Year-End Tax Planning for 2013
By Swensen, R Bruce | |
Proquest LLC |
How the American Taxpayer Relief Act Affects Individuals and Businesses
This year's tax planning could be significantly productive for CPAs, because of the higher tax rates on high-income earners for regular income taxes, capital gains, and dividend income enacted by the American Taxpayer Relief Act of 2012 (ATRA). Also effective for 2013 are an increased payroll tax (0.9%) and a new tax on net investment income (3.8%) enacted by the Patient Protection and Affordable Care Act of 2010 (ACA). Without new legislation from
Estate and Gift Tax
The
In addition, the portability provisions between spouses-set to expire for decedents dying after
The
Planning for Individuals
There is no change in income tax rates between 2013 and 2014 with the exception of inflation adjustments, according to a formula under Internal Revenue Code (IRC) section 1(f). The effect of these provisions in 2013 is that unmarried individuals with taxable income greater than
Taxpayers falling in these new brackets for 2013 will also be subject to taxation at the new 20% rate on qualified dividends and qualified net long-term capital gains (previously 15%). In addition, CPAs should caution taxpayers about spikes in taxable income that can push an individual into a higher tax bracket, such as individu- al retirement account (IRA) distributions, conversion to Roth IRAs, or the sale of assets. Taxpayers should try to manage these in order to avoid bunching them up in one year.
Net investment income tax (3.8%). Starting with 2013, the ACA imposes an additional 3.8% tax on net investment income, to the extent that modified adjusted gross income (MAGI) exceeds a certain threshold (
Net investment income includes interest, dividends, capital gains, annuities, royalties, and net nonbusiness rent income; however, it does not include tax-exempt income or distributions from qualified retirement plans or income recognized upon conversion to a Roth IRA. Nonexcluded gain on sale of a home is included, as well as ordinary income or capital gains from a passive trade or business. Estates and trusts are subject to this tax on undistributed net investment income, with certain limitations.
Because investment income includes capital gains and dividends, taxpayers should try to minimize investment income by employing one or more of the following techniques:
* Use an installment sale to spread gains into 2014 and later.
* Sell assets with potential capital losses. These losses can reduce capital gains and even provide a deductible loss up to
* Be careful buying a mutual fund that pays dividends late in the year, after a purchase has been made. Because the price will drop to reflect the dividend payout, taxpayers will have effectively created dividend income. Instead, taxpayers should wait until the year-end dividend is paid and call the fund for the payout information before buying.
* Invest in tax-exempt bonds. Tax-exempt interest is not included in computing MAGI, nor is it included in net investment income.
* Reduce investment income by making gifts of income-producing assets; avoid gifting assets that have declined in value because of the reduced-basis rule related to the sale of assets received as a gift. For example, taxpayers should set up an IRC section 529 plan. Transferred assets are omitted from the donor's estate. The annual exemption is currently
Additional
Income tax rate tables for estates and trusts. All prior tax rates were retained for all existing tax brackets, except for the highest rate bracket, which rose to 39.6% (previously 35%) starting in 2013. The new top bracket for 2013 is projected to start at
"Permanent" alternative minimum tax (AMT) provisions. The
In planning to minimize the AMT, taxpayers should remember that some tax deductions are not allowed for AMT purposes- for example, property taxes on a residence, state income taxes (or sales taxes if elected in lieu of income taxes), miscellaneous itemized deductions, and personal exemptions.
Phaseout of itemized deductions and personal exemptions. Starting with 2013, itemized deductions and personal exemptions will be reduced to the extent that a taxpayer's AGI exceeds specified amounts. Hie phaseout of itemized deductions will be calculated at 3% of AGI exceeding the threshold amounts. The phaseout will not apply to medical expenses; investment interest; and allowable losses from casualty, theft, or wagering. The reduction cannot exceed 80% of itemized deductions. Hie phaseout of itemized deductions does not apply to estates and trusts.
Personal exemptions are phased out at tie rate of 2% for each
Elimination of standard deduction 'marriage penalty. ' The
Medical expense deduction floor. Itemized deductions are currently allowed for medical expenses paid during the year, to the extent that they exceed 7.5% of AGI. For 2013 and later, this increases to 10%, except that for 2013-2016, the 7.5% limitation still applies to taxpayers or their spouses who are 65 years or older by year-end (IRC section 213[f]). Note that payment before medical services are rendered does not accelerate the deduction absent a prepayment requirement by the service provider; moreover, credit card charges are deductible in the year charged.
Health flexible spending arrangements (FSA). The
Other deductions extended to
Tax credits extended, enhanced, or made permanent. The
* Adoption credit-a nonrefundable credit allowed for qualified adoption expenses with a maximum credit of
* Child and dependent care credit-a nonrefimdable credit made permanent by the
* Child tax credit-$1,000 per qualifying child (including stepchildren and eligible foster children), with a maximum credit of
* American opportunity tax credit-an enhanced version of the Hope Scholarship credit extended to 2017. The maximum credit for 2013 is
* Earned income credit-a refundable credit designed to encourage low-wage individuals to work. (See Revenue Procedure 2013-15 for a table [adjusted for inflation] to assist in the calculation of the allowable credit for 2013.)
In addition to the foregoing credits,
* tie nonbusiness energy property credit for consumers who purchase and install products, such as energy-efficient windows, insulation, doors, roofs, and heating and cooling equipment (IRC section 25C) and * the residential energy efficient credit under IRC section 25D for individuals who make improvements to existing residences that result in increased energy efficiency (e.g., solar, wind, geothermal heaters). Because IRC section 25C is set to expire on
Exclusion of cancellation of indebtedness income on principal residence. Cancellation of debt generally leads to income to the debtor, unless one of the statutory exclusions applies. The
Charitable contributions. The
Expiring on
Planning for Businesses
Equipment purchases-expensing (IRC section 179). If qualified equipment, including qualified real property and computer software, is put into use by
If
Equipment purchases-50% bonus depreciation (IRC section 168[k]). Bonus depreciation allows companies to write off 50% of the cost of new modified accelerated cost recovery system (MACRS) assets with useful lives of 20 years or less. The other 50% is recovered by normal depreciation. Generally, property must be placed in service by
The bonus depreciation provision expires by the year's end, unless extended by
Equipment purchases-special vehicles. Also expiring on
For example, a
Equipment purchases-qualified leasehold improvements, retail improvements, and restaurant improvements. A 15-year recovery period for qualified leasehold improvements, retail improvements, and restaurant property improvements expired on
Charitable contributions of ordinary income property (e.g., inventory). The standard rule has been that a charitable deduction equals the fair market value of the donated property, reduced by any potential gain that would have been realized if the property were sold at fair market value; however, the enhanced charitable deduction rule (which allows a larger deduction for contributions of certain inventory food for human consumption) expires on
Other extended or expiring provisions. Many other provisions of the tax code that were scheduled to expire were extended to
Noteworthy Items. The following are additional items that preparers should take note of:
* Revenue Procedure 2013-30 and 201336 IRB 173. The
Revenue Procedure 2013-30 combines existing S corporation relief procedures into one document and extends some relief provisions. In general, it expands the time for requesting relief for these late elections to three years and 75 days after the date the election was intended to be effective; however, for simple late S election requests, there is no deadline for requesting relief if certain requirements are met (see Exhibit 5).
* Reduction in S corporation recognition period for built-in gains. Prior to the passage of the
* Final
* Same-sex marriages. On
For tax years 2013 and later, same-sex spouses must file using married filing separately or joint status. For tax years 2012 and prior, same-sex spouses who filed an original tax return on or after
General Year-End Actions to Consider
Year-end tax planning considerations for business taxpayers including setting up and funding a retirement plan, delaying sales of assets with potential gains, selling securities with potential losses, writing off uncollectible accounts receivable, delaying payment of corporate dividends, electing installment sale reporting for qualified sales, and reducing year-end inventory.
Year-end tax planning considerations for individual taxpayers include donating to charities; paying billed medical expenses; making gifts of income-producing assets; taking required minimum distributions in cash or in kind; expediting casualty losses by settling with an insurance company; deferring interest income by purchasing certificates of deposit (CD) maturing after
Note that IRA contributions can be converted from a traditional IRA to a Roth (or vice versa). Such conversions can subsequently be undone; transfers must be trustee to trustee. Although conversion of a traditional IRA to a Roth IRA will cause taxable income to be recognized, its tax-saving significance upon later withdrawals should be considered. Conversion by
Due to the ever-changing tax landscape, diligent year-end planning can produce significant tax savings. There is little time left for many taxpayers to minimize their taxes through the strategies discussed above. Without Congressional action beforehand, many popular rules that apply to large segments of taxpayers are slated to expire at the end of 2013. ?
The
Copyright: | (c) 2013 New York State Society of Certified Public Accountants |
Wordcount: | 4034 |
Commitment, Ethics & Compliance: A Look at Perceptions in the SH&E Profession
Do Multiple Reporting Frameworks Enhance Financial Statement Usefulness?
Advisor News
Annuity News
Health/Employee Benefits News
Life Insurance News