Top 10 Tax Changes and Strategies For 2013

by Steven Sodini 1. November 2013 17:28
Top 10 Tax Changes and Strategies for 2013   With two months left in 2013, tax planning strategies should definitely be examined now, as there is still sufficient time for both individual and business taxpayers to make changes or adjustments to their income and deductions before year-end. However, in order to do so, most taxpayers will have to consider the changes made by both the American Taxpayer Relief Act of 2012 (ATRA) and the Patient Protection Affordable Care Act of 2010 (Affordable Care Act) before year end. To help assist taxpayers with their planning, we are going to examine our Top 10 Tax Changes and Strategies for 2013 below as follows: Individual Tax Rates In 2013 there will be a continuation of the "Bush-era" tax rates from 2012, but there will also be a revival of the 39.6 percent tax rate for the highest income earners. The AGI thresholds for the new 39.6 percent tax bracket in 2013 will be: Single ($400,000) Married Jointly and Surviving Spouse ($450,000) Head of Household ($425,000) Married Separate ($225,000)   These thresholds are scheduled to be adjusted annually for inflation for tax years after 2013. In addition, for estates and trusts, the threshold income amount is only $11,950 for 2013, so executors and trustees should consider making distributions to beneficiaries before year-end, so that amount of taxable income will not be included in the taxable income of the estate or trust, and will instead be passed through to the beneficiaries, who may be in a lower tax bracket.   Capital Gains and Qualified Dividends The top rate for capital gains and qualified dividends will also rise from 15 to 20 percent for individuals in the 39.6 percent income tax bracket based on the same income levels as noted above. Due to the rising capital gains rate, a taxpayer may want to consider using carryforward losses from 2012 as, barring a change by the IRS, carryforward losses from prior to 2013 will be able to be used to offset capital gains at the new 20 percent rate without an adjustment for the rate change. It may also by prudent in some case, for investors to sell off certain types of investments (ie, bonds) before year-end to generate additional capital losses to offset capital gains for the year if little or no capital loss carryforwards are available to the taxpayer. In addition, for dividends to be subject to the lower qualified rates, the underlying stock should be held for at least 61 days within a 121 day period.   Medicare Surtax on Net Investment Income and Compensation Beginning in 2013, many higher income taxpayers may also be liable for two new Medicare surtaxes. The first is the Net Investment Income (NII) Medicare surtax of 3.8 percent. Net investment income includes taxable interest, dividends, net capital gains, net rental income (except for real estate professionals), and net income from an activity in which the taxpayer is a passive participant. According to a Draft Form 8960 released by the IRS over the Summer, net investment income can also be offset by investment interest expenses and investment fees from brokers, but this could change once the final form is released in early 2014. The surtax on individuals equals 3.8 percent of the lesser of; the taxpayer’s net investment income for the tax year, or, the excess of modified adjusted gross income (MAGI) for the tax year over the threshold amount. The threshold amounts are:   Married Jointly and Surviving Spouse ($250,000) Married Separate ($125,000) Single and Head of Household ($200,000)   Because of this new surtax, any investment income in 2013 should be examined to determine whether or not it will be subject to the surtax. The IRS has also indicated that the surtax will be subject to penalties for underpayment of estimated tax, so to the extent this has not been considered for the first three quarters of 2013, a revised calculation should be done for the fourth quarter to determine whether any additional estimates are required. However, it should also be noted that there has also been no indication that the IRS will not allow the traditional estimate safe harbors to continue to be used for 2013.   The second is a separate Medicare Surtax of 0.9 percent of wages (or self-employment income) in excess of higher income level threshold amounts is also effective for 2013. The threshold amounts are the same as noted above for the NII tax. Employers are required to withhold for this additional surtax for wages paid above the threshold amounts shown above and unlike Social Security Taxes, there is no cap on the amount of compensation that is subject to this tax once the thresholds are exceeded. However, for self-employed taxpayers, careful attention should be paid to estimates, particularly for the fourth quarter.   To plan for both additional Medicare surtaxes, a taxpayer may also request that their employer(s) withhold an additional amount of income to be applied to the taxpayer’s income tax return for November and December, which will in turn spread the additional payments over all four quarters for estimate purposes. At this point, it does not appear that the thresholds for either of the Medicare surtaxes will be adjusted for inflation for tax years after 2013.   Pease Limitation The Pease limitation (named after the member of Congress that sponsored the original legislation back in 1990), which was eliminated with the Bush-era tax cuts, will now return in 2013. The Pease limitation reduces the total allowable itemized deductions by three percent of the amount of the taxpayer’s adjusted gross income that exceeds the set thresholds, but not more than 80 percent in total. Certain itemized deductions are excluded from the limitation such as, medical expenses, investment interest, and casualty, theft, or wagering losses. The thresholds will be adjusted for inflation for tax years after 2013. These new limits (along with the personal exemption limits below) should also be considered for 2013 estimate purposes. The 2013 thresholds for the Pease limitation are:   Married Jointly and Surviving Spouse ($300,000) Married Separate ($150,000) Single and ($250,000) Head of Household ($275,000)   Personal Exemption Limitation Much like the Pease limitation, an individual’s Personal Exemptions will also be phased out to the extent an individual’s adjusted gross income exceeds the same thresholds noted above.   Same-Sex Marriage Filing Status On June 26, 2013, the US Supreme Court struck down Section 3 of the Defense of Marriage Act in E.S Windsor, 2013-1 ustc 50,400. Under the court ruling, all same sex marriages that have been legally recognized under state or local laws (currently allowed in 13 states and DC), will also be recognized for federal tax purposes, regardless of whether the couple actually resides in a jurisdiction that does or does not recognize same-sex marriages. Therefore, for all tax returns filed on or after September 16, 2013, these couples must now file using the married joint filing status.   Estate and Gift Taxes After much uncertainty over the past decade, a permanent structure has now been provided for estate and gift taxes. Estate and gift tax rate is now capped at 40 percent with a $5 million exclusion adjusted annually for inflation. The annual gift tax exclusion has risen to $14,000 for an individual and $28,000 for a married couple who elects to gift-split. There is currently no limit to the amount of individual donees to whom tax free gifts may be made under the exclusion rules noted above, so maximizing the annual exclusion continues to be a popular tax planning idea.   Section 179 Expense For taxpayers involved in a owning or operating a business, there are changes in IRC Section 179 regarding expensing of qualified fixed assets used in business. For 2013, the annual dollar limitation for Code Section 179 expensing is $500,000 with an overall investment limitation of $2M (with a dollar for dollar phaseout above that limit). However, absent Congressional action, for tax years beginning after 2013 the dollar limit is expected to decrease to $25,000, with the phase out ceiling also scheduled to decrease to $200,000. Unlike bonus depreciation (discussed below), Section 179 allows both new and used business assets (including off-the-shelf computer software) to qualify for current deductions. In addition, Section 179 also allows expensing for certain types of qualified real property, including qualified leasehold improvements, but this is also scheduled to expire after 2013. Thus, taxpayers should strongly consider placing assets in service before year-end to take advantage of the taxpayer friendly current rules.   Bonus Depreciation Similarly, for 2012 and 2013, 50 percent bonus depreciation is allowed under the ATRA. However, after 2013, bonus depreciation is scheduled to expire completely, once again pending any Congressional extensions. At present, qualified property subject to bonus depreciation must be new (unlike Section 179 as noted above), must be depreciable under the Modified Accelerated Cost Recovery System (MACRS.), must have a recovery period of 20 years or less, and must be placed in service before January 1, 2014. Along with the expiration of bonus depreciation, the additional $8,000 of first year depreciation limitation for passenger automobiles under IRS Section 280F is also scheduled to expire after 2013, again subject to any Congressional extensions. As with Section 179 above, taxpayers should consider placing qualified assets into service before year-end.   Final Repair/Capitalization Regulations Final regulations have been put in place with guidelines to determine when taxpayers must capitalize costs and when they can deduct expenses for acquiring, maintaining, repairing, and replacing tangible property. These regulations will apply to tax years beginning on or after January 1, 2014. However, these Regs also provide taxpayers with the option to apply the final or temporary regulations to the tax years beginning after 2011 and before 2014. Even more importantly, the Final Regulations include a new de minimis expensing rule. This allows the taxpayer to deduct certain amounts paid or incurred to acquire or produce a unit of tangible property. If a taxpayer has an Applicable Financial Statement (AFS) the Final Regulations allow up to $5,000 to be deducted per invoice. To take advantage of the rule, taxpayers must have written policies at the start of the tax year that specify a per-item dollar amount that will be expenses for financial accounting purposes. Even for a smaller business without an AFS, the Final Regs have a per item or invoice threshold amount of $500.
Categories: Tax