LONG-TERM RELATIONSHIPS ARE ALL ABOUT DEDICATION

Tax Changes and Their Affect

October 22, 2013
Expiring Provisions At
December 31, 2013
Businesses:
50% Bonus depreciation on
asset purchases
Section 179 Expense reverts...
Expiring Provisions at
December 31, 2013
(Continued)
Individual:
Elementary and Secondary
School Teacher Expense $250

Qua...
Expiring Provisions at
December 31, 2013 (Continued)
Individual:
Sales Tax Deduction
Tax Free Distributions to IRA for
Cha...
American Taxpayer Relief Act of 2012
(Passed January 1, 2013)
American Taxpayer Relief Act of
2012 (Continued)

 Highest Tax Bracket

increased to 39.6%
 Increased Capital
Gain Rate ...
American Taxpayer Relief Act of 2012
(Continued)

Alternative Minimum
Tax Exemption made
permanent
Revival of Itemized
D...
Tax Brackets
Tax Brackets (Continued)
The 10, 15, 25, 28, 33, and 35%
brackets remain after 2012.
Tax Brackets (Continued)
An additional 39.6%
bracket began in 2013
Single Individuals
If taxable income is:

The tax will be:

Not over $8,925

10% of taxable income

Over $8,925 but not ov...
Capital Gain Rates

The 20% rate will apply to the extent that income
exceeds the thresholds set for the 39.6% bracket
$40...
Capital Gain Rates (Continued)
Threshold

The 15% rate applies for taxable incomes below the
39.6% threshold.
A 0% rate re...
Joe and Jane Taxpayer
Capital Gain Tax Example
Alternative Minimum Tax (AMT)
Exemptions made permanent 2013
2013 Exemptions
$51,900 for Single Individuals
$80,750 for Ma...
Itemized Deduction Phaseout
Begins at certain levels of
Adjusted Gross Income
$300K Married Filing Jointly
$275K Head of H...
Itemized Deduction Phaseout
(Continued)
Phaseout reduces itemized deductions by
3% of the excess over the threshold
Itemiz...
Personal Exemption Phaseout
Begins at certain levels of adjusted
gross income
$300K
$275K
$250K

Married Filing Jointly
He...
Other Notable Items
 Child Tax Credit:

For dependents under
age 17 at the end of
the year
 $1,000 Credit Extended
Perma...
Education Credits
• Enhanced HOPE education credit continues
through 2017 (American Opportunity Credit).
• $2,500 credit p...
Education Credits (Continued)
• Planning Tip – Pay $4k of tuition
from non-529 Plan accounts in
order to maximize credit (...
Basis Reporting
Effective 2011
For every broker that files a 1099B for gross
proceeds:
Must include cost basis of securit...
1099 Reporting for all vendors
paid > $600 repealed April 2011
Still Required to be issued for
services paid > $600
Ques...
New Jersey Tax Rates

2009

Since
2010

$150K - $500K

6.37%

6.37%

$400K - $500K

8.00%

6.37%

$500K - $1 Million

10.2...
New Jersey Items
Alternative Business Loss Carry forward
Categories:
• Net Loss from Business (Schedule C)
• Net Loss from...
New Jersey Items (Continued)
• Began with 2012 tax year - Separate calculation
• Calculated by netting income/loss in each...
Alternative Business Loss Carry Forward
Losses phase-in to a maximum of 50%
YEAR

AMOUNT

2012

10%

2013

20%

2014

30%
...
1031 Exchanges

No gain or loss on trade; business or
investment property exchanged for
like-kind property, not just real ...
1031 Exchanges (Continued)

LIKE-KIND EXAMPLES
• Apartment for Office

-

Yes

• Land for Building

-

Yes

• Domestic

-
...
1031 Exchanges (Continued)

1031 PROCEDURE
• Selling Contract:
– “Seller intends to utilize IRC 1031 to
defer gain on sale...
1031 Exchanges (Continued)
Independent intermediary cannot be:
 Lawyer
 Accountant
 Realtor
Within 2 years prior to clo...
1031 Exchanges (Continued)
45-day identification period:
Letter, e-mail or fax
to qualified intermediary

Up to 3 properti...
1031 Exchanges (Continued)

180-day title closing
deadline – no exceptions –
or filing date of tax return
(if prior to 180...
Obamacare Funding Provisions
Medicare Contribution Tax

• Begins in 2013
• Additional 3.8% tax on Net
Investment Income (NII)
• Adjusted gross income
t...
Medicare Contribution Tax (Continued)

Effect on tax rates:
2013

Including
Medicare Tax*

Ordinary Income

39.6%

43.4%

...
Medicare Contribution Tax (Continued)

Net investment income includes:
• Interest, dividend, annuity, royalty and
rent inc...
Medicare Contribution Tax (Continued)

Net investment income - not included:
• Taxable retirement plan distributions
• Gai...
Medicare Contribution Tax (Continued)

Other issues/planning:
• Estates and trusts are subject to
3.8% tax.
• Invest more ...
Medicare Contribution Tax (Continued)
Examples:
• For 2013, a single taxpayer has NII of $50k and MAGI of
$220k.
Medicare ...
Medicare Tax on Earned Income
• Also begins in 2013
• Imposes tax of .9% of wages in excess:
• $250K

MFJ

• $200K

Others...
Medicare Tax on Earned Income (Continued)
• Net Earnings from SelfEmployment also subject to
tax
• S Corporation income is...
Medicare Tax on Earned Income (Continued)
Examples:
• Taxpayer wages = $300k
• Employer withholds .9% on
excess over $250k...
Medicare Tax on Earned Income (Continued)

• Taxpayer has K-1
Partnership income of
$300k
• Taxpayer has ($50k)
loss from ...
Increased AGI threshold for
claiming medical on Schedule A
 From 7.5% to 10%
 Remains at 7.5% for
those age 65
and older...
Mr. and Mrs. Big
2012 vs. 2013
Tax Impact
Tax Planning Going Forward
Income and Expense Shifting
Usually Defer Income
Capital Gains
Bonuses
Installment Sales
Other Income
Income and Expense Shifting (Continued)

Usually accelerate expenses:
 Medical
 State Estimated Payments
 Real Estate t...
Income and Expense Shifting
(Continued)
Maybe the “Usual” doesn’t work with many
variables to consider:
 3.8% Medicare Co...
Roth IRA Conversion
• Beginning in 2010, conversions allowed with

no income limits.

• For 2010 only, conversions were re...
Roth IRA Benefits
• Value not included in required minimum

distribution calculation.
• Not taxed when distributed as long...
Roth IRA Legacy Example
• Husband converts regular IRA to Roth at age 65.
• His death occurs at age 73 (Roth held 8 yrs.)....
Estates

Federal Estate Exemption for 2013   $5,250,000
SAME AMOUNT
Lifetime gift exemption
Top tax rate
 
40%
$14,000
Yea...
Lifetime Gifts
• Removes gifted assets from estate now
• Removes future growth
and income associated
with those assets
• M...
Other Gift Considerations
 Donor should make sure they have
enough assets to live on
 Annual gift exclusion excludes
pay...
Exemption Portability
 Allows unused exemption of first
spouse to die to be passed to
survivor
Exemption Portability (Continued)
 Regardless of estate value, an
estate return MUST be filed to elect
portability of the...
New Jersey Estates
Exemption

$675,000
Federal vs. New Jersey Estates

• Difference in Exemptions
• Possibility exists to pay NJ

Estate Tax and zero Federal
Est...
What to Do???
• Reduce Estate size
• Move out of New Jersey
• See Attachment titled

“Florida Residency
Checklist”
DISCUSSIONS AND QUESTIONS

LONG-TERM RELATIONSHIPS ARE ALL ABOUT DEDICATION
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Tax Changes 2013 / 2014 and Their Impact

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Peter Pfister, Parter at The Curchin Group, CPAs, shares insight into the tax changes in 2013 and their future impact on businesses and individuals as well as what is likely to happen in 2014.

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Tax Changes 2013 / 2014 and Their Impact

  1. 1. LONG-TERM RELATIONSHIPS ARE ALL ABOUT DEDICATION Tax Changes and Their Affect October 22, 2013
  2. 2. Expiring Provisions At December 31, 2013 Businesses: 50% Bonus depreciation on asset purchases Section 179 Expense reverts to $125K from $500K of asset purchases S Corporation built-in-gain tax recognition period current 5 years reverts to 10 years
  3. 3. Expiring Provisions at December 31, 2013 (Continued) Individual: Elementary and Secondary School Teacher Expense $250 Qualified Tuition Deduction
  4. 4. Expiring Provisions at December 31, 2013 (Continued) Individual: Sales Tax Deduction Tax Free Distributions to IRA for Charitable purposes
  5. 5. American Taxpayer Relief Act of 2012 (Passed January 1, 2013)
  6. 6. American Taxpayer Relief Act of 2012 (Continued)  Highest Tax Bracket increased to 39.6%  Increased Capital Gain Rate to 20% (still some at 15%)  Qualified Dividends remain at 15% for all taxpayers
  7. 7. American Taxpayer Relief Act of 2012 (Continued) Alternative Minimum Tax Exemption made permanent Revival of Itemized Deduction Phaseout Revival of Personal Exemption Phaseout
  8. 8. Tax Brackets
  9. 9. Tax Brackets (Continued) The 10, 15, 25, 28, 33, and 35% brackets remain after 2012.
  10. 10. Tax Brackets (Continued) An additional 39.6% bracket began in 2013
  11. 11. Single Individuals If taxable income is: The tax will be: Not over $8,925 10% of taxable income Over $8,925 but not over $36,250 $892.50 plus 15% of the excess over $8,925 Over $36,250 but not over $87,850 $4,991.25 plus 25% of the excess over $36,250 Over $87,850 but not over $183,250 $17,891.25 plus 28% of the excess over $87,850 Over $183,250 to $398,350 $44,603.25 plus 33% of the excess over $398,350 Over $398,350 to $400,000 $115,586.25 plus 35% of the excess over $398,350 Over $400,000 $116,163.75 plus 39.6% of the excess over $400,000 Married Couples Filing Jointly If taxable income is: The tax will be: Not over $17,850 10% of taxable income Over $17,850 but not over $72,500 $1,785 plus 15% of the excess over $17,850 Over $72,500 but not over $146,400 $9,982.50 plus 25% of the excess over $72,500 Over $146,400 but not over $223,050 $28,457.50 plus 28% of the excess over $146,400 Over $223,050 but not over $398,350 $49,919.50 plus 33% of the excess over $223,050 Over $398,350 but not over $450,000 $107,768.50 plus 35% of the excess over $398,350 Over $450,000 $125,846 plus 39.6% over $450,000
  12. 12. Capital Gain Rates The 20% rate will apply to the extent that income exceeds the thresholds set for the 39.6% bracket $400K $450K Single Married - Joint
  13. 13. Capital Gain Rates (Continued) Threshold The 15% rate applies for taxable incomes below the 39.6% threshold. A 0% rate remains to the extent taxable income remains below the 15% bracket.
  14. 14. Joe and Jane Taxpayer Capital Gain Tax Example
  15. 15. Alternative Minimum Tax (AMT) Exemptions made permanent 2013 2013 Exemptions $51,900 for Single Individuals $80,750 for Married filing Jointly Adjusted each year for Inflation
  16. 16. Itemized Deduction Phaseout Begins at certain levels of Adjusted Gross Income $300K Married Filing Jointly $275K Head of Household $250K Single Individuals
  17. 17. Itemized Deduction Phaseout (Continued) Phaseout reduces itemized deductions by 3% of the excess over the threshold Itemized Deductions lost CANNOT be more than 80% Deductible medical expense, investment interest, and casualty losses are excluded
  18. 18. Personal Exemption Phaseout Begins at certain levels of adjusted gross income $300K $275K $250K Married Filing Jointly Head of Household Single Individuals Exemptions reduced by 2% for each $2,500 in excess of the threshold
  19. 19. Other Notable Items  Child Tax Credit: For dependents under age 17 at the end of the year  $1,000 Credit Extended Permanently  Income has to be below certain threshold to obtain
  20. 20. Education Credits • Enhanced HOPE education credit continues through 2017 (American Opportunity Credit). • $2,500 credit per year per student (100% of first $2k paid; 25% of next $2k paid). • Covers all four years of college. • After four years, Lifetime Learning Credit applies. • Credit phase-outs: – Joint filers – adjusted gross income between $160k and $180k. – Other filers – adjusted gross income between $80k and $90k.
  21. 21. Education Credits (Continued) • Planning Tip – Pay $4k of tuition from non-529 Plan accounts in order to maximize credit (no payments from 529 Plans can be used for the credit)
  22. 22. Basis Reporting Effective 2011 For every broker that files a 1099B for gross proceeds: Must include cost basis of security sold Covers purchases beginning 2011 What about prior years? All reporting on IRS Form 8949
  23. 23. 1099 Reporting for all vendors paid > $600 repealed April 2011 Still Required to be issued for services paid > $600 Questions on tax returns Reporting Trap
  24. 24. New Jersey Tax Rates 2009 Since 2010 $150K - $500K 6.37% 6.37% $400K - $500K 8.00% 6.37% $500K - $1 Million 10.25% 8.97% >$1 Million 10.75% 8.97% Taxable Incomes: Note: Below $150k - various rates ranging from 1.4% - 5.525%
  25. 25. New Jersey Items Alternative Business Loss Carry forward Categories: • Net Loss from Business (Schedule C) • Net Loss from Rental, Royalty, Patent and Copyrights • Net Loss from Partnerships • Net Loss from S Corporations
  26. 26. New Jersey Items (Continued) • Began with 2012 tax year - Separate calculation • Calculated by netting income/loss in each category • Net result from each category is netted to determine Alternative Business Loss • Losses carried forward 20 years following the taxable year of the loss • Loss carried forward offsets future income from the category created • Tax still paid with categories of net income each year
  27. 27. Alternative Business Loss Carry Forward Losses phase-in to a maximum of 50% YEAR AMOUNT 2012 10% 2013 20% 2014 30% 2015 40% 2016 and after 50%
  28. 28. 1031 Exchanges No gain or loss on trade; business or investment property exchanged for like-kind property, not just real estate Not available for primary residences
  29. 29. 1031 Exchanges (Continued) LIKE-KIND EXAMPLES • Apartment for Office - Yes • Land for Building - Yes • Domestic - Yes • Foreign - No • Partnership Shares - No • Stocks - No
  30. 30. 1031 Exchanges (Continued) 1031 PROCEDURE • Selling Contract: – “Seller intends to utilize IRC 1031 to defer gain on sale and has engaged Curchin 1031 Exchange as qualified intermediary” • At Closing: Proceeds (including deposit) – To independent intermediary within five days
  31. 31. 1031 Exchanges (Continued) Independent intermediary cannot be:  Lawyer  Accountant  Realtor Within 2 years prior to closing
  32. 32. 1031 Exchanges (Continued) 45-day identification period: Letter, e-mail or fax to qualified intermediary Up to 3 properties Up to 200% of sale price of property sold 200%
  33. 33. 1031 Exchanges (Continued) 180-day title closing deadline – no exceptions – or filing date of tax return (if prior to 180 days)
  34. 34. Obamacare Funding Provisions
  35. 35. Medicare Contribution Tax • Begins in 2013 • Additional 3.8% tax on Net Investment Income (NII) • Adjusted gross income thresholds: – MFJ - $250k – Others - $200k
  36. 36. Medicare Contribution Tax (Continued) Effect on tax rates: 2013 Including Medicare Tax* Ordinary Income 39.6% 43.4% Qualified Dividends 15.0% 18.8% Capital Gains 20.0% 23.8% * AGI >$250K MFJ/$200K others
  37. 37. Medicare Contribution Tax (Continued) Net investment income includes: • Interest, dividend, annuity, royalty and rent income. • Capital gains/losses. • Allowable deductions against income items/net gains. • Taxable gain on sale of primary residence. • Net gains from passive activities.
  38. 38. Medicare Contribution Tax (Continued) Net investment income - not included: • Taxable retirement plan distributions • Gain excluded on sale of primary residence • Tradebusiness income • Tax-exempt income
  39. 39. Medicare Contribution Tax (Continued) Other issues/planning: • Estates and trusts are subject to 3.8% tax. • Invest more in tax-exempt bonds? • Convert traditional IRA to Roth IRA?
  40. 40. Medicare Contribution Tax (Continued) Examples: • For 2013, a single taxpayer has NII of $50k and MAGI of $220k. Medicare tax paid on $20k (amount in excess of threshold). Tax would be $760 ($20k x 3.8%). • For 2013, married taxpayers have NII of $75k and MAGI of $230k. No Medicare tax since the MAGI does not exceed the threshold. • NII will be taxed on the full amount if MAGI exceeds the threshold amount by at least the amount of NII.
  41. 41. Medicare Tax on Earned Income • Also begins in 2013 • Imposes tax of .9% of wages in excess: • $250K MFJ • $200K Others • $125K MFS • Employers are required to withhold • Withholding begins at $200K for all taxpayers • Individuals responsible if tax not withheld
  42. 42. Medicare Tax on Earned Income (Continued) • Net Earnings from SelfEmployment also subject to tax • S Corporation income is not earned income-not subject to tax • Calculation of additional tax/refund on personal tax return • Focus of the tax is on Earned Income not AGI
  43. 43. Medicare Tax on Earned Income (Continued) Examples: • Taxpayer wages = $300k • Employer withholds .9% on excess over $250k or $450 • If married and spouse has additional earned income, it would be paid with the tax return filing • If married and spouse has negative earned income, a refund results
  44. 44. Medicare Tax on Earned Income (Continued) • Taxpayer has K-1 Partnership income of $300k • Taxpayer has ($50k) loss from sole -proprietorship • Not subject to .9% not in excess of $250k
  45. 45. Increased AGI threshold for claiming medical on Schedule A  From 7.5% to 10%  Remains at 7.5% for those age 65 and older until 2016  New Jersey threshold remains at 2%
  46. 46. Mr. and Mrs. Big 2012 vs. 2013 Tax Impact
  47. 47. Tax Planning Going Forward
  48. 48. Income and Expense Shifting Usually Defer Income Capital Gains Bonuses Installment Sales Other Income
  49. 49. Income and Expense Shifting (Continued) Usually accelerate expenses:  Medical  State Estimated Payments  Real Estate taxes  Misc. Itemized deductions
  50. 50. Income and Expense Shifting (Continued) Maybe the “Usual” doesn’t work with many variables to consider:  3.8% Medicare Contribution Tax  10% AGI Limitation for medical expenses  Alternative Minimum Tax  0%, 15%, or 20% Capital Gains Rates  New Jersey Tax Impact
  51. 51. Roth IRA Conversion • Beginning in 2010, conversions allowed with no income limits. • For 2010 only, conversions were recognized ratably in 2011 and 2012 unless election made to recognize in 2010. • For 2011 and after, tax paid in year of conversion • Low values spurred conversion opportunity.
  52. 52. Roth IRA Benefits • Value not included in required minimum distribution calculation. • Not taxed when distributed as long as held for five years. • Establishes a legacy for future beneficiary. • Downside: Paying tax on value upon conversion.
  53. 53. Roth IRA Legacy Example • Husband converts regular IRA to Roth at age 65. • His death occurs at age 73 (Roth held 8 yrs.). • Wife inherits at age 70 and dies at age 86 (Roth held 16 yrs.). • Daughter inherits at age 55 and must begin minimum distributions. • Daughter life expectancy is 29 yrs. • Roth legacy potential = 53 years (8 + 16 + 29).
  54. 54. Estates Federal Estate Exemption for 2013   $5,250,000 SAME AMOUNT Lifetime gift exemption Top tax rate   40% $14,000 Yearly gift allowance for 2013 See Handout of Historical Exemptions and Rates
  55. 55. Lifetime Gifts • Removes gifted assets from estate now • Removes future growth and income associated with those assets • Minimizes estate taxes • Shifts income tax associated with the gifted asset to the donee
  56. 56. Other Gift Considerations  Donor should make sure they have enough assets to live on  Annual gift exclusion excludes payments made directly to qualifying educational organizations for tuition and medical expenses paid directly to providers
  57. 57. Exemption Portability  Allows unused exemption of first spouse to die to be passed to survivor
  58. 58. Exemption Portability (Continued)  Regardless of estate value, an estate return MUST be filed to elect portability of the unused exemption  This means $10.5 Million of assets can move to heirs Federal Estate TAX FREE
  59. 59. New Jersey Estates Exemption $675,000
  60. 60. Federal vs. New Jersey Estates • Difference in Exemptions • Possibility exists to pay NJ Estate Tax and zero Federal Estate Tax
  61. 61. What to Do??? • Reduce Estate size • Move out of New Jersey • See Attachment titled “Florida Residency Checklist”
  62. 62. DISCUSSIONS AND QUESTIONS LONG-TERM RELATIONSHIPS ARE ALL ABOUT DEDICATION

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