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January 2013 Roundtable  University of Maryland Heritage Hall            January 29, 2013
Welcome!Roundtable Panel Bill Smith, Managing Director       Zack Pace, Senior Vice President CBIZ MHM National Tax Office...
“Housekeeping” - Circular 230 Notice Any tax advice contained in this program is not intended to be used and cannot be use...
Today’s Agenda• Roundtable Part 1 - Fiscal Cliff & Tax Issues  – Bill Smith, Larry Kline, Stu Anolik• Roundtable Part 2 – ...
Roundtable Part 1 - Fiscal Cliff & Tax Issues• Fiscal Cliff• American Taxpayer Relief Act of 2012   – Payroll Tax Cut (Exp...
Roundtable Part 2 – Assessing and Mitigating the2014 Health Care Reform Employer Penalties • Key Penalty Risks            ...
Fiscal Cliff
Fiscal Cliff - Overview Combination of tax increases due to the expiration of tax provisions, new taxes under the Affordab...
Fiscal Cliff – Impact• CBO projected that the automatic spending cuts plus  expiration of tax cuts and extenders would sen...
American Taxpayer Relief Act of 2012                                       10
American Taxpayer Relief Act of 2012 –Ordinary Income Tax Rates • Current income tax rates of 10%, 15%, 25%, 28%, 33%   an...
American Taxpayer Relief Act of 2012 –Capital Gains and Dividend Rates • Current capital gains and qualified dividend rate...
American Taxpayer Relief Act of 2012 –Capital Gains and Dividend Rates (continued)  • A 20% rate will apply to individuals...
American Taxpayer Relief Act of 2012 –Permanent AMT Relief • The AMT “Patch” expired 12/31/11 • The patch has routinely be...
American Taxpayer Relief Act of 2012 –Permanent AMT Relief (continued) • The higher exemptions amounts are retroactively  ...
American Taxpayer Relief Act of 2012 –Personal Exemption Phase-out (PEP) • Beginning in 2013, the Act reinstates the previ...
American Taxpayer Relief Act of 2012 –“Pease” Limitation • Beginning in 2013, the previously suspended limitation on   ite...
American Taxpayer Relief Act of 2012 –“Pease” Limitation (continued) • For taxpayers subject to the limitation the total a...
American Taxpayer Relief Act of 2012 –Estate and Gift Tax  • The estate and gift tax rates and lifetime exemption were    ...
American Taxpayer Relief Act of 2012 –Estate and Gift Tax (continued)  • Under the Act, for individuals dying and gifts ma...
American Taxpayer Relief Act of 2012 –Expiration of the Payroll Tax Cut • An extension of the temporary 2% reduction of th...
American Taxpayer Relief Act of 2012 –Individual Tax Extenders  • The election to deduct state and local general sales tax...
American Taxpayer Relief Act of 2012 –Individual Tax Extenders  • Tax free distributions from IRAs for charitable purposes...
American Taxpayer Relief Act of 2012 –Section 179 Expensing  • The Section 179 expensing provision is retroactively    ext...
American Taxpayer Relief Act of 2012 –Bonus Depreciation • The percentage dropped from 100% in 2011 to 50% in   2012 and w...
American Taxpayer Relief Act of 2012 –Bonus Depreciation (continued) • The property must have a recovery period of 20 year...
American Taxpayer Relief Act of 2012 –Business Tax Extenders • The following business tax provisions that had expired at  ...
American Taxpayer Relief Act of 2012 –Business Tax Extenders (continued) • The following business tax provisions that had ...
American Taxpayer Relief Act of 2012 –Energy Incentives Extenders • Several energy incentives, most of which had expired a...
American Taxpayer Relief Act of 2012 –Other Notable Provisions • The automatic spending cuts scheduled to go into effect  ...
American Taxpayer Relief Act of 2012 –Other Notable Provisions (continued) • The provision that would have drastically red...
New Medicare Taxes for 2013                              32
New Medicare Taxes • Effective in 2013 • Two new taxes:   – Additional 0.9% tax on earned income   – 3.8% surtax on unearn...
Additional 0.9% Medicare Tax on Earned Income • Change in 2013:   – Additional 0.9% HI tax on wages (to 2.35%) and net SE ...
Additional 0.9% Medicare Tax on Earned Income • Unlike the OASDI ceiling which is applied based on the   employee’s wages,...
Withholding on 0.9% Medicare Tax • Employers are required to withhold the additional 0.9%   tax on wages in excess of $200...
Withholding on 0.9% Medicare Tax (continued) • Implications:   – If an employee’s wages are below $200,000 but when combin...
3.8% Medicare Tax on Unearned Income • Surtax on Net Investment Income (NII) • First time that FICA/Medicare taxes have be...
3.8% Medicare Tax – Individuals • Individuals   – 3.8% of the lesser of:      • Net investment income, or      • Excess of...
3.8% Medicare Tax – Trusts and Estates • Trusts and Estates   – 3.8% of the lesser of:      • Undistributed net investment...
3.8% Medicare Tax – Net Investment Income • Net Investment Income – Defined as investment income   less otherwise allowabl...
3.8% Medicare Tax – Net Investment Income (cont’d.) • Includes three categories:   – Gross income from interest, dividends...
3.8% Medicare Tax – Key Points • Taxpayer’s must have both NII and gross income over the   applicable thresholds in order ...
3.8% Medicare Tax – Key Points • Only property sold that was not held in a trade or   business is included in net investme...
3.8% Medicare Tax – Key Points • Net investment income reduced by “properly allocable”   deductions   – Examples include i...
3.8% Medicare Tax – Key Points • The 3.8% Medicare tax does not apply to distributions   from qualified retirement plans •...
3.8% Medicare Tax – Key Points • The 3.8% Medicare tax does not apply to investment   income excludible from taxable incom...
3.8% Medicare Tax – Case Study            Interest income from various corporate bonds and bank          $10,000          ...
3.8% Medicare Tax – Case Study              Interest income from various corporate bonds and bank      $10,000Net         ...
3.8% Medicare Tax – Case Study                 Interest income from various corporate bonds and bank       $10,000        ...
3.8% Medicare Tax – Case Study               Modified AGI                                          $317,000The 3.8%       ...
Planning Strategies to Reduce 3.8% Medicare Tax • Convert to a Roth IRA so future qualified retirement plan   distribution...
Planning Strategies to Reduce 3.8% Medicare Tax • Taxable conversion amount would be subject to 3.8% tax   – Time Roth con...
Planning Strategies to Reduce 3.8% Medicare Tax• Realign Investment Strategies (continued)  – Time gains and losses to off...
Planning Strategies to Reduce 3.8% Medicare Tax • Passive Activities   – Evaluate profitable passive activities to see if ...
Impact of State Taxes
Estate Taxes• The state “Pick-Up” tax permanently repealed• Many states have a lower exemption that the Federal  exemption...
Business Provisions• Bonus Depreciation extended  – As most states decouple anyway (31 states do), no new impact  – Concer...
Future Impact• Will more states decouple from the Federal code?• Politically, many states have one party in charge – could...
International Tax Provisions
American Tax Relief Act of 2012 –International Tax Provisions• Active Financing Exception  – Certain income from the activ...
American Tax Relief Act of 2012 –International Tax Provisions• Look through rule for payments between related CFCs  – Look...
American Tax Relief Act of 2012 –International Tax Provisions• 20% Withholding Rate on Sales of USRPIs  – The IRS may, to ...
IRS Enforcement - Compliance• Foreign Account Tax Compliance Act (“FATCA”)  – IRS has entered into several inter-governmen...
IRS Enforcement - Compliance• Report of Foreign Bank and Financial Accounts (“FBAR”)  – FBAR filing deadline extended to J...
International Tax – Planning Examples• IP Migration  – Transfer of intellectual property assets outside U.S. taxing jurisd...
International Tax – Planning Examples• Expatriation Planning  – US citizens and residents are subject to U.S. gift tax and...
Potential Tax Reform
Potential Tax Reform • Upcoming Budget Negotiations    – Raising the Debt Ceiling    – Automatic Cuts Under Sequestration ...
Top 5% Income Earners paid 58.7% of the Taxes Category         AGI Cut Off       Number          Share of                 ...
Potential Tax Reform • The issue on individual rates my be settled but some   popular deductions may be in jeopardy down t...
Obama Tax Plan – Individuals• What did not get in the new law  – Cap certain deductions or exclusions at 28% for taxpayers...
Potential for Corporate Tax Reform • February 2012-The President’s Framework for Business   Tax Reform (the Framework)   –...
Corporate Reform Under the Framework• Reduce top corporate rate from 35% to 28%• Reduction or elimination of many popular ...
Industry                       Tax Rate                    Agriculture, forestry, Fishing and Hunting                 22%E...
Corporate Reform Under the Framework • Proposes to strengthen U.S. manufacturing by offering   incentives, including cutti...
Corporate Reform Under the Framework • Framework calls for simplification for small businesses   and adding incentives, su...
Potential State Reaction to Federal Tax Reform• Multi-state tax issues – more states moving towards a  weighting of the sa...
International – Obama Proposals• Retain the worldwide taxation system vs. territorial tax  system  – A territorial system ...
Summary / Key Takeaways • Fiscal Cliff • The American Taxpayer Relief Act of 2012   – Payroll Tax Cut not included   – AMT...
Summary/Key Takeaways • Potential Future Tax Reform   – Effect on Individual Deductions   – Capping Itemized Deductions   ...
Questions  before moving on to theHealth Care Reform segment
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Business Whitepaper 1: Fiscal Cliff & Tax Issues/ Assessing and Mitigating the 2014 Health Care Reform Employer Penalties

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A copy of the presentation given at the CBIZ Rountable event regarding the fiscal cliff and health care reform.

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Business Whitepaper 1: Fiscal Cliff & Tax Issues/ Assessing and Mitigating the 2014 Health Care Reform Employer Penalties

  1. 1. January 2013 Roundtable University of Maryland Heritage Hall January 29, 2013
  2. 2. Welcome!Roundtable Panel Bill Smith, Managing Director Zack Pace, Senior Vice President CBIZ MHM National Tax Office CBIZ Benefits Consulting Stu Anolik, Managing Director Larry Kline, Line Managing Director CBIZ MHM National Tax Office Tax Practice Leader International Tax Practice Leader CBIZ MHM BethesdaCBIZ and MHM Mid-Atlantic Leadership Greg Allender Michael Marchini Senior Managing Director President CBIZ MHM Financial Services CBIZ Insurance Services
  3. 3. “Housekeeping” - Circular 230 Notice Any tax advice contained in this program is not intended to be used and cannot be used for the purposes of avoiding any penalties that may be imposed by the Internal Revenue Code. 3
  4. 4. Today’s Agenda• Roundtable Part 1 - Fiscal Cliff & Tax Issues – Bill Smith, Larry Kline, Stu Anolik• Roundtable Part 2 – Assessing and Mitigating the 2014 Health Care Reform Employer Penalties – Zack Pace and Bill Smith• Q&A 4
  5. 5. Roundtable Part 1 - Fiscal Cliff & Tax Issues• Fiscal Cliff• American Taxpayer Relief Act of 2012 – Payroll Tax Cut (Expired) – Limitations to Personal Exemptions – Revised income tax rates and Itemized Deductions effective 2013 – Estate and Gift Tax Provisions – Revised capital gains and – Extension of 179 and Bonus dividend rates Provisions – AMT Patch retroactive for – Individual and Business Extenders 2012, indexed 2013 and after• New Medicare Taxes for 2013 under the Health Care Act• State Taxes and International Tax Provisions• Potential Tax Reform 5
  6. 6. Roundtable Part 2 – Assessing and Mitigating the2014 Health Care Reform Employer Penalties • Key Penalty Risks • Variable Hour Employees • Five Steps to Determining • Seasonal Employees Your Risk • The Exchanges – Eligibility Waiting Period • Summary, Next Steps – Employer Size – 30 Hour Rule – Premium Affordability Test – Plan Design Affordability 6
  7. 7. Fiscal Cliff
  8. 8. Fiscal Cliff - Overview Combination of tax increases due to the expiration of tax provisions, new taxes under the Affordable Care Act, and the $1.2T of mandatory spending cuts put in place by the Budget Control Act of 2011 (known as “sequestration”). All would have been effective as of January 1, 2013. Expiring Taxes New Taxes • 2001 and 2003 tax cuts • Health care taxes • Payroll tax cut • Extenders Spending • Estate tax relief • Automatic spending cuts (“Sequestration”) 8
  9. 9. Fiscal Cliff – Impact• CBO projected that the automatic spending cuts plus expiration of tax cuts and extenders would send the US into a recession in 2013• Stock market could drop due to higher rates on capital gains and dividends• Nearly 90% of US taxpayers would pay more tax• Middle income household average tax increase: $3,000• IRS warned Congress if they don’t act by the end of the year it could delay the tax filing season 9
  10. 10. American Taxpayer Relief Act of 2012 10
  11. 11. American Taxpayer Relief Act of 2012 –Ordinary Income Tax Rates • Current income tax rates of 10%, 15%, 25%, 28%, 33% and 35% permanently extended – Rates would have increased to 15%, 28%, 31%, 36% and 39.6% • A 39.6% rate will apply to individuals with taxable income over $400,000 ($450,000 for joint filers; $425,000 for heads of households) beginning in 2013 – Caution: the rate could be as high as 43.4% on investment income if subject to the 3.8% Medicare surtax 11
  12. 12. American Taxpayer Relief Act of 2012 –Capital Gains and Dividend Rates • Current capital gains and qualified dividend rate of 15% permanently extended for individuals with taxable income of $400,000 or less ($450,000 or less for joint filers) beginning in 2013 – Caution: the rate could be as high as 18.8% if the income is subject to the 3.8% Medicare surtax – Rate still 0% for taxpayers in 10%/15% ordinary income brackets – Capital gain rate would have increased to 20% and qualified dividend rate would have increased to ordinary income rates 12
  13. 13. American Taxpayer Relief Act of 2012 –Capital Gains and Dividend Rates (continued) • A 20% rate will apply to individuals with taxable income over $400,000 ($450,000 for joint filers) beginning in 2013 – Caution: the rate could be as high as 23.8% if the income is subject to the 3.8% Medicare surtax 13
  14. 14. American Taxpayer Relief Act of 2012 –Permanent AMT Relief • The AMT “Patch” expired 12/31/11 • The patch has routinely been extended in the past • The patch temporarily increased the AMT exemptions, which are not indexed for inflation – For example, in 2011 the exemption for MFJ increased from $45,000 to $72,450 • The Act makes the higher exemption amounts permanent which saves an estimated 30 million taxpayers from having to pay the AMT on their 2012 returns 14
  15. 15. American Taxpayer Relief Act of 2012 –Permanent AMT Relief (continued) • The higher exemptions amounts are retroactively effective to the beginning of 2012 • The increases in the exemption amounts are as follows: – Singles, from $33,750 to $50,600 – MFJ, from $45,000 to $78,750 – MFS, from $22,500 to $39,375 • The exemption amounts are now indexed for inflation beginning in 2013 • In addition, many nonrefundable personal credits will now reduce the AMT liability as well as the regular tax liability
  16. 16. American Taxpayer Relief Act of 2012 –Personal Exemption Phase-out (PEP) • Beginning in 2013, the Act reinstates the previously suspended Personal Exemption Phase-out for taxpayers with AGI over the following thresholds: – Single filers $250,000 – Married couples $300,000 – Heads of Household $275,000 • Under the phase-out, the total amount of personal exemption that can be claimed is reduced by 2% for each $2,500 (or portion thereof) by which the taxpayer’s AGI exceeds the applicable threshold 16
  17. 17. American Taxpayer Relief Act of 2012 –“Pease” Limitation • Beginning in 2013, the previously suspended limitation on itemized deductions is reinstated for taxpayers whose AGI are above the following thresholds (same as PEP) – Single filers $250,000 – Married couples $300,000 – Heads of Household $275,000 17
  18. 18. American Taxpayer Relief Act of 2012 –“Pease” Limitation (continued) • For taxpayers subject to the limitation the total amount of their itemized deductions is reduced by 3% of the amount by with the taxpayer’s AGI exceeds the above thresholds • The reduction is limited to 80% of the otherwise allowable itemized deductions 18
  19. 19. American Taxpayer Relief Act of 2012 –Estate and Gift Tax • The estate and gift tax rates and lifetime exemption were set to go back to 2001 levels with the expiration of the Bush-Era tax provisions – Top Rate of 55% (35% in 2012) – Exclusion amount of $1 million ($5.12 million in 2012) • Popular opinion was that Congress would eventually come up with a 45% rate with a $3.5 million exclusion for estates, while the gift tax exemption would go back $1 million 19
  20. 20. American Taxpayer Relief Act of 2012 –Estate and Gift Tax (continued) • Under the Act, for individuals dying and gifts made after 2012, the $5 million exemption (adjusted for inflation) remains for both estate, gift and GST taxes – 2013 exemption projected to be $5,250,000 • The top rate is permanently increased from 35% to 40% • The top rate kicks in on taxable estates and gifts over $1 million (after taking into account the exemption) • The Act also maintains the portability rules for a deceased spouse’s unused estate tax exemption 20
  21. 21. American Taxpayer Relief Act of 2012 –Expiration of the Payroll Tax Cut • An extension of the temporary 2% reduction of the social security payroll tax rate for employees and self-employed persons was not included in the bill – On January 1 2013, the employee’s share of FICA increased from 4.2% to 6.2% – FICA portion of self-employment tax increased from 10.4% to 12.4% 21
  22. 22. American Taxpayer Relief Act of 2012 –Individual Tax Extenders • The election to deduct state and local general sales taxes instead of state income tax which expired at the end of 2011 was extended through 2013 and was retroactively reinstated for 2012 • The child tax credit remains at $1,000 (was to revert back to $500 after 2012) • The exclusion in income from the discharge of indebtedness for a personal residence was set to expire at the end of 2012 and is now extended through 2013 22
  23. 23. American Taxpayer Relief Act of 2012 –Individual Tax Extenders • Tax free distributions from IRAs for charitable purposes – Originally expired at the end of 2011 – Under the new law, qualified distributions from IRA’s for charitable purposes made prior to February 1, 2013 may be deemed to be made in 2012 – Also, cash distributions taken from IRA’s after November 30, 2012 and transferred to charity prior to February 1, 2013 may qualify as tax-free distributions in 2012 (assuming the distributions otherwise qualify for the exclusion) 23
  24. 24. American Taxpayer Relief Act of 2012 –Section 179 Expensing • The Section 179 expensing provision is retroactively extended by the Act through 2014: – The limit dropped from $500,000 in 2011 to $139,000 in 2012 and was set to revert back to $25,000 in 2013 – The Act keeps in place the 2011 level of $500,000 for the years 2012 and 2013 – The deduction begins to phase out when total qualified purchases for the year exceeds $2 million – The Act also reinstated the 2011 provision that allows the immediate deduction of up to $250,000 of qualified leasehold improvements, restaurant and retail improvements 24
  25. 25. American Taxpayer Relief Act of 2012 –Bonus Depreciation • The percentage dropped from 100% in 2011 to 50% in 2012 and was set to expire starting in 2013 • The Act extends the 50% bonus depreciation provision to assets placed in service before January 1, 2014 • The original use of the property must begin with the taxpayer, so used equipment will not apply for bonus depreciation 25
  26. 26. American Taxpayer Relief Act of 2012 –Bonus Depreciation (continued) • The property must have a recovery period of 20 years or less • Bonus depreciation is mandatory, but taxpayers can elect out (the election applies to all property in the class or classes of property for which the election is made) 26
  27. 27. American Taxpayer Relief Act of 2012 –Business Tax Extenders • The following business tax provisions that had expired at the end of 2011 were extended through 2013, retroactive to the beginning of 2012, including, but not limited to the: – The research and experimentation (R&E) credit – The 15 year straight line cost recovery for qualified leasehold improvements, qualified restaurant property and qualified retail improvements 27
  28. 28. American Taxpayer Relief Act of 2012 –Business Tax Extenders (continued) • The following business tax provisions that had expired at the end of 2011 were extended through 2013, retroactive to the beginning of 2012, including, but not limited to the: – Five-year recognition period for S corporation built-in gains tax (originally was a 10 year period) – 100% exclusion of gain from sale of qualified small business stock – New markets tax credit – Work opportunity tax credit (WOTC) 28
  29. 29. American Taxpayer Relief Act of 2012 –Energy Incentives Extenders • Several energy incentives, most of which had expired at the end of 2011, were extended through 2013, including, but not limited to the: – Residential energy property credit – Energy efficient new homes credit – Energy efficient appliances credit – Renewable electricity production credit, and – Credit for biodiesel and renewable diesel used as fuel 29
  30. 30. American Taxpayer Relief Act of 2012 –Other Notable Provisions • The automatic spending cuts scheduled to go into effect on January 1st were deferred until March 1, 2013 • Taxpayers may now transfer amounts from a qualified retirement plan to a qualified Roth plan (e.g. Roth 401(k)) without paying an early withdrawal penalty 30
  31. 31. American Taxpayer Relief Act of 2012 –Other Notable Provisions (continued) • The provision that would have drastically reduced Medicare payments to physicians has been deferred for another year • Federal long-term unemployment benefits have been extended for one year • The Federal milk subsidy has been extended for one year 31
  32. 32. New Medicare Taxes for 2013 32
  33. 33. New Medicare Taxes • Effective in 2013 • Two new taxes: – Additional 0.9% tax on earned income – 3.8% surtax on unearned income • Generally impacts couples with income over $250,000 and individuals with income over $200,000 • Enacted as part of 2010 healthcare reform legislation (Affordable Care Act or “ACA”) • IRS recently issued proposed reliance regulations on the operation of the two new Medicare taxes 33
  34. 34. Additional 0.9% Medicare Tax on Earned Income • Change in 2013: – Additional 0.9% HI tax on wages (to 2.35%) and net SE income (to 3.8%) in excess of the thresholds below – Additional tax is on employee’s contribution only (or ½ of SE individual’s contribution) Filing Status Threshold Married Filing Jointly $250,000 Single/Head of Household $200,000 Married Filing Separately $125,000 34
  35. 35. Additional 0.9% Medicare Tax on Earned Income • Unlike the OASDI ceiling which is applied based on the employee’s wages, the 0.9% additional Medicare tax is applied based on the combined wages of married couples filing jointly • This causes additional complications as it pertains to employee withholding 35
  36. 36. Withholding on 0.9% Medicare Tax • Employers are required to withhold the additional 0.9% tax on wages in excess of $200,000 whether married or not • Employers must disregard the wages received by the employee’s spouse 36
  37. 37. Withholding on 0.9% Medicare Tax (continued) • Implications: – If an employee’s wages are below $200,000 but when combined with the spouse’s wages they exceed $250,000, the couple may be under-withheld – If an employee’s wages are between $200,000 and $250,000 and the spouse has no wages, the couple may be over-withheld – The 0.9% tax is a tax for purposes of the underpayment of estimated tax penalty 37
  38. 38. 3.8% Medicare Tax on Unearned Income • Surtax on Net Investment Income (NII) • First time that FICA/Medicare taxes have been assessed on unearned income • Applies to individuals, trusts and estates • Considered a tax for purposes of the underpayment of estimated tax penalty • The proposed regulations attempt to define NII subject to the 3.8% tax 38
  39. 39. 3.8% Medicare Tax – Individuals • Individuals – 3.8% of the lesser of: • Net investment income, or • Excess of Modified AGI over the threshold amounts below – Modified AGI = AGI + foreign earned income exclusion Filing Status Threshold Married Filing Jointly $250,000 Single/Head of Household $200,000 Married Filing Separately $125,000 39
  40. 40. 3.8% Medicare Tax – Trusts and Estates • Trusts and Estates – 3.8% of the lesser of: • Undistributed net investment income, or • AGI over the amount at which the highest tax bracket is applicable ($11,950 for 2013) – Does not apply to simple trusts since, by definition, all income is distributed annually (but would apply to income distributed to beneficiaries) – Does not apply to grantor trusts since they are disregarded for income tax purposes (but would apply to income reported by grantor) 40
  41. 41. 3.8% Medicare Tax – Net Investment Income • Net Investment Income – Defined as investment income less otherwise allowable deductions properly allocable to such income 41
  42. 42. 3.8% Medicare Tax – Net Investment Income (cont’d.) • Includes three categories: – Gross income from interest, dividends, annuities, royalties and rents (other than such income derived in the ordinary course of an active trade or business) – Other gross income from any passive trade or business or business in the trading of financial instruments or commodities – Net gains attributable to the disposition of property (other than property held in an active trade or business) • Less: – Deductions properly allocable to such gross income or net gain 42
  43. 43. 3.8% Medicare Tax – Key Points • Taxpayer’s must have both NII and gross income over the applicable thresholds in order to be subject to the tax • The thresholds are NOT adjusted for inflation – This may cause a problem similar to the AMT in the future • The inclusion of passive activities in NII represents a huge shift in traditional tax planning – More emphasis will be placed on treating profitable activities as active instead of passive to avoid the 3.8% surtax, however • Passive losses may go unused • Net income from an active trade or business may be subject to self employment tax 43
  44. 44. 3.8% Medicare Tax – Key Points • Only property sold that was not held in a trade or business is included in net investment income – In the case of sales of interests in a partnership or S corporation we have to do some calculations in order to determine how much of the gain or loss is attributable to an active trade or business – The Proposed Regulations include a complex four step process to achieve this • The surtax also applies to income attributable to “working capital” 44
  45. 45. 3.8% Medicare Tax – Key Points • Net investment income reduced by “properly allocable” deductions – Examples include investment interest expense, investment fees, expenses related to rents, trade or business deductions and state and local income taxes • Allocation of state and local taxes between net investment income and other income can be determined under “any reasonable method” • The proposed regs provide a safe harbor method of allocating state and local taxes based on the ratio of NII to gross income – Carryovers from years prior to 2013 • Capital losses, passive losses and investment interest expense 45
  46. 46. 3.8% Medicare Tax – Key Points • The 3.8% Medicare tax does not apply to distributions from qualified retirement plans • However, those distributions still increase MAGI which could either – raise the taxpayer’s MAGI over the threshold amount, thus subjecting the taxpayer to the tax, or – increase the amount subject to the tax by increasing the spread between MAGI and the threshold amount 46
  47. 47. 3.8% Medicare Tax – Key Points • The 3.8% Medicare tax does not apply to investment income excludible from taxable income (e.g. municipal bond interest, excluded gain from sale of personal residence) 47
  48. 48. 3.8% Medicare Tax – Case Study Interest income from various corporate bonds and bank $10,000 accountsIncome Tax-exempt interest income from various municipal bonds $8,000Scenario: Qualified dividend income from various mutual funds and $12,000 stock investments Net long-term capital gains from the disposition of various $40,000 mutual funds and stock investments Regular IRA distribution $100,000 Net rental income from a building that Joe owns $15,000 Distributive ordinary trade or business income from an LLC $20,000 in which Joe does not materially participate Distributive net Section 1231 gain from the same LLC $10,000 Distributive ordinary trade or business income from an S $60,000 corporation in which Joe materially participates Distributive net Section 1231 gain from the same S $50,000 corporation
  49. 49. 3.8% Medicare Tax – Case Study Interest income from various corporate bonds and bank $10,000Net accountsinvestment Qualified dividend income from mutual funds and stock $12,000income is investmentscalculatedas follows: Net long-term capital gains from the disposition of $40,000 investments Net rental income $15,000 Ordinary trade or business income from LLC in which Joe $20,000 does not materially participate Net Section 1231 gain from the LLC $10,000 Net investment income $107,000 49
  50. 50. 3.8% Medicare Tax – Case Study Interest income from various corporate bonds and bank $10,000 accountsModified Qualified dividend income from mutual funds and stock $12,000adjusted gross investmentsincome is Net long-term capital gains from the disposition of $40,000calculated as investmentsfollows: Regular IRA distribution $100,000 Net rental income $15,000 Ordinary trade or business income from the LLC $20,000 Net Section 1231 gain from the same LLC $10,000 Ordinary trade or business income from the S corporation $60,000 Net Section 1231 gain from the same S corporation $50,000 Modified AGI $317,000
  51. 51. 3.8% Medicare Tax – Case Study Modified AGI $317,000The 3.8% Less Threshold $200,000Medicarecontribution Modified AGI in Excess of Threshold $117,000tax iscalculated Lesser of Net Investment Income and Modified AGI in $107,000as follows: Excess of Threshold Medicare Tax Rate 3.8% Medicare Contribution Tax $4,066 51
  52. 52. Planning Strategies to Reduce 3.8% Medicare Tax • Convert to a Roth IRA so future qualified retirement plan distributions don’t increase MAGI – Although regular IRA distributions are not subject to 3.8% tax, they are included in modified AGI – In prior example, if IRA distribution was from Roth IRA, modified AGI would have been reduced to $217,000, so the maximum subject to 3.8% tax would be reduced to $17,000 – If modified AGI (minus threshold amount) is greater than net investment income even without IRA distributions, no benefit to switching to Roth 52
  53. 53. Planning Strategies to Reduce 3.8% Medicare Tax • Taxable conversion amount would be subject to 3.8% tax – Time Roth conversion in a year with minimal NII • Realign Investment Strategies – Shift investments to growth securities that don’t produce dividends, i.e. tax-exempt bonds, insurance (with cash buildups) and annuities – Take advantage of installment sale treatment to spread passive income over several years 53
  54. 54. Planning Strategies to Reduce 3.8% Medicare Tax• Realign Investment Strategies (continued) – Time gains and losses to offset • Be careful of wash sale rules on loss positions • Gains not subject to wash sale rules – Shift investments to children • Avoid 3.8% tax if MAGI less than threshold • Kiddie tax may tax income at parents’ marginal rate (under 19 or under 24 and full time student) 54
  55. 55. Planning Strategies to Reduce 3.8% Medicare Tax • Passive Activities – Evaluate profitable passive activities to see if changes could be made to reach to the level of material participation – Watch self-employment income from partnerships and LLC’s – Review passive activity rules to see if passive activities can be grouped with non passive activities to avoid passive income • Factors to consider include similarities, common ownership, geographical locations, interdependence of operations • Consider passive loss investment opportunities to offset passive income 55
  56. 56. Impact of State Taxes
  57. 57. Estate Taxes• The state “Pick-Up” tax permanently repealed• Many states have a lower exemption that the Federal exemption• Many states lost lots of revenues with these changes• Watch for state legislators to look at this area for future revenue increases 57
  58. 58. Business Provisions• Bonus Depreciation extended – As most states decouple anyway (31 states do), no new impact – Concern for business – monitoring the differences between Federal and state – For multi-state business, can have multiple depreciation schedules!• Renewable Energy Credits – No direct benefit, but potential increases in utilization of state credits and/or increased sales tax receipts 58
  59. 59. Future Impact• Will more states decouple from the Federal code?• Politically, many states have one party in charge – could make it easier to push through major tax changes. 59
  60. 60. International Tax Provisions
  61. 61. American Tax Relief Act of 2012 –International Tax Provisions• Active Financing Exception – Certain income from the active conduct of a banking, financing or similar business, or from the conduct of an insurance business is excluded from the definition of Subpart F income through 2013. – Allows banks, finance, insurance and similar companies to defer active financing income offshore for tax years beginning before January 1, 2014. 61
  62. 62. American Tax Relief Act of 2012 –International Tax Provisions• Look through rule for payments between related CFCs – Look-through treatment applies to dividends, interest, rents, and royalties received by one CFC from a related CFC; allows payments to be treated as non-subpart F income. – Look-through rules similar to those that a U.S. shareholder uses to allocate interest, rent, royalty and dividend income received from a CFC to separate foreign tax credit baskets applied 62
  63. 63. American Tax Relief Act of 2012 –International Tax Provisions• 20% Withholding Rate on Sales of USRPIs – The IRS may, to the extent provided in regulations, reduce the withholding rate on distributions from a partnership, trust or estate attributable to the disposition of a USRPI from 35% to 20%. 63
  64. 64. IRS Enforcement - Compliance• Foreign Account Tax Compliance Act (“FATCA”) – IRS has entered into several inter-governmental agreements to facilitate enforcement of FATCA provisions. – New in 2011: Form 8938 requires reporting of certain foreign financial assets – may require disclosure of foreign bank accounts that are already reported on FBAR. 64
  65. 65. IRS Enforcement - Compliance• Report of Foreign Bank and Financial Accounts (“FBAR”) – FBAR filing deadline extended to June 30, 2014 for certain individuals with signature authority but no financial interest in foreign accounts. – January 2012 offshore voluntary disclosure program (“OVDP”) continues to be available. – Publicly, the IRS acknowledges its 2011 OVDP assumed willfulness in imposing penalties, and is making an effort to avoid this “one size fits all” approach within the 2012 OVDP 65
  66. 66. International Tax – Planning Examples• IP Migration – Transfer of intellectual property assets outside U.S. taxing jurisdiction – Requires valuation of assets, tax-efficient structuring of the transaction, and transfer pricing study to move taxable income in tax- favored countries. – May also involve use of an offshore company, e.g. Cyprus. 66
  67. 67. International Tax – Planning Examples• Expatriation Planning – US citizens and residents are subject to U.S. gift tax and estate tax on transfers of any property; non-citizens and non-residents are subject to gift tax and estate on transfers of real or tangible property located in the US (including stock in a U.S. corporation). – US taxpayers are taxable on gifts from “covered expatriates” – nonresident aliens can take steps to avoid being a covered expatriate (e.g., no green card). – Use of foreign trusts to hold assets until heirs become expatriates. – Before expatriating, a US person can make gifts up to the estate and gift exclusion amount ($5 million adjusted for inflation, per the American Taxpayer Relief Act of 2012). 67
  68. 68. Potential Tax Reform
  69. 69. Potential Tax Reform • Upcoming Budget Negotiations – Raising the Debt Ceiling – Automatic Cuts Under Sequestration – March 1, 2013 • “We can’t simply cut our way to prosperity”. “The deficit needs to be reduced in a way that is balanced. Everyone pays their fair share.” [President Obama, January 2, 2013] • “Simply put, the tax code is a nightmare. The Ways and Means Committee will pursue comprehensive tax reform in the new Congress.” [Rep. Dave Camp, Chairman of the House Ways and Means Committee, January 2, 2013] 69
  70. 70. Top 5% Income Earners paid 58.7% of the Taxes Category AGI Cut Off Number Share of Income Tax Top 0.1% $1,432,890 137,982 17.1% Top 1% $343,927 1,380,000 36.7% Top 5% $154,653 6,899,000 58.7% Top 10% $112,124 13,798,000 70.5% Top 25% $66,193 34,496,000 87.3% Top 50% $32,396 68,991,000 97.7% Bottom 50% <$32,396 68,991,000 2.3%Source: Tax Foundation, based on IRS returns 2009 70
  71. 71. Potential Tax Reform • The issue on individual rates my be settled but some popular deductions may be in jeopardy down the road as Congress looks to raise more revenue • Various tax reform studies have looked at eliminating or capping many popular deductions including: – Mortgage interest deduction – Charitable deductions – Employer sponsored health insurance exclusion – State and local taxes – Interest exclusion on state and local bonds 71
  72. 72. Obama Tax Plan – Individuals• What did not get in the new law – Cap certain deductions or exclusions at 28% for taxpayers in the 36% and 39.6% brackets – Eliminate the carried interest “loophole” for hedge fund managers and other similar service providers – Eliminate a special depreciation “loophole” for corporate jets (this would increase the period for depreciation from 5 years to 7 years and would raise $2 billion over 10 years) – Replace the AMT with the “Buffett Rule” – taxpayers with income over $1 million must pay an effective federal income tax rate of at least 30%. 72
  73. 73. Potential for Corporate Tax Reform • February 2012-The President’s Framework for Business Tax Reform (the Framework) – Rough blueprint for the President’s plan • To cut corporate tax rates to internationally competitive levels • Simplify the corporate tax rules • Reduce or eliminate tax loopholes in the current system 73
  74. 74. Corporate Reform Under the Framework• Reduce top corporate rate from 35% to 28%• Reduction or elimination of many popular deductions and credits, for example: – Accelerated depreciation – Interest expense deduction – LIFO inventory accounting – Oil and gas tax preferences – Other tax breaks for specific industries• According to the Framework these tax expenditures create a tax system that distorts business decision making and results in a less efficient allocation of capital as seen by the various tax rates by industry 74
  75. 75. Industry Tax Rate Agriculture, forestry, Fishing and Hunting 22%Effective Actual Mining 18%Corporate Tax Utilities 14%Rates By Selected Construction 31%Industry 2007- Manufacturing 26%2008* Wholesale and Retail Trade 31% Transportation and Warehousing 19% Information 25% Insurance 25% Finance & Holding Companies 28% Real Estate 23% Leasing 18% All Services 29% Average Effective Actual Tax Rate 26% *Source: U.S. Treasury, Office of Tax Analysis
  76. 76. Corporate Reform Under the Framework • Proposes to strengthen U.S. manufacturing by offering incentives, including cutting the top corporate rate on manufacturing to 25% by – Increase in Domestic Production Activities Deduction (DPAD) – And an even lower rate (approximately 18%) for “advanced manufacturing” • Establish greater parity between large pass-through entities and C corporations – Previously the Treasury had proposed taxing any business with more than $50 million in gross receipts as a corporation 76
  77. 77. Corporate Reform Under the Framework • Framework calls for simplification for small businesses and adding incentives, such as – Allowing companies with up to $10 million in gross receipts to use the cash method of accounting (current limit is $5 million) – Allowing small businesses to expense up to $1 million under IRC Section 179 – Expanding and simplifying the Small Business Health Care Tax Credit (including an increase in the eligibility cut-off from 25 to 50 employees) 77
  78. 78. Potential State Reaction to Federal Tax Reform• Multi-state tax issues – more states moving towards a weighting of the sales factor and/or considering where the revenues are generated from, versus sold to• State sales tax nexus – could Congress actually take action on this much delayed area? 78
  79. 79. International – Obama Proposals• Retain the worldwide taxation system vs. territorial tax system – A territorial system would not tax the foreign income of U.S. individuals or corporations• Impose a minimum tax on foreign profits of U.S. companies to discourage taxpayers from keeping funds outside the US (current estimate is up to $2 trillion in cash overseas)• Protect U.S. jobs by: – Draw manufacturing investments to the U.S. by providing a 20% tax credit for locating jobs and business activity in the U.S. – Prohibiting tax deductions for shipping jobs overseas 79
  80. 80. Summary / Key Takeaways • Fiscal Cliff • The American Taxpayer Relief Act of 2012 – Payroll Tax Cut not included – AMT Relief for 2012 – Equipment Expensing for 2012 • 2013 Changes – Changes to Individual Income Tax rates – Changes to the Estate and Gift rates – New Medicare Taxes • 0.9% Medicare tax on earned income • 3.8% Medicare tax on unearned income 80
  81. 81. Summary/Key Takeaways • Potential Future Tax Reform – Effect on Individual Deductions – Capping Itemized Deductions – Buffet Rule – Potential Corporate Tax Reform • Broaden the tax base and lower the rate – Establish parity between corporations and large passthroughs – International Taxation 81
  82. 82. Questions before moving on to theHealth Care Reform segment

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