Changes for 2013/2014 Tax Year

11/25/2013

Starting in 2013, there will be a series of changes that may affect an individual’s taxable liability.A summary of these changes will include:


Higher Tax Brackets



Medical Expense Deduction

Starting in 2013, the Medical Expense Deduction on Schedule A will be increased from deductible expenses that exceed 7.5% of AGI to expenses that exceed 10% of AGI. Taxpayers or their spouses who are 65 or older before the close of the tax year may continue to use 7.5% of AGI through 2016. The increase in the Medical Expense Deduction will remain at 10% when calculating Alternative Minimum Tax liability.


Expiration of "Extenders”

The following deductions are currently scheduled to expire at the end of the year 2013.

· State and Local Sales Tax Deduction

· Teacher’s Classroom Expense Deduction

· Exclusion of Cancellation of Indebtedness on Principal Residence

· Transit Benefits

· Mortgage Insurance Premiums

· Contribution of Capital Gains Real Property for Conservation

· IRA Distribution to Charity


Reduction in Itemized Deductions and phase outs of personal exemptions

Starting in 2013, Itemized deductions must be reduced by the lesser of 3% of adjusted gross income in excess of the specified levels below, or 80% of the amount of itemized deductions otherwise allowable.

· Single: 250,000 in 2013, and $254,200 in 2014

· Head of Household: 275,000 in 2013, and $279,650 in 2014

· Married Filing Jointly: 300,000 in 2013, and $305,050 in 2014

· Married Filing Separately: 150,000 in 2013, and $152,525 in 2014

Personal exemptions ($3,900 2013 / $3,950 2014) are phased out for taxpayers at a rate of 2% for each $2,500 or fraction of $2,500 ($1,250 or fraction of $1,250 for married taxpayers filing separate returns) by which the taxpayer's AGI exceeds the same levels above.


Depreciation Changes

A change in Bonus and Section 179 Depreciation will affect business entitys moving forward as they continue to purchase new equipment.


Section 179 - In 2014, the Section 179 expense drops from $500,000 to $25,000 and the phase out will begin at $200,000 rather than $2,000,000


Bonus Depreciation – After 2013 the bonus depreciation is set to expire and return to 0%


Luxury Car Depreciation Caps – The additional $8,000 first year depreciation cap for automobiles under section 280F to account for bonus depreciation will expire in 2013.

Income and Deductions should be accelerated or deferred based on such situations. If you wish to take advantage of the higher Section 179 deduction or bonus depreciation deduction for 2013, the asset must be purchased and put in service before December 31, 2013.



Tax Planning


Who should accelerate income to 2013 from 2014

· Taxpayers who expect to be in a higher tax bracket next year.

· If you will have a Head-of-Household or surviving spouse status end after this year
· If a taxpayer plans to get married next year
· Taxpayer expects to be eligible for one or more credits next year (e.g., the child tax credit), but not this year, that are subject to phase out when AGI reaches specified limits.
· Taxpayer expects to start receiving Social Security benefits next year
If the opposite is true consider the effects of deferring 2013 income to 2014, and accelerating as many deductions to 2013 by year end as possible.

Due to the unique differences in everyone’s tax situations, it is important and recommended that you talk with your tax advisor before making any decisions.


Tax Planning to Help Reduce AGI and/or MAGI

With all of the changes coming into effect for 2013 / 2014, the following planning strategies can be used to reduce tax liability by deferring income and accelerating deductions into the most beneficial period.


Qualified Education Expenses -

For 2013, individual taxpayers can deduct up to $4,000 of qualified higher education expenses above the line.


Thresholds:

· Modified AGI does not exceed for the taxpayer $65,000, or $130,000 for joint filers,

· The expense is reduced to $2,000 for taxpayers whose modified AGI exceeds $65,000 ($130,000 for joint returns) but does not exceed $80,000 ($160,000 for joint returns).

· For 2013 and 2014, the American Opportunity Tax Credit is an amount equal to 100% of qualified tuition and related expenses not in excess of $2,000 plus 25% of those expenses in excess of $2,000, but not in excess of $4,000.

· Maximum credit is $2,500 (2,000 * 25% + $2,000)

Consider prepayment of tuition expense. Unless extended, this credit will expire in 2014.


Student Loan Interest Deduction:

Above the line deduction:

1. $2,500 of interest on qualified education loans.

2. For 2013, reduced ratably at MAGI between $125,000 and $155,000 for joint, and $60,000 and $75,000 for others.

3. For 2014, reduced ratably at MAGI between $130,000 and $160,000 for joint, and $65,000 and $80,000 for others.


Child Tax Credit

· Taxpayers are allowed a $1,000 child tax credit for each qualifying child under age 17.

·The amount of the credit allowable is reduced by $50 for each $1,000 (or part of a $1,000) of MAGI above $110,000 for joint filers, $75,000 for single filers, and $55,000 for marrieds filing separately.


In planning, consider the AGI of the current year as well as the estimated MAGI of next year to see if this credit could be available with the acceleration or deferral of income/deductions in either year.


Convert taxable interest to tax-exempt interest

The tax-exempt interest will not be included in AGI (except in determining the taxability of Social Security benefits), and for some individuals, the after-tax amount received from tax-exempt interest might be at least as much as the after-tax amount received from taxable interest.


Convert taxable interest to tax-deferred interest or income

Shift funds to U.S. Series EE bonds or inflation-indexed U.S. Series I savings bonds. Interest on Series EE or I bonds isn't taxed until the bonds mature or are redeemed.


Buy Treasury Bills with term of one-year or less. The income from the Bills won't be included in gross income until the following year.


Pay off debts

If an individual has both income-generating investments and debts on which he is paying interest, he should consider selling part of his investments and using the proceeds to pay off debt.

· It reduces AGI

· Can increase net income due to offsetting deductions


Increase contributions to 401(k) plans, SIMPLE pension plans, etc.

Some individuals may be able to reduce AGI by increasing contributions to retirement plans such as 401(k) plans, SIMPLE pension plans, and Keogh plans.


IRA Contribution:

· Contribute to traditional IRA to decrease AGI

· Convert to Roth IRA to increase AGI

· Keep track of value over year to determine if re-characterization is helpful.


Increase contributions to health savings account (HSA)

Individuals who are covered by a qualifying high deductible health plan may make deductible contributions to an HSA, subject to certain limits:


Assuming a full year of coverage, max contribution is:

· $3,250 for self-only coverage in 2013

· $3,300 for self-only coverage in 2014

· $6,450 for family coverage in 2013

· $6,550 for family coverage in 2014

· An additional $1,000 may be contributed by individuals over 50

· Payments can be made anytime.


Defer receipt of year-end bonuses.

An employee who believes a bonus may be coming his way may request that his employer delay payment of any bonus until early in the following year.


Small Business Stock

Small business stock that was acquired between September 27, 2010 and before January 1, 2014 and held for more than five years qualifies for a full 100% exclusion.


Stock that is acquired after December 31, 2013 reverts back to 50% and 60% for empowerment zones.


Consider having clients purchase such stock before year-end.


Capital Gains

For 2013 and later years, long-term capital gains are taxed at a rate of:

· 20% if they would be taxed at a rate of 39.6% if they were taxed as ordinary income

· 15% if they would be taxed at above 15% but below 39.6% if they were taxed as ordinary income

· 0% if they would be taxed at a rate of 10% or 15% if they were taxed as ordinary income


In addition to these rates, the taxpayer may be subject to the additional unearned income tax of 3.8% based on the Affordable Care Act tax, making the top Capital Gain rate of 23.8%.


Take capital losses in 2013

Consider taking losses in 2013 to reduce AGI by offsetting capital gains and $3,000 of ordinary income.


This will also help to reduce MAGI and limit the amount of surtax liability.


To preserve investment position, it may be advised to sell a stock and buy it back at least 31 days later to prevent a wash sale.


Investment Income Surtax

For tax years beginning after 2012, a 3.8% surtax applies to the lesser of (1) net investment income or (2) the excess of modified adjusted gross income (MAGI) over the threshold amount

· $250,000 for joint filers or surviving spouses,

· $125,000 for a married individual filing a separate return, and

· $200,000 for other taxpayers.


The 3.8% surtax applies to a trade or business if it is a passive activity of the taxpayer, or a trade or business of trading in financial instruments or commodities. Does not apply to active activity of any entity. Capital gains are included in the surtax.


Methods to reduce Surtax Liability

The 3.8% surtax applies to income from a passive investment activity. To help reduce the amount of income subject to the surtax the following should be considered:

· Use Grouping to take advantage of PAL.

· Use Installment Method to spread out gain on sale over multiple years.

· Use like-kind exchanges to defer gains

· Look at timing for sale of home

· Recognizes losses to offset gains

· Use Roth IRAs (not included in MAGI or NII)

· Conversion to Roth IRA timing

· Sell securities at a loss to decrease investment gains.


Timing considerations for required minimum distributions

Taxpayers who attain age 701/2 in 2013 are allowed to delay taking their first RMD (i.e., for 2013) until their required beginning date of Apr. 1, 2014.


Taxpayers who are age 701/2 or older can reduce this year's taxable RMD, and thereby reduce MAGI, by making a qualified charitable distribution (QCD)


Affordable Care Act


Individual Mandate-

Beginning January 1, 2014, individuals will be required to carry minimum essential coverage. Individuals that fail to have insurance will be subject to a fine of $95 or 1% of taxable income, it will increase to $325 or 2% in 2015 and $695 or 2.5% in 2016.


Employer Mandate

Postponed until 2015. Calculated based on the prior year staffing numbers. Starting on January 1, 2014, business with an average of 50 Full Time employees will be required to provide their employees with Affordable Care Act compliant insurance or pay a heavy fine.


Employer and Insurer Reporting

Requires large employers starting in 2015 to file an information return that reports the terms and conditions of the health care coverage provided to the employer’s full-time employees for the year.