Simple Strategies To Save
On Your 2013 Taxes
Michael L. Minotti, CPA
`
Michael Soful, CPA
Jenna Staton, EA
December 12, 20...
SKODA MINOTTI TEAM

Michael Minotti, CPA
President, Skoda Minotti
Partner

Mike Soful, CPA
Partner

Jenna Staton, EA
Manag...
SKODA MINOTTI TEAM

Jeff Foster, CPA
Partner

Kenny Goodwin, CPA
Senior Manager

Susan Licate, MBA
Senior Marketing Specia...
TODAY’S AGENDA





Business Tax Changes
Patient Protection and Affordable Care Act
Personal Tax Changes
Medicare Tax ...
UPDATE

Due to the government shutdown, the
IRS will not be accepting paper filed
or electronically filed returns until
Fe...
BUSINESS TAX CHANGES
Provisions Expiring
Various temporary tax provisions will be expiring December 31, 2013







...
BUSINESS TAX CHANGES
Provisions Expiring
Continued provisions expiring December 31, 2013

 Low-income tax credits for non...
BUSINESS TAX CHANGES
Bonus Depreciation
 50% first-year bonus depreciation - 2013
 0% first-year bonus depreciation - 20...
BUSINESS TAX CHANGES
Section 179 – Expensing Election
 Dollar Limitations
− $500,000 for 2013
− $25,000 for 2014

 Reduc...
BUSINESS TAX CHANGES
First Year Depreciation Cap for Autos & Trucks
 For 2013 the luxury auto limit was scheduled to be
$...
BUSINESS TAX CHANGES
Depreciation Example
Purchase $50,000 of computers in 2013 (Assume 5-year life.)
Straight
Line
2013

...
BUSINESS TAX CHANGES
Depreciation Example
Purchase $750,000 Machine ( Assume 5-year life.)

Straight
Line

MACRS

2013

$7...
BUSINESS TAX CHANGES
Final Regulations on Repair vs. Capitalization Standards
What To Look For
 Repairs & Maintenance
 C...
DE MINIMUS
CAPITALIZATION POLICY
For tax years beginning ___________ and forward, (Name
of Business) elects to treat as an...
BUSINESS TAX CHANGES
Depreciation/De Minimis Example
Purchase 50 Computers @ $1500 each ( Assume 5-year life.)

Straight
L...
TAX IDEA
Cost Segregation
What to Look For
 Depreciable real estate > $1MM
 Tax paying entity
 Built or acquired after ...
TAX IDEA
Research & Development Credit
What to Look For
 Means, Methods, and Techniques
 Structure and Facility Design f...
TAX IDEA
Prepaid Expenses
What to Look For
 Material Prepaid Expenses
 Prepaid insurance
 Prepaid maintenance
agreement...
BUSINESS IDEA
Energy Cost Savings Audit
What to Look For
 Any company with energy costs
 Electric
 Gas
 Lighting Retro...
Patient Protection and
Affordable Care Act (PPACA)
WHAT IS PPACA?
 Affordable Care Act or ―Obamacare‖
 Most significant overhaul since Medicare and
Medicaid enacted in 196...
AM I SUBJECT TO PPACA?
 Do I have 50 full-time equivalent (FTE) employees
subjecting me to the PPACA requirements?
 What...
FULL TIME EQUIVALENT
 Full time – employees that work at least 30 hours per
week in any month
 Part time – calculated by...
AM I SUBJECT TO PPACA?
Bright Idea?
Company has 55 full time employees
Needs/Capacity 55 x 160 =

8,800 hours

Change make...
FULL TIME EQUIVALENT
Calculation of Full Time Equivalent

FULL TIME
PART TIME
20 @ 110
15 @ 80

HOURS
N/A

2,200
1,200
3,4...
FULL TIME EQUIVALENT
Further Definitions – Who gets counted?
 Leased employees
 Temporary agency employees
 Employees w...
NOW THAT I AM
A LARGE EMPLOYER
Must Offer Coverage
 If I fail to offer to 95% of full-time employees and one person
goes ...
THE TWO-PART TEST
 Large employer must offer healthcare that is
1.
2.

Affordable coverage
Minimum coverage
DEFINITION OF
AFFORDABLE COVERAGE
 The cost of the plan to the employee cannot exceed 9.5%
of the household's adjusted gr...
DEFINITION OF
MINIMUM COVERAGE
 Minimum coverage means the insurance plan must cover
60 percent of the cost of the essent...
WHAT HAPPENS?
What happens if I fail to comply with part one of the
two-part test?
If an employer:
 Fails to offer a full...
WHAT HAPPENS?
What happens if I fail to comply with part two of the
two-part test?
 If an employer offers its full-time e...
HOW QUICKLY
DO I NEED TO ACT?
Open enrollment is
scheduled to run from
October 1, 2013 through
February 28, 2014.
NOW WHAT?
My business is subject to PPACA ─ now what?
 Determine if your plan provides ―minimum essential coverage‖
 Pol...
NOW WHAT?
My business is subject to PPACA ─ now what?

 Make certain that the insurance is offered to 95% of your
full ti...
NOW WHAT?
My business is not subject to PPACA ─ now what?

 Continually monitor your FTE count to see if you will
potenti...
NOW WHAT?
My business might be subject to PPACA ─ now what?

 Analyze FTE count to see if the 50 employee threshold
is me...
PERSONAL TAX CHANGES
PERSONAL TAX CHANGES
Highlights





Bush tax cuts retained for most taxpayers
Raises top rate for income, dividends a...
NEW TAX RATES
2013 Taxable
Income

2013 Taxable
Income

Taxpayer

Capital Gains

Single

MFJ

Tax Rate

Tax Rate

$0-$8,92...
PERSONAL TAX CHANGES
AMT Permanent Patch
Alternative Minimum Tax (AMT) Relief
 Increased exemption for 2013
 $51,900 Sin...
PERSONAL TAX CHANGES
Future of AMT
 Could be abolished in the future
 Obama proposed to replace part of the AMT with the...
PERSONAL TAX CHANGES
General Tax Planning Strategies
 Defer maximum salary to 401k or SEP
 Defer maximum into HSA plans
...
PERSONAL TAX CHANGES
Defer Maximum 401k or SEP
 2013 and 2014 maximum for 401k = $17,500
 Over 50 may contribute additio...
PERSONAL TAX CHANGES
Accelerate Charitable Contributions
 Cash to 501(c)(3) charities
 Includes gifts made on credit car...
PERSONAL TAX CHANGES
Bunch Medical Expenses
 Deduct unreimbursed medical expenses greater
than 10% of Adjusted Gross Inco...
PERSONAL TAX CHANGES
Year End Security Sales For Losses
 May deduct up to $3,000 in investment losses against
ordinary in...
PERSONAL TAX CHANGES
Return of Phase Outs
 Itemized Deduction Phase Out
− Reduces itemized deductions by 3% of the amount...
PERSONAL TAX CHANGES
Individual Tax Credits Available in 2013
 Adoption Credit – Available if you adopted a child and
pai...
PERSONAL TAX CHANGES
 Child and Dependent Care Credit – Available if child is
under 12 years of age, or a dependent of an...
PERSONAL TAX CHANGES
 Retirement Savings Credit – Credit available for low to
moderate income workers who contribute to a...
PERSONAL TAX CHANGES
Energy Credits
 A tax credit of 10% of up to $500 (for all tax years after 2005 and
only $200 can be...
PERSONAL TAX CHANGES
Popular Tax Provisions Expiring December 31, 2013
 $250 above-the-line annual deduction for professi...
MEDICARE TAX CHANGES
MEDICARE TAX CHANGES
Patient Protection and Affordable Care Act – Two Parts
 0.9% increased Medicare tax due on wages and...
MEDICARE TAX CHANGES
Tax Earnings
An additional 0.9% surtax on higher
income households

Thresholds

The tax applies to wa...
MEDICARE TAX CHANGES
Tax Earnings
Ron
 Single Taxpayer
 Employee
 $500,000 Earnings
Excess of Earning Threshold
$500,00...
MEDICARE TAX CHANGES
3.8% Medicare „Surtax‟ Overview
Investment Income
 Beginning with the 2013 tax year, a new 3.8% Medi...
MEDICARE TAX CHANGES
3.8% Medicare „Surtax‟ Overview
Current Tax Rate

Tax Rate in 2013

Tax Rate in 2013
+ (with surtax)
...
MEDICARE TAX CHANGES
3.8% Medicare „Surtax‟ Overview – Individuals

1. Net Investment Income
OR

3.8% X
the lesser of

Sin...
MEDICARE TAX CHANGES
3.8% Medicare „Surtax‟ Overview – Critical Terms
Three critical terms associated with the 3.8% Medica...
3.8% MEDICARE ‘SURTAX’
OVERVIEW – NII
Subject to Surtax:
• Taxable Interest
• Dividends
• Annuity Income
• Passive Royalti...
MEDICARE TAX CHANGES
3.8% Medicare „Surtax‟ Overview – Threshold Amount
“Threshold Amount”
 Is the key factor in determin...
MEDICARE TAX CHANGES
3.8% Medicare „Surtax‟ Overview – MAGI
“Modified Adjusted Gross Income”
 Is the amount that is compa...
MEDICARE TAX CHANGES

Married taxpayers
filingjointly
$250,000
MEDICARE TAX CHANGES
3.8% Medicare „Surtax‟ Example
John
 Single Taxpayer
 $100,000 of Salary
 $50,000 Net Investment I...
MEDICARE TAX CHANGES
3.8% Medicare „Surtax‟ Example
Linda
 Single Taxpayer
 $0 Employment Income
 $225,000 Net Investme...
MEDICARE TAX CHANGES
3.8% Medicare „Surtax‟ Example
Tina & Terry
 Married, Filing Jointly
 $300,000 Combined Salary
 $0...
MEDICARE TAX CHANGES
3.8% Medicare „Surtax‟ Example
Peter & Paula
 Married, Filing Jointly
 $400,000 Salary Income
 $50...
MEDICARE TAX CHANGES
3.8% Medicare „Surtax‟ Example
Sarah & Scott
 Married, filing jointly
 $200,000 salary income
 $15...
MEDICARE TAX CHANGES
PLEASE NOTE
A taxpayer should never pay both the 0.9%
tax on earned income and the 3.8% surtax on
net...
MEDICARE TAX CHANGES
What Else is Exempt?
 S Corp distributions to owners who materially participate
 Rents received by ...
MEDICARE TAX CHANGES
Applications to S Corp Earnings
 K-1 profits for S Corp owners who materially participate are
not su...
MEDICARE TAX CHANGES
Applications to S Corp Interest
 For material participants, only net gain or loss attributable
to pr...
MEDICARE TAX CHANGES
Applications to Partnership Earnings
 Earnings for partners who materially participate are not
subje...
MEDICARE TAX CHANGES
Applications to Partnership Interest
 For material participants, only net gain or loss attributable
...
MEDICARE TAX CHANGES
Understanding the „Surtax‟ Code 469 PAL Rules
Trade or Business
Activity
Entity

Materially
Participa...
SINGLE TAXPAYER
2012

2013

$200,000

$200,000

Itemized Deductions

(8,900)

(8,900)

Exemptions

(3,800)

(3,900)

Taxab...
SINGLE TAXPAYER
2012
Wages
Itemized Deductions
Exemptions

2013

$250,000

$250,000

(11,814)

(11,814)

(3,800)

Change

...
SINGLE TAXPAYER
2012

2013

$200,000

$200,000

Rents

50,000

50,000

Itemized Deductions

(11,814)

(11,814)

(3,800)

(...
SINGLE TAXPAYER
2012

2013

$450,000

$450,000

Capital Gains

100,000

100,000

Itemized Deductions

(29,589)

(20,589)

...
SINGLE TAXPAYER
2012
Retirement Income

2013

$150,000

$150,000

Social Security

17,000

17,000

Dividends

50,000

50,0...
MARRIED TAXPAYERS
2012

2013

$280,000

$280,000

Interest

10,000

10,000

Dividends

30,000

30,000

Business Income

90...
MARRIED TAXPAYERS
2012

2013

$103,459

$106,946

3,487

10,669

6,456

(4,213)

114,128

113,402

(726)

Self-Employment ...
QUESTIONS?

Mike Soful
Michael Minotti
mminotti@skodaminotti.com msoful@skodaminotti.com

www.skodaminotti.com
Cleveland 4...
Thank You
Skoda Minotti Speaker Series - Strategies to Save on Your 2013 Taxes
Skoda Minotti Speaker Series - Strategies to Save on Your 2013 Taxes
Skoda Minotti Speaker Series - Strategies to Save on Your 2013 Taxes
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Skoda Minotti Speaker Series - Strategies to Save on Your 2013 Taxes

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From the repeal of the Bush-era tax cuts to the implementation of the Affordable Care Act, there was a lot of change in United States tax law this year for both businesses and individuals. With so many new laws to parse through, it's easy to feel overwhelmed as you prepare your 2013 tax information. Unclear about your current tax bracket? Want to know how the Affordable Care Act affects your business?

This presentation will provide you with several easy-to-implement strategies for your personal and business taxes.

What you can expect to learn:
• Tax law changes for 2013
• Year-end tax planning strategies, for businesses and individuals
• How patient protection laws affect you
• The Affordable Care Act and how it will affect businesses

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Skoda Minotti Speaker Series - Strategies to Save on Your 2013 Taxes

  1. 1. Simple Strategies To Save On Your 2013 Taxes Michael L. Minotti, CPA ` Michael Soful, CPA Jenna Staton, EA December 12, 2013
  2. 2. SKODA MINOTTI TEAM Michael Minotti, CPA President, Skoda Minotti Partner Mike Soful, CPA Partner Jenna Staton, EA Manager
  3. 3. SKODA MINOTTI TEAM Jeff Foster, CPA Partner Kenny Goodwin, CPA Senior Manager Susan Licate, MBA Senior Marketing Specialist Tim Stiller, CPA Manager Robin Thomas Marketing Coordinator
  4. 4. TODAY’S AGENDA     Business Tax Changes Patient Protection and Affordable Care Act Personal Tax Changes Medicare Tax Changes
  5. 5. UPDATE Due to the government shutdown, the IRS will not be accepting paper filed or electronically filed returns until February 4, 2014
  6. 6. BUSINESS TAX CHANGES Provisions Expiring Various temporary tax provisions will be expiring December 31, 2013       Research Credit Work Opportunity Credit Differential Wage Credit for Activated Military Reservists Enhanced deduction for charitable contributions of food inventory Tax incentives for empowerment zones Indian employment credit
  7. 7. BUSINESS TAX CHANGES Provisions Expiring Continued provisions expiring December 31, 2013  Low-income tax credits for non-federally subsidized new buildings  Low-Income housing tax credit treatment of military housing TODAY’S AGENDA allowances  Adjusted-basis reduction of stock after S corporation charitable deduction of property  Recognition period for S corporation built in gains  100% exclusion of small business stock sale or exchange
  8. 8. BUSINESS TAX CHANGES Bonus Depreciation  50% first-year bonus depreciation - 2013  0% first-year bonus depreciation - 2014  Qualified property is tangible property depreciated under MACRS with a recovery period of 20 years or less  Must meet original use, timely acquisition, and timely placed in service requirements  Applies automatically; must opt-out by asset class  Can create a loss
  9. 9. BUSINESS TAX CHANGES Section 179 – Expensing Election  Dollar Limitations − $500,000 for 2013 − $25,000 for 2014  Reduction in Limitations − $2,000,000 for 2013 − $200,000 for 2014  Section 179 cannot create a loss  Available for used property
  10. 10. BUSINESS TAX CHANGES First Year Depreciation Cap for Autos & Trucks  For 2013 the luxury auto limit was scheduled to be $3,160 for autos and $3,360 for light trucks and vans  The applicable first-year depreciation limit has been increased by $8,000 − $11,160 for autos − $11,360 for light trucks and vans
  11. 11. BUSINESS TAX CHANGES Depreciation Example Purchase $50,000 of computers in 2013 (Assume 5-year life.) Straight Line 2013 MACRS Bonus Plus MACRS Section 179 2014 $5,000 $10,000 TODAY’S AGENDA 10,000 16,000 $30,000 $50,000 8,000 - 2015 10,000 9,600 4,800 - 2016 10,000 5,760 2,880 - 2017 10,000 5,760 2,880 - 2018 5,000 2,880 1,440 ______- $50,000 $50,000 $50,000 $50,000
  12. 12. BUSINESS TAX CHANGES Depreciation Example Purchase $750,000 Machine ( Assume 5-year life.) Straight Line MACRS 2013 $75,000 $150,000 2014 150,000 TODAY’S240,000 AGENDA 2015 150,000 2016 Bonus Section 179 $450,000* $650,000** 120,000 40,000 144,000 72,000 24,000 150,000 86,400 43,200 14,400 2017 150,000 86,400 43,200 14,400 2018 75,000 43,200 21,600 7,200 $750,000 $750,000 $750,000 $750,000 *$375,000 Bonus, $75,000 MACRS **$500,000 Section 179, $125,000 Bonus, $25,000 MACRS
  13. 13. BUSINESS TAX CHANGES Final Regulations on Repair vs. Capitalization Standards What To Look For  Repairs & Maintenance  Capitalization  Building & Equipment  Materials & Supplies What You Will Find  De Minimis Rule  Routine Maintenance Safe Harbor  Small Taxpayer Safe Harbor for Buildings  Betterment/Restoration  Effective for 2014 (but can be applied to 2012 & 2013)
  14. 14. DE MINIMUS CAPITALIZATION POLICY For tax years beginning ___________ and forward, (Name of Business) elects to treat as an expense for both book and income tax purposes property with a cost of $________, or less, including items that have a useful life of 12 months or less. It is (Name of Business’s) intention that this election complies with the IRS Section 1.263(a)-1(f) de minimis safe harbor election. (Officer Signature) (date)
  15. 15. BUSINESS TAX CHANGES Depreciation/De Minimis Example Purchase 50 Computers @ $1500 each ( Assume 5-year life.) Straight Line Bonus/ MACRS 2014 $7,500 $15,000 2015 15,000 24,000 TODAY’S AGENDA 2016 15,000 2017 Section 179 De Minimis $35,000 $75,000 16,000 - 14,400 9,600 - 15,000 8,640 5,760 - 2018 15,000 5,184 3,456 - 2019 and on 7,500 7,776 5,184 ______- $75,000 $75,000 $75,000 $75,000
  16. 16. TAX IDEA Cost Segregation What to Look For  Depreciable real estate > $1MM  Tax paying entity  Built or acquired after 1986 What You Will Find  Accelerate depreciation deductions  Time value of money  Immediate cash
  17. 17. TAX IDEA Research & Development Credit What to Look For  Means, Methods, and Techniques  Structure and Facility Design for Constructability  Construction Equipment Development and Improvements  Design for LEED/green initiatives  HVAC Design  Electrical System Design  Building Information Modeling (BIM)  Analysis of a design to improve performance, reliability, quality, safety and/or life cycle costs  Requests for Information (RFIs)  Mechanical Equipment Sizing What You Will Find  Generate R&D tax credit = 6.0% of qualified R&D  Amend prior year tax returns  Immediate cash  AMT
  18. 18. TAX IDEA Prepaid Expenses What to Look For  Material Prepaid Expenses  Prepaid insurance  Prepaid maintenance agreements What You Will Find  Automatic method change allows tax payer to deduct prepaid expenses on a cash basis  Reduced federal, state, and local tax liability
  19. 19. BUSINESS IDEA Energy Cost Savings Audit What to Look For  Any company with energy costs  Electric  Gas  Lighting Retrofit What You Will Find  10 - 40% savings
  20. 20. Patient Protection and Affordable Care Act (PPACA)
  21. 21. WHAT IS PPACA?  Affordable Care Act or ―Obamacare‖  Most significant overhaul since Medicare and Medicaid enacted in 1965  Goals − Increase quality and affordability − Lower uninsured rate − Reducing costs for individuals and government  Require insurance companies to cover all applicants  Same rates regardless of pre-existing condition or gender
  22. 22. AM I SUBJECT TO PPACA?  Do I have 50 full-time equivalent (FTE) employees subjecting me to the PPACA requirements?  What types of workers must be counted?  ―Common law employee‖  What is a common law employee?  Remember the 20 Question Test  Who is not a common law employee?     Independent Contractors Sole Proprietors 2% S Corp Shareholders Partners in a Partnership
  23. 23. FULL TIME EQUIVALENT  Full time – employees that work at least 30 hours per week in any month  Part time – calculated by taking the hours worked by all part-time employees in a month and divide by 120  Seasonal – not counted for those working up to 120 days in a year
  24. 24. AM I SUBJECT TO PPACA? Bright Idea? Company has 55 full time employees Needs/Capacity 55 x 160 = 8,800 hours Change make-up of employees 30 full time – add overtime 30 x 180 = 5,400 20 part time – get below 120 15 fill in 20 x 110 = 2,200 15 x 80 = 1,400 8,800 hours
  25. 25. FULL TIME EQUIVALENT Calculation of Full Time Equivalent FULL TIME PART TIME 20 @ 110 15 @ 80 HOURS N/A 2,200 1,200 3,400 ÷120 FTE 30 28 58
  26. 26. FULL TIME EQUIVALENT Further Definitions – Who gets counted?  Leased employees  Temporary agency employees  Employees who work overseas  Foreign workers  Union employees  Retirees
  27. 27. NOW THAT I AM A LARGE EMPLOYER Must Offer Coverage  If I fail to offer to 95% of full-time employees and one person goes to exchange and receives premium credit  $2,000 penalty per full-time employee, not counting first 30  If you offer to 95% or more and one person goes to exchange and receives premium credit  $3,000 penalty per excluded employee who gets credit
  28. 28. THE TWO-PART TEST  Large employer must offer healthcare that is 1. 2. Affordable coverage Minimum coverage
  29. 29. DEFINITION OF AFFORDABLE COVERAGE  The cost of the plan to the employee cannot exceed 9.5% of the household's adjusted gross income for the taxable year (this includes spouses and dependents who are required to file a federal tax return)  How does an employer know the employee's household adjusted gross income? − W-2 Safe Harbor − − Rate of Pay Safe Harbor Federal Poverty Line Safe Harbor
  30. 30. DEFINITION OF MINIMUM COVERAGE  Minimum coverage means the insurance plan must cover 60 percent of the cost of the essential health benefits  The essential health benefits include emergency services, ambulatory services, hospitalization, lab services, prescription drug coverage and maternity and newborn care, among others  Vision and dental are not included
  31. 31. WHAT HAPPENS? What happens if I fail to comply with part one of the two-part test? If an employer:  Fails to offer a full-time employee (or one of their dependents) coverage; and,  The employee receives a subsidy (either a tax credit or costsharing reduction) through the exchange for purchasing health insurance  The employer will be liable for a $2,000 penalty per year for the total number of full-time employees (not counting the first 30 employees)
  32. 32. WHAT HAPPENS? What happens if I fail to comply with part two of the two-part test?  If an employer offers its full-time employees (and dependents) coverage but the coverage is either: 1. 2. Unaffordable Does not provide minimum coverage  The employer will be liable for a penalty of $3,000 per year, times the number of full-time employees who receive insurance through the exchange
  33. 33. HOW QUICKLY DO I NEED TO ACT? Open enrollment is scheduled to run from October 1, 2013 through February 28, 2014.
  34. 34. NOW WHAT? My business is subject to PPACA ─ now what?  Determine if your plan provides ―minimum essential coverage‖  Policy must include physician and mid-level practitioner care, hospital and emergency room services, pharmacy, laboratory and imaging  Compare the amount that you are charging employees for coverage to the PPACA affordability guidelines  Affordable = individual employee coverage does not exceed 9.5% of the employee’s household income for the year  Household income = W-2, hourly rate of pay x 130 hours/month, or federal poverty line
  35. 35. NOW WHAT? My business is subject to PPACA ─ now what?  Make certain that the insurance is offered to 95% of your full time employees  If you fail the tests, weigh the cost of correction (better policy, lower employee cost) against payment of the excise taxes  Human Resource issues
  36. 36. NOW WHAT? My business is not subject to PPACA ─ now what?  Continually monitor your FTE count to see if you will potentially become subject to PPACA  Coverage level thoughts: − Continue current coverage − Compare exchange rates to your current coverage rates − Shop coverage
  37. 37. NOW WHAT? My business might be subject to PPACA ─ now what?  Analyze FTE count to see if the 50 employee threshold is met  Take personnel action to keep the count below 50, if desired  If you are close, analyze whether your plan coverage, employee offering level and cost sharing structure will satisfy PPACA’s rules
  38. 38. PERSONAL TAX CHANGES
  39. 39. PERSONAL TAX CHANGES Highlights     Bush tax cuts retained for most taxpayers Raises top rate for income, dividends and capital gains Permanently ―patches‖ AMT Return of phase outs of itemized deductions and personal exemptions
  40. 40. NEW TAX RATES 2013 Taxable Income 2013 Taxable Income Taxpayer Capital Gains Single MFJ Tax Rate Tax Rate $0-$8,925 $0-$17,850 10% 0% 0% $36,251-$87,850 $17,85015% $72,500 TODAY’S AGENDA $72,501-$146,400 25% 15% $87,851-$183,250 $142,401-$223,051 28% 15% $183,251-$398,350 $223,051-$398,350 33% 15% $388,351 -$400,000 $388,351 -$450,000 35% 15% $400,000 + $450,001 + 39.6% 20% $8,925-$36,250
  41. 41. PERSONAL TAX CHANGES AMT Permanent Patch Alternative Minimum Tax (AMT) Relief  Increased exemption for 2013  $51,900 Single; $80,800 MFJ  Indexed for inflationTODAY’S AGENDA – 2014  $52,800 Single; $82,100 MFJ
  42. 42. PERSONAL TAX CHANGES Future of AMT  Could be abolished in the future  Obama proposed to replace part of the AMT with the so-called ―Buffet Rule  Buffet Rule would ensure taxpayer making over $1 million would pay an effective rate of at least 30 percent. TODAY’S AGENDA  2012 – Senate rejected the ―Paying a Fair Share Act‖
  43. 43. PERSONAL TAX CHANGES General Tax Planning Strategies  Defer maximum salary to 401k or SEP  Defer maximum into HSA plans  Accelerate charitable contributions  Pay January house payment early TODAY’S  Bunch medical expenses AGENDA  Year end security sales for losses Strategies If You‟re NOT in Alternative Minimum Tax  Accelerate payment of State, Local and Real Estate Taxes
  44. 44. PERSONAL TAX CHANGES Defer Maximum 401k or SEP  2013 and 2014 maximum for 401k = $17,500  Over 50 may contribute additional $5,500  2013 and 2014 maximum for SEP = 25% of total income up to $52,000 Defer Maximum into HSA Plans AGENDA TODAY’S  2013 – Individual $3,250  2013 – Family $6,450  Over 55 may contribute additional $1,000  2014 – Individual $3,300  2014 – Family $6,650  Over 55 may contribute additional $1,000
  45. 45. PERSONAL TAX CHANGES Accelerate Charitable Contributions  Cash to 501(c)(3) charities  Includes gifts made on credit cards  Charitable Gift Annuities  Non-Cash household goods and clothing TODAY’S AGENDA  http://satruck.org/donation-value-guide
  46. 46. PERSONAL TAX CHANGES Bunch Medical Expenses  Deduct unreimbursed medical expenses greater than 10% of Adjusted Gross Income  65 and older allowed to deduct 7.5% of Adjusted Gross Income TODAY’S  Example: $100,000 AGENDA must have $10,000 in of AGI, medical expenses before getting $1 of deduction  Includes Long Term Care Insurance Premiums  Must have prescription for deduction for any medications  Cannot deduct over the counter medication and vitamins
  47. 47. PERSONAL TAX CHANGES Year End Security Sales For Losses  May deduct up to $3,000 in investment losses against ordinary income  Wash sale rules TODAY’S AGENDA
  48. 48. PERSONAL TAX CHANGES Return of Phase Outs  Itemized Deduction Phase Out − Reduces itemized deductions by 3% of the amount by which AGI exceeds threshold, not to exceed 80% − Single $250,000 MFJ $300,000 TODAY’S AGENDA  Personal Exemption Phase Out − Reduces exemption by 2% for each $2,500 (or portion thereof) by which AGI exceeds threshold − Single $250,000, MFJ $300,000
  49. 49. PERSONAL TAX CHANGES Individual Tax Credits Available in 2013  Adoption Credit – Available if you adopted a child and paid-out-of-pocket expenses relating to the adoption − The maximum value of the credit is $12,970 per eligible and it is non-refundable TODAY’S AGENDA − Phase-out is between $194,580 - $234,580
  50. 50. PERSONAL TAX CHANGES  Child and Dependent Care Credit – Available if child is under 12 years of age, or a dependent of any age who cannot care for themselves. − The value of the credit depends on AGI and is between 20% - 35% of qualified expense TODAY’S AGENDA − The maximum amount of qualified expenses that can be claimed is $3,000 for one child and $6,000 for two or more children
  51. 51. PERSONAL TAX CHANGES  Retirement Savings Credit – Credit available for low to moderate income workers who contribute to a qualified plan. AGI must be less than: − $59,000 Married filing jointly − $44,250 Head TODAY’S AGENDA of Household − $29,500 Single
  52. 52. PERSONAL TAX CHANGES Energy Credits  A tax credit of 10% of up to $500 (for all tax years after 2005 and only $200 can be used for windows) is still available.  The 30% (with no upper limit) credit for geothermal heat pumps, small wind turbines, and solar energy systems does not expire until December 31, 2016 TODAY’S AGENDA
  53. 53. PERSONAL TAX CHANGES Popular Tax Provisions Expiring December 31, 2013  $250 above-the-line annual deduction for professional educator’s qualified unreimbursed expenses  Exclusion from gross income for discharges of qualified principal residence indebtedness TODAY’S AGENDA  Itemized deduction for mortgage insurance premiums  Election to claim deduction for state and local sales tax in lieu of state and local income taxes  Exclusion from gross income of charitable distributions for individuals aged 70 ½ or older  Residential energy property credit
  54. 54. MEDICARE TAX CHANGES
  55. 55. MEDICARE TAX CHANGES Patient Protection and Affordable Care Act – Two Parts  0.9% increased Medicare tax due on wages and self-employment earnings  3.8% surtax on at least a portion of investment income such as capital gains, dividends and net rental income TODAY’S AGENDA
  56. 56. MEDICARE TAX CHANGES Tax Earnings An additional 0.9% surtax on higher income households Thresholds The tax applies to wages and TODAY’S AGENDA self-employment income in excess of threshold There is no employer match on the 0.9 percent tax Single Taxpayer $200,000 Married Taxpayers Filing Jointly $250,000
  57. 57. MEDICARE TAX CHANGES Tax Earnings Ron  Single Taxpayer  Employee  $500,000 Earnings Excess of Earning Threshold $500,000 - 200,000 $300,000 .9% Surtax Would APPLY to ax Payer Single $300,000 $200,000 = Married$2,700 taxpayers filingjointly Tax Additional $250,000
  58. 58. MEDICARE TAX CHANGES 3.8% Medicare „Surtax‟ Overview Investment Income  Beginning with the 2013 tax year, a new 3.8% Medicare ―surtax‖ will apply to all taxpayers whose income exceeds a certain ―threshold amount‖  This new ―surtax‖ will, in essence, raise the marginal income tax Single ax Payer rate for affected taxpayers $200,000  Thus, a taxpayer in the 39.6% tax bracket (i.e. the highest marginal income tax rate in 2013) would have a marginal rate of 43.4%! Married taxpayers filingjointly $250,000
  59. 59. MEDICARE TAX CHANGES 3.8% Medicare „Surtax‟ Overview Current Tax Rate Tax Rate in 2013 Tax Rate in 2013 + (with surtax) 10% 15% 15% 15% 15% 15% 25% 28% 28% 31% 33% 36% 28% Single ax Payer 34.8% $200,000 39.8% 35% 39.6% 43.4% Married taxpayers NOTE: The chart above assumes that the 3.8% Medicare surtax would not begin to apply filingjointly until a person’s taxable income reaches the 31% tax bracket (based on certain net $250,000 investment income and itemized deduction assumptions). However, there are times when the 3.8% could apply to a person in a lower tax bracket (i.e. 15%, 28%) or may not apply to a person in higher tax brackets (31%, 36%, 39.6%).
  60. 60. MEDICARE TAX CHANGES 3.8% Medicare „Surtax‟ Overview – Individuals 1. Net Investment Income OR 3.8% X the lesser of Single ax Payer $200,000 2. The Excess (if any) of – • ―Modified Adjustable Gross Income (MAGI) Married taxpayers • ―Threshold Amount filingjointly $250,000
  61. 61. MEDICARE TAX CHANGES 3.8% Medicare „Surtax‟ Overview – Critical Terms Three critical terms associated with the 3.8% Medicare surtax  ―Net investment income‖ (NII)  ―Threshold amount‖ (TA)  ―Modified adjusted gross income‖ (MAGI) Married taxpayers filingjointly $250,000
  62. 62. 3.8% MEDICARE ‘SURTAX’ OVERVIEW – NII Subject to Surtax: • Taxable Interest • Dividends • Annuity Income • Passive Royalties • Rents Exempt from Surtax: • Wages • Exempt Interest • Active Royalties • IRA Distributions • 401(k) Distributions • Pension Income • RMDs • Social Security Income Married taxpayers filingjointly $250,000
  63. 63. MEDICARE TAX CHANGES 3.8% Medicare „Surtax‟ Overview – Threshold Amount “Threshold Amount”  Is the key factor in determining the ―lesser of‖ formula for purposes of calculating the surtax Threshold Amounts  Single taxpayers — $200,000  Married taxpayers — $250,000 Married taxpayers filingjointly $250,000
  64. 64. MEDICARE TAX CHANGES 3.8% Medicare „Surtax‟ Overview – MAGI “Modified Adjusted Gross Income”  Is the amount that is compared to the ―threshold amount‖ to determine the ―net investment income‖ that is subject to the surtax MAGI Equals  Adjusted gross income − i.e., Form 1040, Line 37 Married taxpayers filingjointly − i.e., gross income excluded under the foreign earned income $250,000 exclusion less certain deductions or exclusions that were disallowed due to the foreign earned income exclusion  PLUS Net foreign earned income exclusion
  65. 65. MEDICARE TAX CHANGES Married taxpayers filingjointly $250,000
  66. 66. MEDICARE TAX CHANGES 3.8% Medicare „Surtax‟ Example John  Single Taxpayer  $100,000 of Salary  $50,000 Net Investment Income MAGI is $150,000 Threshold is $200,000 3.8% Surtax Would NOT Apply MAGI is Less Than Threshold Married taxpayers filingjointly $250,000
  67. 67. MEDICARE TAX CHANGES 3.8% Medicare „Surtax‟ Example Linda  Single Taxpayer  $0 Employment Income  $225,000 Net Investment Income Excess of MAGI Over Threshold $225,000 - 200,000 $ 25,000 3.8% Surtax Would Apply to $25,000 Tax = $950 Married taxpayers filingjointly $250,000
  68. 68. MEDICARE TAX CHANGES 3.8% Medicare „Surtax‟ Example Tina & Terry  Married, Filing Jointly  $300,000 Combined Salary  $0 net Investment Income MAGI is Threshold is Excess is $300,000 $250,000 $50,000 3.8% Surtax Would NOT Apply Wages Exempt Married taxpayers filingjointly $250,000
  69. 69. MEDICARE TAX CHANGES 3.8% Medicare „Surtax‟ Example Peter & Paula  Married, Filing Jointly  $400,000 Salary Income  $50,000 Net Investment Income Excess of MAGI Over Threshold $450,000 - 250,000 $200,000 But $50,000 < $200,000 3.8% Surtax Would Apply to $50,000 Tax = $1,900 Married taxpayers filingjointly $250,000
  70. 70. MEDICARE TAX CHANGES 3.8% Medicare „Surtax‟ Example Sarah & Scott  Married, filing jointly  $200,000 salary income  $150,000 net investment income Excess of MAGI Over Threshold $350,000 - 250,000 $100,000 3.8% Surtax would apply to $100,000 Tax = $3,800 Married taxpayers filingjointly $250,000
  71. 71. MEDICARE TAX CHANGES PLEASE NOTE A taxpayer should never pay both the 0.9% tax on earned income and the 3.8% surtax on net investment income on the same item of income! Married taxpayers filingjointly $250,000
  72. 72. MEDICARE TAX CHANGES What Else is Exempt?  S Corp distributions to owners who materially participate  Rents received by ―real estate professionals‖ who materially participate in underlying rental activity  Grouping of rental activities with businesses in which owners materially participate  Re-characterized rents received from businesses in which owner materially participates (whether or not PAL grouping election has been made) Married taxpayers filingjointly $250,000
  73. 73. MEDICARE TAX CHANGES Applications to S Corp Earnings  K-1 profits for S Corp owners who materially participate are not subject to either the 0.9% tax on earned income OR the 3.8% surtax on net investment income  Distinguish portfolio income which is separately stated  Passive owners would still be subject to the 3.8% surtax Married taxpayers filingjointly $250,000
  74. 74. MEDICARE TAX CHANGES Applications to S Corp Interest  For material participants, only net gain or loss attributable to property held by the entity which is not ―property attributable to an active trade or business‖ is taken into account (e.g. stocks, bonds, other investment property) for the 3.8% surtax  For passive investors, any and all gain or loss will be included in calculating net investment income Married taxpayers filingjointly $250,000
  75. 75. MEDICARE TAX CHANGES Applications to Partnership Earnings  Earnings for partners who materially participate are not subject to the 3.8% tax on net investment income BUT will be subject to the 0.9% tax on earned income  Passive owners are just the opposite − They would be subject to the 3.8% surtax on NII, but not the 0.9% tax on earned income Married taxpayers filingjointly $250,000
  76. 76. MEDICARE TAX CHANGES Applications to Partnership Interest  For material participants, only net gain or loss attributable to property held by the entity which is not ―property attributable to an active trade or business‖ is taken into account (e.g. stocks, bonds, other investment property) for the 3.8% surtax  For passive investors, any and all gain or loss will be included in calculating Net Investment Income Married taxpayers filingjointly $250,000
  77. 77. MEDICARE TAX CHANGES Understanding the „Surtax‟ Code 469 PAL Rules Trade or Business Activity Entity Materially Participate 3.8% Tax .9% Tax S-Corp Yes No No S-Corp No Yes No Partnership Yes No Yes Partnership No Yes No
  78. 78. SINGLE TAXPAYER 2012 2013 $200,000 $200,000 Itemized Deductions (8,900) (8,900) Exemptions (3,800) (3,900) Taxable Income $187,300 $187,200 Federal Income Tax $ 46,337 $ 45,907 Wages Change ($430) Married taxpayers filingjointly $250,000
  79. 79. SINGLE TAXPAYER 2012 Wages Itemized Deductions Exemptions 2013 $250,000 $250,000 (11,814) (11,814) (3,800) Change (3,900) Taxable Income $234,386 $234,286 Federal Income Tax $ 61,957 $ 61,445 Surtax Total $ 61,957 ($512) 450Married taxpayers 450 filingjointly $ 61,895 $250,000 ($ 62) Surtax is .9% on excess wage of $250,000 - $200,000 threshold.
  80. 80. SINGLE TAXPAYER 2012 2013 $200,000 $200,000 Rents 50,000 50,000 Itemized Deductions (11,814) (11,814) (3,800) (3,900) Wages Exemptions Taxable Income $234,386 $234,386 Federal Income Tax $ 61,957 $ 61,445 Change Surtax Total -___ $ 61,957 ($512) taxpayers 1,900 Married 1,900 filingjointly $ 63,345 $1,388 $250,000 Surtax of 3.8% on rents of $50,000 No surtax if married filing joint return.
  81. 81. SINGLE TAXPAYER 2012 2013 $450,000 $450,000 Capital Gains 100,000 100,000 Itemized Deductions (29,589) (20,589) (9,000) (3,800) -___ (3,800) Wages Exemptions Change Taxable Income $516,611 $529,411 $12,800 Federal Income Tax $137,575 $147,811 $10,236 3,800 3,800 $151,611 $14,036 Surtax 3.8% -___ $137,575 Surtax of 3.8% on capital gains of $100,000. Additional $2,250 in the .9% surtax with held at source.
  82. 82. SINGLE TAXPAYER 2012 Retirement Income 2013 $150,000 $150,000 Social Security 17,000 17,000 Dividends 50,000 50,000 Itemized Deductions (8,900) (8,900) Exemption (3,800) Change (3,900) Taxable Income $204,300 $204,200 Federal Income Tax $ 44,557 $ 43,969 Married taxpayers ($588) filingjointly 646 646 $250,000 $ 44,615 $ 58 Surtax 3.8% Total Tax -___ $ 44,557
  83. 83. MARRIED TAXPAYERS 2012 2013 $280,000 $280,000 Interest 10,000 10,000 Dividends 30,000 30,000 Business Income 90,000 90,000 Capital Gains 50,000 50,000 SE Tax Deduction (1,205) (1,205) (24,065) (19,301) Wages Itemized Deductions Exemptions Taxable Income (7,600) $427,130 Change (4,764) Married taxpayers -____ (7,600) filingjointly $250,000 $439,494 $12,364
  84. 84. MARRIED TAXPAYERS 2012 2013 $103,459 $106,946 3,487 10,669 6,456 (4,213) 114,128 113,402 (726) Self-Employment Tax 2,410 2,410 - Surtax 3.8% Surtax .9% -____ 3,420 1,080 3,420 1,080 $120,312 $3,774 Federal Income Tax AMT Total Tax $116,538 Change Surtax of 3.8% on NII of $90,000 ($10,000 + $30,000 + $50,000) Surtax of .9% on wages of $280,000 + profits of $90,000 less threshold
  85. 85. QUESTIONS? Mike Soful Michael Minotti mminotti@skodaminotti.com msoful@skodaminotti.com www.skodaminotti.com Cleveland 440-449-6800 Akron 330-668-1100 Jenna Staton jstaton@skodaminotti.com
  86. 86. Thank You

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