Tax Changes 2013 / 2014 and Their Impact

LONG-TERM RELATIONSHIPS ARE ALL ABOUT DEDICATION

Tax Changes and Their Affect

October 22, 2013

Expiring Provisions At

December 31, 2013 Businesses:

50% Bonus depreciation on asset purchases

Section 179 Expense reverts to $125K from $500K of asset purchases

S Corporation built-in-gain tax recognition period current 5 years reverts to 10 years

Expiring Provisions at December 31, 2013 (Continued)

Elementary and Secondary School Teacher Expense $250

Individual:

Qualified Tuition Deduction

Individual:

Sales Tax Deduction

Tax Free Distributions to IRA for Charitable purposes

Expiring Provisions at December 31, 2013 (Continued)

American Taxpayer Relief Act of 2012(Passed January 1, 2013)

American Taxpayer Relief Act of 2012 (Continued)

Highest Tax Bracket increased to 39.6%

Increased Capital Gain Rate to 20% (still some at 15%)

Qualified Dividends remain at 15% for all taxpayers

American Taxpayer Relief Act of 2012 (Continued)

Alternative Minimum Tax Exemption made permanent

Revival of Itemized Deduction Phaseout

Revival of Personal Exemption Phaseout

Tax Brackets

Tax Brackets (Continued)The 10, 15, 25, 28, 33, and 35% brackets remain after 2012.

Tax Brackets (Continued)

An additional 39.6% bracket began in 2013

Single Individuals

If taxable income is: The tax will be:

Not over $8,925 10% of taxable income

Over $8,925 but not over $36,250 $892.50 plus 15% of the excess over $8,925

Over $36,250 but not over $87,850 $4,991.25 plus 25% of the excess over $36,250


Over $183,250 to $398,350 $44,603.25 plus 33% of the excess over $398,350

Over $398,350 to $400,000 $115,586.25 plus 35% of the excess over $398,350

Over $400,000 $116,163.75 plus 39.6% of the excess over $400,000

Married Couples Filing Jointly

If taxable income is: The tax will be:

Not over $17,850 10% of taxable income

Over $17,850 but not over $72,500 $1,785 plus 15% of the excess over $17,850





Over $450,000 $125,846 plus 39.6% over $450,000

Capital Gain Rates

The 20% rate will apply to the extent that income exceeds the thresholds set for the 39.6% bracket

$400K Single

$450K Married - Joint

Capital Gain Rates (Continued)

The 15% rate applies for taxable incomes below the 39.6% threshold.

A 0% rate remains to the extent taxable income remains below the 15% bracket.

Threshold

Joe and Jane TaxpayerJoe and Jane Taxpayer

Capital Gain Tax ExampleCapital Gain Tax Example

Alternative Minimum Tax (AMT)Alternative Minimum Tax (AMT)

Exemptions made permanent 2013

2013 Exemptions $51,900 for Single Individuals$80,750 for Married filing Jointly

Adjusted each year for Inflation

Itemized Deduction Phaseout

Begins at certain levels of Adjusted Gross Income

$300K Married Filing Jointly

$275K Head of Household

$250K Single Individuals

Itemized Deduction PhaseoutItemized Deduction Phaseout

(Continued)(Continued)

Phaseout reduces itemized deductions by 3% of the excess over the threshold

Itemized Deductions lost CANNOT be more than 80%

Deductible medical expense, investment interest, and casualty losses are excluded

Personal Exemption Phaseout Begins at certain levels of adjusted gross income

$300K Married Filing Jointly$275K Head of Household$250K Single Individuals

Exemptions reduced by 2% for each $2,500 in excess of the threshold

Other Notable Items Child Tax Credit:

For dependents under

age 17 at the end of

the year $1,000 Credit Extended

Permanently Income has to be below

certain threshold to obtain

• Enhanced HOPE education credit continues through 2017 (American Opportunity Credit).

• $2,500 credit per year per student(100% of first $2k paid; 25% of next $2k paid).

• Covers all four years of college.

• After four years, Lifetime Learning Credit applies.

• Credit phase-outs:

– Joint filers – adjusted gross income between $160k and $180k.

– Other filers – adjusted gross income between $80k and $90k.

Education Credits

• Planning Tip – Pay $4k of tuition

from non-529 Plan accounts in

order to maximize credit (no

payments from 529 Plans can be

used for the credit)

Education Credits (Continued)

Basis Reporting

Effective 2011

For every broker that files a 1099B for gross proceeds:

Must include cost basis of security soldCovers purchases beginning 2011What about prior years?All reporting on IRS Form 8949

1099 Reporting for all vendors paid > $600 repealed April 2011

Still Required to be issued for services paid > $600Questions on tax returnsReporting Trap

New Jersey Tax Rates

Note: Below $150k - various rates ranging from 1.4% - 5.525%

Taxable Incomes: 2009 Since

2010

$150K - $500K 6.37% 6.37%

$400K - $500K 8.00% 6.37%

$500K - $1 Million 10.25% 8.97%

>$1 Million 10.75% 8.97%

New Jersey Items

Alternative Business Loss Carry forward

Categories:

• Net Loss from Business (Schedule C)

• Net Loss from Rental, Royalty, Patent and Copyrights

• Net Loss from Partnerships

• Net Loss from S Corporations

New Jersey Items (Continued)

• Began with 2012 tax year - Separate calculation

• Calculated by netting income/loss in each category

• Net result from each category is netted to determine Alternative Business Loss

• Losses carried forward 20 years following the taxable year of the loss

• Loss carried forward offsets future income from the category created

• Tax still paid with categories of net income each year

Alternative Business Loss Carry Forward

Losses phase-in to a maximum of 50%

YEAR AMOUNT

2012 10%

2013 20%

2014 30%

2015 40%

2016 and after 50%

1031 Exchanges

No gain or loss on trade; business or investment property exchanged for like-kind property, not just real estate

Not available for primary residences

1031 Exchanges (Continued)

LIKE-KIND EXAMPLES

• Apartment for Office - Yes

• Land for Building - Yes

• Domestic - Yes

• Foreign - No

• Partnership Shares - No

• Stocks - No


1031 PROCEDURE

• Selling Contract:

– “Seller intends to utilize IRC 1031 to defer gain on sale and has engaged Curchin 1031 Exchange as qualified intermediary”

• At Closing: Proceeds (including deposit)

– To independent intermediary within five days


Independent intermediary cannot be:

Lawyer Accountant Realtor

Within 2 years prior to closing


45-day identification period:

200%

Up to 200% of sale price of property sold

Up to 3 propertiesLetter, e-mail or faxto qualified intermediary


180-day title closing

deadline – no exceptions –

or filing date of tax return

(if prior to 180 days)

Obamacare Funding Provisions

Medicare Contribution Tax

• Begins in 2013

• Additional 3.8% tax on Net Investment Income (NII)

• Adjusted gross income thresholds:

– MFJ - $250k

– Others - $200k

Medicare Contribution Tax (Continued)

Effect on tax rates:

2013 Including Medicare Tax*

Ordinary Income 39.6% 43.4%

Qualified Dividends 15.0% 18.8%

Capital Gains 20.0% 23.8%

* AGI >$250K MFJ/$200K others

Net investment income includes:

• Interest, dividend, annuity, royalty and rent income.

• Capital gains/losses.

• Allowable deductions against income items/net gains.

• Taxable gain on sale of primary residence.

• Net gains from passive activities.


Net investment income - not included:

• Taxable retirement plan distributions

• Gain excluded on sale of primary residence

• Trade\business income

• Tax-exempt income



Other issues/planning:

• Estates and trusts are subject to 3.8% tax.

• Invest more in tax-exempt bonds?

• Convert traditional IRA to Roth IRA?


Examples:

• For 2013, a single taxpayer has NII of $50k and MAGI of $220k.

Medicare tax paid on $20k (amount in excess of threshold).

Tax would be $760 ($20k x 3.8%).

• For 2013, married taxpayers have NII of $75k and MAGI of $230k.

No Medicare tax since the MAGI does not exceed the threshold.

• NII will be taxed on the full amount if MAGI exceeds the threshold amount by at least the amount of NII.

Medicare Tax on Earned Income

• Also begins in 2013

• Imposes tax of .9% of wages in excess:

• $250K MFJ

• $200K Others

• $125K MFS

• Employers are required to withhold

• Withholding begins at $200K for all taxpayers

• Individuals responsible if tax not withheld

• Net Earnings from Self-Employment also subject to tax

• S Corporation income is not earned income-not subject to tax

• Calculation of additional tax/refund on personal tax return

• Focus of the tax is on Earned Income not AGI

Medicare Tax on Earned Income (Continued)


Examples:

• Taxpayer wages = $300k

• Employer withholds .9% on excess over $250k or $450

• If married and spouse has additional earned income, it would be paid with the tax return filing

• If married and spouse has negative earned income, a refund results

• Taxpayer has K-1 Partnership income of $300k

• Taxpayer has ($50k) loss from sole -proprietorship

• Not subject to .9% - not in excess of $250k


Increased AGI threshold for claiming medical on Schedule A

From 7.5% to 10%

Remains at 7.5% for those age 65and older until 2016

New Jersey threshold remains at 2%

Mr. and Mrs. BigMr. and Mrs. Big

2012 vs. 20132012 vs. 2013

Tax ImpactTax Impact

Tax Planning Going Forward

Income and Expense Shifting

Usually Defer Income

Capital GainsBonusesInstallment SalesOther Income

Income and Expense Shifting (Continued)

Usually accelerate expenses: Medical State Estimated Payments Real Estate taxes Misc. Itemized deductions

Income and Expense Shifting (Continued)

Maybe the “Usual” doesn’t work with many variables to consider:

3.8% Medicare Contribution Tax 10% AGI Limitation for medical

expenses Alternative Minimum Tax 0%, 15%, or 20% Capital Gains

Rates New Jersey Tax Impact

Roth IRA Conversion

• Beginning in 2010, conversions allowed with no income limits.

• For 2010 only, conversions were recognized ratably in 2011 and 2012 unless election made to recognize in 2010.

• For 2011 and after, tax paid in year of conversion

• Low values spurred conversion opportunity.

Roth IRA Benefits

• Value not included in required minimum distribution calculation.

• Not taxed when distributed as long as held for five years.

• Establishes a legacy for future beneficiary.

• Downside: Paying tax on value upon conversion.

Roth IRA Legacy Example

• Husband converts regular IRA to Roth at age 65.

• His death occurs at age 73 (Roth held 8 yrs.).

• Wife inherits at age 70 and dies at age 86 (Roth held 16 yrs.).

• Daughter inherits at age 55 and must begin minimum distributions.

• Daughter life expectancy is 29 yrs.

• Roth legacy potential = 53 years (8 + 16 + 29).

EstatesEstates

Federal Estate Exemption for 2013 $5,250,000 Lifetime gift exemption SAME AMOUNTTop tax rate 40%Yearly gift allowance for 2013 $14,000

See Handout of Historical Exemptions and Rates

Lifetime GiftsLifetime Gifts

• Removes gifted assets from estate now

• Removes future growth and income associated with those assets

• Minimizes estate taxes

• Shifts income tax associated with the gifted asset to the donee

Other Gift Considerations

Donor should make sure they have enough assets to live on

Annual gift exclusion excludes payments made directly to qualifying educational organizations for tuition and medical expenses paid directly to providers

Exemption Portability

Allows unused exemption of first spouse to die to be passed to survivor

Exemption Portability (Continued)

Regardless of estate value, an estate return MUST be filed to elect portability of the unused exemption

This means $10.5 Million of assets can move to heirs Federal Estate TAX FREE

New Jersey Estates

Exemption $675,000

Federal vs. New Jersey Estates

•Difference in Exemptions

•Possibility exists to pay NJ Estate Tax and zero Federal Estate Tax

What to Do???

• Reduce Estate size

• Move out of New Jersey

• See Attachment titled “Florida Residency Checklist”

DISCUSSIONS AND QUESTIONS

LONG-TERM RELATIONSHIPS ARE ALL ABOUT DEDICATION

Economy & Finance

Tax Changes 2013 / 2014 and Their Impact