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INDIVIDUAL TAX ISSUESWhat Will Affect Your Return in 2014
Updated Nov. 15, 2013
What Sweeping Tax Changes Mean to You
• American Taxpayer Relief Act (ATRA) — extensivechanges that affect planning
• High-income taxpayers need to considertax-deferral options due to:
- New higher rates
- Curtailed deductions
• Middle-income taxpayers cantake advantage of extendedtax benefits
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New Tax Rates on Ordinary Income and Capital Gains
• The top tax bracket personal income tax rate increased from 35% to 39.6%.
• The top tax bracket for qualified dividend income and long-term capital gains tax rate increased from 15% to 20% (23.8% if the new net investment income applies) with the breakout below:
- Taxpayers in lower income tax brackets ($36,250 or less): 0% rate
- Taxpayers in middle income tax brackets ($36,251-$400,000): 15% rate
- Taxpayers in highest tax bracket ($400,001 and over): 20% rate
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20% Capital Gains Rate — Example
• Facts:
Single taxpayer with $420,000 in taxable income ($100,000 from capital gains)
$89,731 Tax on ordinary income (per tax tables)
• Calculating the tax on capital gains:
$ 4,000 (20% on the income in excess of $400,000)
12,000 (15% on the remaining capital gains income)
$16,000 Tax on capital gains
• $105,731 Total Tax (before 0.9% HI and 3.8% Net Investment Income Tax)
New Tax on Net Investment Income
• Affects individuals with incomeabove certain thresholds
• Applies to capital gains, interestand dividend income frominvestment assets
• May also apply to rentaland royalty income
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Alternative Minimum Tax (AMT)
• Created to prevent the wealthy from using tax loopholes to avoid payingincome tax
• How does it work?
- Re-computes taxable income by adding back certain non-taxable income and removing some deductions
- Re-computed income is then multiplied by a flat rate = AMT
• AMT is compared to regular tax and whicheverresults in the higher tax is the amount owed
• Can be very complex to calculate
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AMT – Good and Bad News
• Good news:
- A higher AMT exemption
- AMT now indexed for inflation
• Bad news:
- The income levels at which the exemptionlevel phases out were not increased
• Possible pitfall:
- Triggering the AMT when taking certaintax breaks
• AMT Exemption Amount for Tax Year 2013:
- $51,900 (Single/head of household)
- $80,800 (Married filing jointly)
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Personal Exemptions
• Phase-out of personal exemptions reinstated
• Total amount of personal exemptions for taxpayers and dependentsis reduced if the taxpayer’s adjusted gross income is greater than:
- $300,000 for married couples
- $250,000 for single taxpayers
- $275,000 head of household
- $150,000 married filing separately
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Itemized Deductions
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• There is a limitation on itemized deductions forhigh-income taxpayers
• Deductions reduced by 3% of amount by whichtaxpayer’s AGI exceeds threshold
• Reduction is limited to 80% of otherwise allowablededuction (i.e., taxpayers will receive at least 20%of itemized deductions)
• Exception for certain itemized deductions:
- Medical expenses
- Investment interest expense
- Casualty or theft losses
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Itemized Deduction Limit — Example
• Married taxpayers (filing jointly) have the following deductions:
- Medical expenses of $6,000 (post 10% AGI floor)
- State income taxes of $30,000
- Mortgage interest of $20,000
- Charitable contributions of $7,000
• AGI is $350,000
• Threshold for 2013 is $300,000
• AGI exceeds threshold by $50,000 ($350,000-$300,000)
• Result: Itemized deductions are reducedby $1,500 (3% x $50,000)
Some Tax Benefits Set to Expire
• The ATRA extended many deductions and credits until Dec. 31, 2013:
- Deduction for state and local sales taxes
- Some credits and benefits for families, such as the $1,000 child tax credit
- Exemption for cancellation of debt on a principal residence
- Tax credits for making qualified energy-saving improvementsto a personal residence
• Unclear if these benefits will be extended again
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Retirement Planning
• Higher contribution limits for 401(k)s:
- Up to $17,500 ($23,000 if you are age50 or older). Possible to qualify for anemployer match for some or allcontributions.
• All assets in non-Roth retirement accountscan be converted to a Roth IRA or Roth 401(k).
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Estate and Gift Taxes
• Estates up to $5 million now permanently exempt from estate taxand indexed for inflation in future years. For 2013, the exemptionis $5.25 million.
• Estate tax rate raised to 40%
• The “portability” law enabling a surviving spouse to make use of adeceased spouse’s unused exclusion has been made permanent.
- Example: If husband dies with estate worth $3 million, his unusedexemption amount of $2.25 million will not be lost; wife will havenew exemption amount of $7.5 million
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Charitable Contributions
• Taxpayers age 70½ and older can once againmake up to $100,000 of tax-free distributionsfrom an IRA directly to qualified charities.
• Contributions are:
- Not deductible, but the IRAdistributions are excludedfrom gross income
- Counted toward the minimumrequired distributions for theyear and may also reduce theamount of taxable SocialSecurity benefits
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Higher Education Incentives
• American Opportunity Tax Credit
- Extended through 2017
- Allows eligible taxpayers toclaim a tax credit for qualifiedpost-secondary education expenses
• Lifetime learning credit andabove-the-line deduction forqualified tuition and expenses
• Above-the-line deduction for qualified tuition and expenses
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Higher Education Incentives
• Permanent extensions of:
- $5,250 exclusion for employer-provided educational assistance
- $2,500 deduction forstudent loan interest(without a 5-year limitation)
- $2,000 maximum contributionfor education savings accounts
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Health Care Timeline
• Open enrollment in the newly created HealthInsurance Marketplace began Fall 2013
• Coverage can start as early as Jan. 1, 2014.
• Open enrollment closes March 31, 2014, andwill not open again until October 2014
• Other key provisions are scheduled to becomeeffective in the coming year
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Planning Opportunities
• Although new tax laws add complexity to the system,they also often open up new opportunities to minimizeyour tax bill.
• We can help you understand your tax situation anddetermine the best steps to address your taxchallenges and any other financial concerns.
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Copyright © 2011 American Institute of CPAs
Copyright © 2013 American Institute of CPAs
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