is the time to start thinking about year-end planning. In fact,
year-end tax planning has become around-the-year tax planning because of tax legislation (or the lack of tax legislation), new
IRS rules and regulations and personal and business considerations. Looking ahead to year-end 2013, there are many tax planning
strategies to explore and evaluate.
ATRA brings some certainty
Unlike last year at this time, there is some more certainty to tax planning because of passage of the American Taxpayer Relief Act
of 2012 (ATRA). ATRA permanently extended the Bush-era individual income tax rate cuts for most taxpayers but also put in place a
top income tax bracket of 39.6% for higher-income taxpayers. In 2012, taxpayers were unsure what the individual rate brackets
would be for 2013, which complicated year-end planning. Now, we know the brackets are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%
for 2013 and beyond.
ATRA also ended uncertainty over the alternative minimum tax (AMT). Previously, Congress had to pass so-called "AMT patches" to
prevent the AMT from encroaching on middle-income taxpayers. ATRA patches the AMT for 2013 and subsequent years by increasing
the exemption amounts and allowing nonrefundable personal credits to the full amount of the individual's regular tax and AMT.
In the estate tax area, ATRA brings some certainty to tax planning. ATRA set the maximum estate tax rate at 40%, provided
for portability and more.
Many expiring provisions
ATRA extended - but did not make permanent - countless tax incentives. They range from incentives targeted to individuals, such as
the state and local sales tax deduction, the teachers' classroom expense deduction and the higher education tuition deduction,
to incentives for business, including the research tax credit, bonus depreciation, and enhanced small business expenses. In 2012,
for the first time in many years, Congress did not extend all of the expiring incentives (leaving, for example, the District of
Columbia homebuyer credit to expire). It is possible that Congress could prune the extenders even more in 2013. President Obama
has proposed to eliminate many fossil fuel extenders. If Congress keeps to past practice, the fate of the extenders will not be
decided until late in 2013, or in early 2014. Late tax legislation means that the IRS will likely have to delay the start of the
2014 filing season. Our office will keep you posted of developments.
Traditional year-end considerations
Traditional year-end planning considerations should not be overlooked. These include changes in filing status due to marriage, death
or divorce. Keep in mind also the Supreme Court's decision to strike down Section 3 of the Defense of Marriage Act (DOMA), which
presumably will open the door to married same-sex couples being able to file as married filing jointly (much-anticipated IRS guidance
has yet to be issued). Gift-giving is another valuable year-end tool. For 2013, the annual gift tax exclusion is $14,000 ($28,000 for
married couples making split-gifts). Qualified individuals can also make a gift to charity from IRA funds, but only through the end
of 2013.
If possible, taxpayers may want to project what will be the amount of their 2013 itemized deductions. For some taxpayers, medical expenses
may make up a large percentage of their itemized deductions. The floor on deductible medical expenses is 10% of adjusted gross income
in 2013 (7.5% for senior citizens). Others should compare the state and local sales tax deduction (especially taxpayers who have made
or may make big ticket purchases in 2013) with the state and local income tax deduction to maximize their savings. Don't forget the education
tax incentives. For 2013, the American Opportunity Tax Credit and the Lifetime Learning credit, along with others, are available to qualified
taxpayers.
Timing the recognition of capital gains and losses is important, to maximize offsetting short-term gains taxed at ordinary income tax rates,
with short-term losses. In 2012, the maximum tax rate on qualified capital gains (and dividends) was 15% (with some taxpayers qualifying
for a zero% rate). However, ATRA raises the top rate to 20% for certain higher-income taxpayers whose income exceeds the thresholds
for the 39.6% income tax rate.
Additional business strategies
Along with planning for the extenders and the Affordable Care Act (discussed below), businesses should also be aware of pending revisions to regulations on the
capitalization of tangibles (called "repair regs" for short). The rules go far beyond "repairs." One important ingredient to planning under the repair regs is
the provision for de minimis expensing. This rule can be helpful if the tax year in which the cost of qualified materials and supplies is paid or incurred
before the tax year of use or consumption.
The window for bonus depreciation is also closing, unless extended by Congress. ATRA extended 50% bonus depreciation through 2013 (some transportation and
longer period production property may be eligible for 50% bonus depreciation through 2014). Qualified property must be placed in service before January 1, 2014
(or January 1, 2015, if applicable).
Employers who want to take advantage of the Work Opportunity Tax Credit (WOTC), with its enhanced benefits for hiring veterans, need to act before January 1, 2014. The WOTC is a popular incentive and is likely to be extended but the provisions for veterans could be changed.
Affordable Care Act
January 1, 2014 is the start date for many provisions of the Affordable Care Act. The Obama administration has postponed the so-called
employer mandate until 2015 but other requirements - including the individual mandate - continue to apply. For example, the Affordable
Care Act limits annual salary reduction contributions to a health flexible spending arrangement under a cafeteria plan to $2,500
(adjusted for inflation after 2013). The IRS is also asking that employers voluntarily comply with information reporting requirements
for health insurance coverage for 2014. Please contact our office for more details about the Affordable Care Act's requirements for 2014
and beyond.
NII surtax
On January 1, 2013, the new 3.8% net investment income (NII) surtax took effect. The surtax, which was passed by Congress to
help fund health care reform, is imposed on the net investment income of higher-income individuals, estates and trusts that exceeds
certain thresholds. Generally, the surtax applies to passive income, but can also reach capital gains from the disposition of property.
Some taxpayers may have sold property or changed their source of income in 2012 to avoid the surtax. Now that the surtax is effective,
new strategies should be considered to minimize, if possible, the surtax. There is also a new 0.9% Additional Medicare Tax that
reaches higher-income individuals.
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