Year End Strategies For Tax and Wealth Planning

Year End Strategies For Tax and Wealth Planning

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Porter Keadle Moore, LLC and Monterey Wealth

Tax Landscape: January 1, 2013

Presented by: Robert Schwarzmann and Adam Polakov

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Follow us on Twitter: @PKMAdvisorsReference the Event: #YETAWP

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Tax Landscape What is the Fiscal Cliff?

Expiration of Bush Tax Cuts and Extenders ($500 billion of new taxes in 2013)

Automatic cuts in government spending ($120 billion in 2013, $1.2 Trillion over 10 yrs)

Patient Protection and Affordable Care Act (PPACA)

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Bush Tax Cuts Sunset – 12/31/2012

Marginal income tax rates return to pre-2001 levels

OverBut Not Over Over

But Not Over 2012 2013

$0 $8,700 $0 $17,400 10% 15%8,700 35,350 17,400 $70,700 15% 15%

35,350 85,650 70,700 142,700 25% 28%85,650 178,650 142,700 217,450 28% 31%

178,650 388,350 217,450 388,350 33% 36%388,350 ... 388,350 ... 35% 39.60%

Tax Brackets (2012 Dollar Amounts) Marginal RateUnmarried Filers Married Joint Filers

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Capital Gains tax rates will return to pre-2001 levels Capital gains currently taxed 0% for taxpayers in the 10 and 15% brackets and

at 15 % for all others. Increases to 10% for taxpayers in 10 and 15% brackets and 20% for all others.

(If MAGI is in excess of $250,000 MFJ ($200,000 Single), then additional 3.8% Medicare Investment Tax applies)

Qualified Dividends will be taxed at ordinary income rates Qualified Dividends are currently taxed at the same rates as capital gains Tax rate increases to 43.4% with addition of 3.8% investment income tax

The estate tax will be restored with an exemption level of $1 million and a top tax rate of 55%

Child care credit decreases to $500 from $1,000

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Return of the “marriage penalty” on jointly filed taxpayers Joint filer’s standard deduction returns to 167% of individual standard deduction

Phase-out of personal exemptions $3,900 personal exemption phased out by 2% for each $2,500 by which a joint

filer’s exceeds $261,650 ($174,450 for single filers) completely phasing out at $384,150 ($296,950 for single filers)

Limitations on the deductibility of itemized deductions Subject to a phase-out of 3% of the amount by which the taxpayer’s AGI exceeds

a certain threshold (estimated to be 174,450 for all taxpayers) Increase to marginal tax rate of 1.2 – 1.5% for higher income taxpayers

Reduction in maximum Coverdell Savings account contribution from $2,000 to $500

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Expiring Extenders – 12/31/2012

End of accelerated “50% bonus” depreciation deductions

Section 179 expense limitation reverts back to $25,000 on $200,000 asset additions (currently $139,000; $560,000)

New tangible property regulations become effective January 1, 2014Provides new guidance on repairs and maintenance,

capitalization policies, and building components

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Expiring Extenders – 12/31/2012

Alternative Minimum Tax (AMT) patch expiresExemption for joint filers falls to $45,000 from

$74,450Common AMT adjustments: State taxes, medical

expenses, etc.Households subject to AMT will increase from 4.5

million in 2011 to over 30 million in 2012

The 2% FICA payroll tax cut is expiringEmployee social security reverts back to 6.2%

from 4.2%

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Fiscal Cliff Proposals President Obama’s December 2012 Fiscal Cliff Tax Proposal

Increase long term capital gains rate to 20%

Reinstate the top tax rate to 39.6%, but maintain Bush era rates for lower income taxpayers

Tax dividends at ordinary income tax rates

Limit benefits of itemized deductions for higher income earners

Supports Federal Estate Tax of 45% with an exemption of $3.5 million

Repeal the Alternative Minimum Tax; Enact the “Buffett Rule” which would impose a minimum 30% tax on taxpayers with an AGI > $1 million

Reduce the corporate tax rate from 35% to 28% while removing deductions/loopholes

Is the tax-exempt status of municipal interest on the chopping block?

High income earners could see limitations on contributions to deferred compensation plans (401-K’s and SEPs)

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Your new Health Care System

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Affordable Care Act – New Taxes Investment Income Tax

3.8% Medicare Tax on Investment Income Impacts individual taxpayers with AGI > $200,000 and joint filers

with AGI > $250,000

How does the Act define Investment Income Dividend Income Interest Income Rental Income Royalties Short and Long Term Capital Gains Passive Income from K-1’s where the taxpayer doesn’t materially

participate Gain from the sale of a primary residence (exceeding exclusions) Gain from the sale of a 2nd home

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Affordable Care Act – New TaxesCertain Income is exempt from the Act

Tax-exempt Income on municipal bonds and securities

Payouts from Regular or Roth IRAsPayouts from 401(k) or pensionSocial Security IncomeLife Insurance ProceedsPass-through business income where the

taxpayer is a material participant

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Affordable Care Act – New Taxes Computation

The new Medicare tax is computed as 3.8% on the lesser of 1) Investment Income or2) the excess of AGI over the income threshold

Example 1 A joint filer has $400,000 of AGI including $240,000 of W-2

wages and $160,000 of investment income Because the excess of AGI over the income threshold

($400,000 -$250,000) of $150,000 is less than investment income of $160,000, the tax is based on excess AGI.

Additional Medicare tax is $5,700 ($150,000 x 3.8%)

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Affordable Care Act – New Taxes Example 2

A single filer has W-2 wages of $260,000 and dividend income of $100,000. AGI equals $360,000.

Because the excess of AGI over the income threshold ($360,000 - $200,000) of $160,000 is greater than investment income of $100,000, the tax is based on investment income.

Additional Medicare tax is $3,800 ($100,000 x 3.8%)

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Affordable Care Act – New Taxes Example 3

A joint filer purchased a home 30 years ago in New York City for $250,000 and sells it in 2013 for $2 million. The joint filer also has W-2 wages of $100,000.

Investment Income is $1,250,000 ($2 million less $250,000 cost basis less $500,000 exclusion)

Because the excess of AGI over the income threshold ($1,350,000 - $250,000) of $1,100,000 is less than investment income of $1,250,000, the tax is based on AGI

Additional Medicare tax is $41,800 ($1,100,000 x 3.8%)

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Affordable Care Act – New Taxes Payroll Taxes

.9% Medicare Hospital Insurance Tax on Ordinary Income Impacts individual taxpayers with Ordinary Income >

$200,000 and joint filers with Ordinary Income > $250,000

Assessed on the employee portion of Medicare

How does the Act define Ordinary Income? W-2 wages Pass-through business income on which taxpayer is

remitting self employment taxes (Partnership Schedule K-1, Schedule C business income)

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Affordable Care Act – New TaxesWithholding

Employers are required to withhold additional Medicare Tax

Employers are not required to consider a spouse’s wages or whether the employee earns wages at a second job

Because tax on “employee portion” of Medicare, self employed persons will not be able to deduct one half of this tax from AGI

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Affordable Care Act – New Taxes Example

A joint filer earns $375,000 in W-2 wages and $150,000 of pass-through income from a business that is subject to self employment taxes

Ordinary Income subject to the .9% Medicare tax is $275,000 ($525,000 ordinary income less $250,000 exclusion)

Additional Medicare tax is $2,475 ($275,000 x .9%)

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Affordable Care Act – New Taxes Medical Expenses

Itemized Deduction The medical expense “floor” increases from 7.5% to

10% of AGI The 7.5% floor is retained for taxpayers over the age

of 65 until December 31, 2016

Healthcare Flexible Spending Account contributions limited to $2,500 (pre-tax)

Penalty for nonqualified distributions from Health Savings Accounts increases from 10% to 20%

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Affordable Care Act – New Taxes Requires employer W-2 reporting of

value of health benefits provided to employeesEmployers filing less than 250 W-2’s are exempt

from this requirementEffective for the 2012 tax year (W-2s issued in

January 2013)

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Ron Swanson on taxes…

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Employer Shared Responsibility Mandate

Employers will not be required to provide health insurance

Effective January 1, 2014, penalties will be assessed on large corporations if health coverage is not offered to all full-time employees An employer has 75 full time employees (FTE’s) One or more employees are not covered by the group policy and the

employee(s) receive health coverage assistance The tax would be based on 45 employees (the first 30 FTE’s are exempted) For each month the employee is not covered, the tax is computed as

follows: 1/12 x $2,000 or $167/month per employee 45 employees x $167 = $7,500 tax per month Annual excise tax of $90,000 (not deductible)

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An Employer may incur a penalty if they offer health care coverage to all FTE’s, but the coverage is not affordable

Failure to provide “minimum essential coverage”

The employee contribution (premium) is > 9.5% of the employee’s household income or

The large employer covers less than 60% of the total cost of benefits

One Tier II FTE has been certified as purchasing health insurance through a state sponsored exchange and qualifies for a premium tax credit

State Exchanges will offer 4 levels of health insurance plans - Bronze, Silver, Gold, and Platinum

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What is a Tier II Employee? Taxpayers with household income between 138% and 400% of Federal Poverty Level (FPL)

FPL: Single Family income between $15,900 and $46,100 FPL: Four member family income between $32,800 and $95,200

The penalty is computed monthly on non-covered employees:

1/12 x $3,000 or $250/month per employee receiving a premium credit Penalty is capped at the penalty the employer would have owed had no health care been

provided Tax is only on the # of employees who purchased insurance from a State Exchange and

received a tax credit, not on all FTE’s

Premium tax credits are refundable for individuals with household income between 138% and 400% of FPL (Tier II)

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Tier II employees offered “minimum essential coverage” will NOT be eligible for premium tax credits for insurance purchased through an exchange

Household Income is defined as the total adjusted gross income of all members of the household plus tax-exempt interest incomeHow will an employer know the household income

of its employees?

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Failure to offer affordable coverage to Tier I employees will not trigger a penalty Tier I provides automatic Medicaid eligibility to

individuals who have an adjusted FPL of 138% or lower Single member household income less than $15,900 Four member household income less than $32,800

Failure to offer affordable coverage to Tier III employees will not trigger a penalty Tier III reflects households above 400% FPL Single member household income greater than $46,100 Four member household income greater than $95,200 Tier III employees are not eligible for premium tax credits

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What are your options as an employer?

PPACA primarily impacts companies employing low-wage workers earning 138% to 400% of FPL

Drop health care coverage and remit penalties to IRS, however, it is very likely that penalties will increase in the future

Re-structure workforce and limit future growth of business to get under the 50 FTE threshold and avoid penalties Watch out for the rules on part-time employees (total # of part-time hours / 120 = full-

time equivalent employees) Again, no penalties on part-time workers (< 30 hrs per week)

Consider a high-deductible plan with affordable premiums (should be able to avoid penalties)

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Mandatory Health Care Coverage

Status of State Sponsored Insurance Exchanges Less than 20 states have made “active” progress Georgia has formally declined to create an exchange Blueprint to HHS by December 14, 2012 (3rd extension) Must be operational by January 1, 2014

Role of the State Sponsored Exchanges Regulate insurers, enforce price controls, verify eligibility for premium tax

credit Penalize businesses that don’t insure employees Police compliance with the individual mandate

HHS can impose a federally run exchange on states that fail to meet certain thresholds by January 1, 2013

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Provide information to each employee regarding their rights, benefits, and health care coverage

Effective March 1, 2013, all employers must provide the following information to employees:

Written notice concerning the existence of an exchange including information on services and contact info

The employee’s potential eligibility for premium credits and cost sharing subsidies if the employer does not provide “minimum essential coverage”

Certification of information provided to HHS on each employee

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Effective January 1, 2014, all employers will be required to report the following to HHS: Certification whether “minimum essential coverage” was

provided to all full-time employees under an employer sponsored plan

Information on monthly premiums, dates of coverage, waiting period, employer’s share of covered expenses, and information on enrollment categories

Number of full-time employees including name, address, and social security # on all FTE’s

IRS working in coordination with HHS

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Premium Tax Credits and Federal Exchanges

Penalties for not maintaining “minimum essential coverage” are contingent upon premium tax credits received in conjunction with health coverage purchased in a State Sponsored Exchange

The Act is unambiguous that Premium Tax Credits are only available in a State-sponsored exchange

“…the taxpayer is covered by a qualified health plan and…enrolled in an Exchange established by the State under Section 1311 of the Patient Protection and Affordable Care Act…”

Can a State block penalties by refusing to create a health exchange?

Could millions of Americans be forced to buy insurance (or pay a penalty) but not be eligible for a tax credit?

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Premium Tax Credits and Federal Exchanges

Recent IRS ruling (May 2012) expands legislative language to allow subsidies (tax credits) for health coverage purchased in federal exchanges

Is this rule contrary to congressional intent? Is the IRS writing laws?The Act does not provide for premium tax credits

issued in conjunction with the purchase of health insurance from a federal exchange

Likely to be challenged in court as unconstitutionalSupporters of the Act claim this is simply a

“drafting error”

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Individual Mandate Effective January 1, 2014, all U.S. residents

are required to maintain minimum essential coverage unless they meet one of the following exceptions: Incarcerated individuals Undocumented aliens Individuals who meet certain hardship

conditions and are unable to afford coverage Individuals below the tax filing threshold Members of Indian tribes

The penalty will be paid as a federal tax liability on income tax returns

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Individual Mandate Annual penalty for not having minimum

essential coverage will be the greater of

A flat dollar amount or $95 in 2014, $325 in 2015, and $695 in 2016

A percentage of the individual’s taxable income over a certain threshold Phased in at 1% in 2015, 2% in 2015, and 2.5% in

2016

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Other Provisions in the Act $500,000 compensation deduction limit for health

insurance insurers No tax deduction allowed on total compensation

remitted to an individual employed by a health insurance company in excess of $500,000

Small Business Health Care Credit Credit is available up to 35% of health insurance

premiums through 2013 50% credit for 2014-2015 (if the small business purchases

health care through an exchange) Maximum eligibility for the credit is for employers with

10 or fewer workers with average wages of $25,000 or less

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Other Provisions in the Act Excise Tax on Medical Device Manufacturers

For sales after December 31, 2012, a 2.3% excise tax will be applied to gross revenues of taxable medical devices

Why? Excise tax is applicable regardless of whether Company

generates a profit Significant increase in effective tax rate of medical device

manufacturers Layoffs already announced for 2013 and forward

Manufacturers scaling back plans to expand operations Acceleration of estimated payments for “large”

corporations

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Questions?

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Robert SchwarzmannTax Partner404-420-5795

[email protected]

Contact Information

Adam PolakovTax Principal404-420-5974

[email protected]

Documents

Year End Strategies For Tax and Wealth Planning