November means the days get shorter and 2013 year-end planning is imminent. This year we have new planning opportunities and we also have challenges. We started October 2013 with an IRS shutdown that frustrated taxpayers as the extension deadline loomed on October 15. We have been told that the filing season for 2014 could be delayed because the IRS needs more time to update and test its tax processing systems following the 16-day shutdown. Instead of accepting returns on Jan. 21 as previously planned, the agency will now start accepting and process returns on Jan. 28 or Feb. 4.
Tax Planning for Individual
The Affordable Care Act brings two concerns that need to be factored into year-end planning by high income taxpayers, the new Additional Medicare Tax and the surtax on Net Investment Income. The American Taxpayer Relief Act of 2012 (signed into law on January 2, 2013), helped to avoid the “fiscal cliff” and many taxpayers will not have higher income taxes as a result.
- For most taxpayers with modified adjusted gross income (MAGI) under $200,000—$250,000 for married couples filing jointly—marginal income tax rates won’t increase, and most tax relief provisions remain in effect. Among them: marriage penalty relief, the child tax credit, the American Opportunity Tax Credit, and lower capital gains tax rates.
- The alternative minimum tax (“AMT”) exemption is permanently patched (with inflation adjustments), thereby sparing millions of middle-income Americans from the AMT’s snare. In 2013 the AMT exemption is $51,900 for single filers and $80,800 for joint filers, up from $50,600 for single filers and $78,750 for joint filers in 2012.
- Qualifying municipal bond interest remains free of federal income taxes.
- Qualified dividends continue to be taxed at preferential capital gains rates, rather than as ordinary income.
- People with MAGI greater than $200,000—$250,000 for couples—may be impacted by a new Medicare surtax on net investment income. This tax is 3.8% on the lesser of your net investment income or the amount over the threshold amount. Taxpayers with earned income above $200,000—$250,000 for couples—will also pay a higher Medicare payroll tax of .9%.
- Anyone with an AGI above $250,000—$300,000 for married couple filing jointly—may have their personal exemptions and itemized deductions reduced.
- In addition, taxpayers with taxable income greater than $400,000—$450,000 for couples—should get ready for a new 39.6% top marginal income tax rate and higher qualified dividend and long-term capital gains rates.
- Medical expenses will need to exceed 10% of your adjusted gross income before you will get a benefit for this itemized deduction. However, taxpayers who are over 65 may continue to apply the 7.5% threshold for tax years through 2016.
- Some popular tax incentives are scheduled to expire after 2013. Whether Congress will extend them again is questionable. Taxpayers should consider acting upon the benefits provided before the end of 2013. These tax incentives include deduction for state and local sales tax, teachers’ classroom expense deduction, exclusion of cancellation of indebtedness on principal residence, transit fringe benefits, deduction for mortgage insurance premiums, and IRA distributions to charity.
Planning for Businesses
- The traditional tax planning strategy of delaying income and accelerating expenses is still a good approach to delay taxable income. In addition a business owner should be aware of choices for expensing and/or depreciating large asset purchases.
- The enhanced (larger) Section 179 deduction is available through 2013 to taxpayers that elect to treat the cost of a qualifying property as an expense. The annual limit on Sec 179 is $500,000.
- The Code Section 179 expensing allowance for qualified real property (including qualified leasehold improvement property, qualified restaurant property and retail improvement property) is scheduled to expire for property placed in service after 2013.
- The bonus depreciation to which we have become so accustomed is scheduled to expire after 2013. However, you can still take advantage of the 50 percent bonus depreciation on qualifying MACRS assets purchased in 2013. The property must be new and placed in service before January 1, 2014.
- Along with the sunset of bonus depreciation, the additional $8,000 first year depreciation on passenger automobiles is scheduled to expire after 2013.
If you have questions or want to learn more about these planning points please contact Sherwood Tax and Accounting. We are happy to assist in understanding these always changing tax laws.