For the Presenter: The information contained in this presentation is designed to be shared with clients, one-on-one or as a group. It is also appropriate for presentation to civic or social groups. The presentation does not provided details on all provisions in the Relief Act, nor is it designed to get deep into the topics discussed. It is designed to be an awareness presentation and to be used to create tax planning opportunities. At the end of the presentation a link is provided to an article housed on our external website that details all the provisions of the American Taxpayer Relief Act of 2012, which should be pointed out to those attending any presentation of these materials. The linked article could also be printed and used as a presentation takeaway.
Suggested presentation narrative: IRS Circular 230 is a series of guidelines that those of us dealing with U.S. Internal Revenue Service matters must adhere to. This slide is currently required to make you aware that the information you are about to receive is not intended to be used, and cannot be used, for the purpose of avoiding penalties imposed and that specific tax advice would be based on each taxpayer's particular circumstance. And…..With that out of the way – let’s move on to the program materials.
For the presenter: The highlights section is designed to be used with all presentation formats (individual only; business only or combined) Suggested presentation narrative: None of us will probably ever forget the term “fiscal cliff”, nor the December 31, 2012 and January 1, 2013 Congressional actions that gave us the American Taxpayer Relief Act of 2012 (Relief Act), which was signed into law by the President on January 2, 2013. The Relief Act is not complicated, but it did do a number of things to help avert a complete fall from the fiscal cliff. Listed are a few of the highlights, most of which will be discussed in more detail as we go through the presentation. [Read Items]
Suggested presentation narrative: [After completing the reading of the listed items] Now let’s review a few specific change items.
Suggested facts to describe slide information: Tax Rate Items: The 10% individual income tax bracket was set to expire at the end of 2012, making the lowest tax rate 15%. The Relief Act permanently extended the 10% individual income tax bracket for taxable years beginning after December 31, 2012. Without the Relief Act, the 25%, 28%, 33%, and 35% individual income tax brackets would have also expired at the end of 2012. The Relief Act permanently extends the 25%, 28%, 33% rates on taxable income at or below $400,000 (individual filers), $425,000 (heads of households) and $450,000 (married filing jointly) for taxable years beginning after December 31, 2012, and makes the top bracket 39.6% for taxable income above those threshold amounts. New law. For tax years beginning after 2012, the Personal Exemption Phaseout, which had previously been suspended, is reinstated by the Relief Act starting at the threshold of $300,000 for joint filers and a surviving spouse, $275,000 for heads of household, $250,000 for single filers, and $150,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. New law. For tax years beginning after 2012, the Relief Act provides that the “Pease“ limitation on itemized deductions, which had previously been suspended, is reinstated with a starting threshold of $300,000 for joint filers and a surviving spouse, $275,000 for heads of household, $250,000 for single filers, and $150,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. The top tax rate for capital gains and qualfieid dividends increases on January 1, 2013 to 20 percent for taxpayers whose taxable income is greater than the thresholds used for determining the 39.6 percent rate (see above). All other taxpayers will retain the maximum rate of 15 percent, except for qualified taxpayers with taxable incomes below the income amount for the 15 percent tax bracket, projected for 2013 to be $72,250 for married filing joint and $36,250 for singles. Those qualified with incomes below the 15 percent tax bracket will continue to use a zero percent rate.
Suggested facts to describe slide information: While not part of the Relief Act, a new Medicare surtax of 3.8 percent on unearned income, including capital gain, and a 0.9 percent additional Medicare tax on applicable employee wages and self-employed individuals also started on January 1, 2013 and should be considered in any 2013 tax planning. It should be noted, the 3.8 percent Medicare surtax and the 0.9 percent new Medicare tax is for those taxpayers with modified adjusted gross income, not taxable income, above $250,000 for married filing joint and $200,000 for single.
Suggested facts to describe slide information: The Relief Act permanently establishes the estate and gift tax exemption at $5 million for deaths and gifts after December 31, 2012, with annual calendar year inflation adjustments. The Relief Act also continues, permanently, the portability of unused exemption amounts between spouses and also extends the deduction for state estate (death) taxes. The $5 million exemption with annual calendar year inflation adjustments, had been in place for deaths in 2011 and 2012. The Relief Act makes the $5 million exemption permanent for deaths occurring after December 31, 2012. Due to inflation adjustments, the unified estate and gift tax exemption for 2013 is $5,250,000. The exemption for 2012 was $5,120,000. The maximum estate and gift tax rate without the Relief Act was scheduled to become 55% after December 31, 2012. The Relief Act permanently sets the maximum estate and gift tax rate at 40% for deaths and gifts occurring after December 31, 2012. Portability of unused exemption. The executor of a deceased spouse’s estate is allowed to transfer any unused exemption of the deceased spouse to the surviving spouse. The transfer was previously available for decedents dying after December 31, 2010 and before December 31 2012. The Relief Act makes the exemption transfer allowance permanent and is effective for estates for decedents dying after December 31, 2012. Reunification. While not always the case, for deaths and gifts occurring in the years 2010, 2011 and 2012, the estate and gift taxes were unified, meaning that a single graduated rate schedule was used for both, and a single lifetime exemption was available for gifts and/or bequests or to offset estate value at the date of death. The Relief Act permanently extends this exemption and tax rate unification and is effective for gifts, and deaths, occurring after December 31, 2012.
Suggested facts to describe slide information: The temporary two percent payroll tax holiday, enjoyed by wage earners and self-employed taxpayers, was terminated as of December 31, 2012; therefore the rate increase is effective January 2013. New Law. The Alternative Minimum Tax (AMT) exemption patch was made in the Relief Act for 2012, preventing almost 30 million taxpayers from becoming subject to the AMT. The AMT exemption amounts for 2012 are $78,750 for married filing joint and $50,600 for singles. In addition, the AMT exemption amounts are now subject to inflation adjustment for years after 2012. And, an added bonus for qualifying taxpayers, all nonrefundable personal credits are allowed for calculating both regular and AMT tax liability for tax years beginning after 2011. New law. The Relief Act retroactively extends the educator expense deduction for two years so that it applies to expenses paid in tax years 2012 and 2013. ( Code Sec. 62(a)(2)(D) , as amended by Act Sec. 201)
Suggested facts to describe slide information: Bonus depreciation. Under current law, businesses are allowed to recover the cost of capital expenditures over time according to a depreciation schedule. For 2008 through 2010, Congress allowed businesses to take an additional depreciation deduction allowance equal to 50 percent of the cost of the depreciable property. 100 percent bonus depreciation for property placed in service after September 8, 2010 and before 2012 and 50 percent bonus depreciation for investments placed in service during 2012. This provision would extend the current 50 percent expensing provision for qualifying property purchased and placed in service before January 1, 2014 (before January 1, 2015 for certain longer production period and transportation assets) and also allow taxpayers to elect to accelerate some AMT credits in lieu of bonus depreciation. This provision also decouples bonus deprecation from allocation of contract costs under the percentage of completion accounting method rules for assets with a depreciable life of seven years or less that are placed in service in 2013. For regulated utilities, the provision clarifies that it is a violation of the normalization rules to assume a bonus depreciation benefit for ratemaking purposes when a utility has elected not to take bonus depreciation.
Suggested facts to describe slide information: Temporarily extend increase in the maximum amount and phase-out threshold under section 179. Under current law, a taxpayer with a sufficiently small amount of annual investment may elect to deduct the cost of certain property placed in service for the year rather than depreciate those costs over time. The 2003 tax cuts temporarily increased the maximum dollar amount that may be deducted from $25,000 to $100,000. The tax cuts also increased the phase-out amount from $200,000 to $400,000. These amounts have been further modified and extended several times on a temporary basis, increasing up to a high of $500,000 and $2 million respectively for taxable years beginning in 2010 and 2011, and then to $125,000 and $500,000 respectively for taxable years beginning in 2012, before reverting to the permanent amounts of $25,000 and $200,000 respectively for taxable years beginning in 2013 and thereafter. The modified proposal would increase the maximum amount and phase-out threshold in 2012 and 2013 to the levels in effect in 2010 and 2011 ($500,000 and $2 million respectively). Within those thresholds, the proposal would also allow a taxpayer to expense up to $250,000 of the cost of qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. This proposal expires at the end of 2013 and the amounts revert to $25,000 and $200,000, respectively
Suggested facts to describe slide information: Tax credit for research and experimentation expenses. The Relief Act extends for two years, through 2013, the research tax credit equal to 20 percent of the amount by which a taxpayer’s qualified research expenses for a taxable year exceed its base amount for that year and provides an alternative simplified credit of 14 percent. The Relief Act also modifies rules for taxpayers under common control and rules for computing the credit when a portion of a trade or business changes hands. The Work Opportunity Tax Credit (WOTC) allows employers who hire members of certain targeted groups to get a credit against income tax for a percentage of first-year wages up to $6,000 per employee ($3,000 for qualified summer youth employees). Where the employee is a long-term family assistance (LTFA) recipient, the WOTC is a percentage of first and second year wages, up to $10,000 per employee. Generally, the percentage of qualifying wages is 40% of first-year wages; it's 25% for employees who have completed at least 120 hours, but less than 400 hours of service for the employer. For LTFA recipients, it includes an additional 50% of qualified second-year wages. The New Markets Tax Credit. Through the New Markets Tax Credit (NMTC) program, the federal government is able to leverage federal tax credits to encourage significant private investment in businesses in low-income communities. The program provides a 39 percent tax credit spread over 7 years. The Relief Act extends for two years the new markets tax credit.
Suggested facts to describe slide information: The Relief Act extends other employment tax credits designed to increase benefits for hiring. For complete list see article referenced at end of presentation.
In addition to the increased threshold for the medical deduction: FSA limit reduced to $2,500/year. Small Business Health Tax Credit remains at 35% through 2013 Increases to 50%. 25 full-time equivalent employees with average annual wage of $50,000 or less.
When reaching the MAGI threshold the 3.8% Medicare tax applies to the lesser of: Amount of net investment income, or Amount of MAGI in excess of threshold. Must look at taxpayer’s role in activity, not activity itself.
2. For the subsidy. 3. Huge marriage penalty/ index- somebody may be OK today but not 2013.
Slide shows additional Medicare tax on excess earned income. Example 2 on page 230 illustrates the additional Medicare tax on both investment and earned income. See examples 3 – 6 on pages 231 – 234.
See slide Must look at taxpayer’s role in activity, not activity itself.
See slide FEIE is added back to AGI to arrive at MAGI See example 1 on page 230
Trade or business – Schedule C, 1065,1120S Does not include disposition of property held actively in a trade or business Observation on Muni- Bonds: Higher tax rates, build America bonds, new credit ratings
Suggested narrative for slide: As noted throughout this presentation, many provisions were extended “permanently”. While the terms is meant to give some assurance of consistency for future years, the permanent nature of any tax law is subject to change, both by additional current and future Congressional action. Totaling up the taxpayer benefits of the Relief Act, and then offsetting the revenue increases will show that there were more benefits than revenue increases. Therefore, the cost of net benefits provide will need to be paid for through future Congressional action, or they will be additions to the National debt. In addition, the Relief Act was not the end of potential tax legislative action for 2013. The debate over the debt ceiling and resolution of the sequester spending issue will both need to be addressed by March, 2013, unless again extended, and both will provide potential for additional tax legislation. The Relief Act contained many non tax provisions related to the farm programs, but primarily for Medicare. The health care consultants are reviewing these new provisions. As information is developed related to the new provision, including a new 15 member Commission on Long-term healthcare, that could impact non Healthcare industry taxpayers, that information will be provided through additional communication items.
Suggested narrative for slide: Does anyone have a question? To the presenter: If there are unusual general application questions that are asked; or questions that could not be answered, please make noted of them and forward to the NTO to the attention of Larry Evans.
American taxpayer relief act
Fiscal Cliff & Falling Rocks Presented by Tom Ritchie www.eidebailly.com
IRS CIRCULAR 230 NOTICEAny tax advice expressed in this communication is not intended to be used, and cannot beused, for the purpose of avoiding penalties imposed on the taxpayer by any governmental taxing authority or agency. In addition, if any such tax advice is made available to anyperson or party other than the party to whom the advice was originally directed, then such advice, under IRS Circular 230, is to be considered as being delivered to support the promotion or marketing (by a person other than Eide Bailly LLP) of the transaction or matter discussed or referenced. Thus, each taxpayer should seek specific tax advice based on the taxpayer’s particular circumstances from an independent tax advisor. www.eidebailly.com 22
Eide Bailly• Top 25 CPA firm in the US• One of the Largest CPA firms in Oklahoma• Prepare more than 80,000 returns annually• Help our clients manage their taxes through planning, business advice, tax research and IRS audit support. www.eidebailly.com 3
Tom Ritchie• 25 years experience• OSU Alum• Head of Eide Bailly Tax Credit Division"To me, client service is bringing value to my clients by providing them with great service and progressive thinking, while still managing to save them money." ~ Tom www.eidebailly.com 4
What is the Fiscal Cliff Debt Ceiling 2012 Tax Increases January ‘13SequesterMarch ‘13 www.eidebailly.com 5
What is the Fiscal Cliff• At Midnight, December 31, 2012 the following took place: • Expiration of 2% payroll tax holiday • Expiration of various tax breaks for businesses • Shifts in AMT • Rollback of “Bush Tax Cuts” • Beginning of taxes related to Health Care • Scheduled spending cuts of $1.2 Trillion www.eidebailly.com 6
We went OVER the Cliff• We did, in fact, go “over the cliff” • 3 hours before midnight, Senate agreed to a deal • 2 hours after the deadline, Senate passed its version • 21 hours later, House approved the deal • Signed by the President on January 2, 2013• Although we went over the cliff, however the changes were retroactive to January 1, 2013.• Had almost 1.5 years to deal with the “Fiscal Cliff” • The “deal” dealt mostly with revenue (taxes) and postponed spending cuts discussions (sequester) until March 1 www.eidebailly.com 7
The Result The American Taxpayer Relief Act of 2012 www.eidebailly.com 8
American Taxpayer Relief Act of 2012Highlights•Averts the tax “fiscal cliff” for many taxpayers•Signed into law on January 2, 2013•Extended many lapsed tax breaks prospectivelyand retroactively•Impacts individual and business taxpayers•Increases tax rates for defined high incometaxpayers•Does not continue 2% payroll tax holiday www.eidebailly.com 9
American Taxpayer Relief Act of 2012Highlights - Continued•Permanently “patched” and indexed AMTexemption•Estate and gift tax exemption $5 million withannual inflation adjustment•Extends sequester to March 1, 2013•Extends many energy credits•Extends permanently research credit•Extends earned income tax credit for 5 years www.eidebailly.com 10
American Taxpayer Relief Act of 2012 Individual Provisions www.eidebailly.com 11
Individual Provisions• Increased Tax Rates for Higher-Income Taxpayers (incomes above$400,000 single / $450,000 joint) • 39.6% top bracket• Personal exemption phaseout and itemized deduction limitation• Increase of 5% on capital gains and qualified dividends • only on incomes above $400,000 single/$450,000 joint www.eidebailly.com 12
Individual ProvisionsIndividual Tax Rates Wage Interest Qualified Capital Income Income Dividends Gains2013 Top Rate 39.6% 39.6% 20.0% 20.0%2013 Phase-Out of ItemizedDeductions 1.2% 1.2% 1.2% 1.2%2013 Medicare Surtax 0.9% 3.8% 3.8% 3.8%Top Combined Rate 41.7% 44.60% 25.00% 25.00% www.eidebailly.com 14
Married with 50,000 taxable income MARRIED FILING JOINTLY 2012 2013 WAGES 68,600 68,600 INTEREST & DIVIDENDS 4,000 4,000 TOTAL INCOME 72,600 72,600 PERSONAL EXEMPTIONS 7,600 7,800 PHASEOUT OF EXEMPTIONS - - 7,600 7,800 ITEMIZED DEDUCTIONS 15,000 15,000 3 % AGI FLOOR - - 28.2% NET ITEMIZED DEDUCTIONS 15,000 15,000 www.eidebailly.com 15
Married with 500,000 taxable income MARRIED FILING JOINTLY 2012 2013 WAGES 500,000 500,000 INTEREST & DIVIDENDS 40,600 40,600 TOTAL INCOME 540,600 540,600 PERSONAL EXEMPTIONS 7,600 7,600 PHASEOUT OF EXEMPTIONS - (7,600) 7,600 - ITEMIZED DEDUCTIONS 33,000 33,000 3 % AGI FLOOR - (7,218) 9.4% NET ITEMIZED DEDUCTIONS 33,000 25,782 www.eidebailly.com 16
Estate Tax• The estate tax individual exemption is permanently set at $5 million as of • Indexed for inflation• Maximum estate and gift tax rate permanently increased to 40%• Spousal portability of exemption permanently extended• Deduction for state estate tax extended• Gift tax exemption continues unification with $5 million estate tax exemption www.eidebailly.com 17
Other Individual Provisions• Two-percent payroll tax holiday terminated• Higher individual AMT exemption amounts indexed for inflation • Were set at a 1993 index!• Educator Expense Deduction Reinstated• Dependent and Education Credits www.eidebailly.com 18
American Taxpayer Relief Act of 2012 Business Provisions www.eidebailly.com 19
Business ProvisionsDepreciation•Bonus Depreciation Extended • Additional 50% depreciation for property acquired and placed service before January 1, 2014. • MACRS life of 20 years or less • Qualified leasehold improvements – 15-year through December 31, 2013 (restaurant and retail as well) • Defined Indian Depreciation www.eidebailly.com 20
US Supreme Court Opinion• National Federation of Independent Businesses v. Sebelius, 132 S. Ct. 2566 (2012) (individual mandate) • The individual mandate is unconstitutional • “The Commerce Clause does not support the individual mandate.” • “Even if the mandate if necessary, such an expansion of federal power in not a proper means for making those reforms effective” • It is a tax: • Roberts “saving construction”: Roberts chose “to read the mandate not as ordering individuals to buy insurance, but rather as imposing a tax on those who do not buy that product.” • “If a tax is properly paid, the Government has no power to compel or punish individuals subject to it.” • “If it were read as a command, it would be unconstitutional because the Federal Government does not have the power to order people to buy health insurance” www.eidebailly.com 24
Constitutional Challenges• Liberty University, et al v Geithner (employer mandate)• Sissel v. United States Department of Health and Human Services et al (Sept 11, 2012) • Congress violated the Origination Clause (supposed to start in House, not Senate) – House Ways and Means Committee • Remains open question • There is no legal obligation to purchase health insurance under the Court’s ruling • Only the penalty was upheld under the taxing power • Court ruled that case may proceed www.eidebailly.com 25
2013 Provisions• Medicare tax for high wage earners (.9%)• Net investment income tax for high wage earners (3.8%)• Medical device excise tax (2.3%)• Improving preventive health coverage• Medical itemized deductions increases from 7.5% to 10%• Limitation on health flexible savings accounts• Reporting value of insurance on W-2 www.eidebailly.com 26
Medical Itemized Deduction Floor will increase from 7.5% to 10% for all taxpayers under 65. Taxpayers age 65 in 2012 can still use the 7.5% threshold for 4 more years.Only one spouse on a jointly filed return need be age 65 to use the lower %. www.eidebailly.com 27
2013 Medicare Tax Changes Currently 1.45% or 2.9%For “wealthy” taxpayers, a new 3.8% on investment income (MTUI) and a .9% tax on earned income (MEII) MAGI threshold $200,000/$250,000 www.eidebailly.com 28
Health Care 2013Example: Harry and Sharie, a married couple, earn wages of$125,000 and $175,000 respectively. For the first $250,000 ofcombined wages the Medicare tax is: $250,000 × 1.45% = $3,625The next $50,000 is taxed at the higher rate of 2.35% (1.45%+ .09) $50,000 × 2.35% = $1,175The combined Medicare tax is: $3,625 + $1,175 = $4,800The new additional tax is .09 × $50,000 = $ 450Observation: The employer is not required to withhold theadditional $450. www.eidebailly.com 29 29 29
Medicare Earned Income IncreaseExtra .9% withheld on every wage earner that makes over $200,000/ yr. Thresholds of $200,000/$250,000 “Settle-up” on the 1040 www.eidebailly.com 30
Investment Income Includes Interest and dividends Annuities (1099-R) Rents and royalties Passive trades or businesses Gains from other than business property Passive K-1 income www.eidebailly.com 31
Not Included IRA’s, pensions, etc. (1099-R) Tax-exempt bond interest Veterans’ benefits Gain from sale of principal residence up to §121 limits Capital gains from sale of non-passive business assets www.eidebailly.com 32
Health Care 2013Observations:• Top tax bracket will be : 39.6%+3.8%=43.4%• Invest in municipal bonds• Invest in retirement plans• Passive income planning• Capital Losses before capital gains !! www.eidebailly.com 33 33 33
American Taxpayer Relief Act of 2012 Closing Comments www.eidebailly.com 34
Tax StrategiesThings To Consider For Future•Stay Single•Stay below 50 employees•Elect out of installment sales•Tax Credits !!!!•Reduce Depreciation•Extend your return•Pay your kids•Identify Tax Leakage www.eidebailly.com 35
American Taxpayer Relief Act of 2012 Questions? www.eidebailly.com 36