Year End Tax Planning

YEAR END TAX PLANNING SEMINAR

Presented By:

Anthony J. Madonia

November 21, 2013

ANTHONY J. MADONIA Founder and President of Anthony J. Madonia &

Associates, Ltd., a law and tax firm located at the Willis Tower, 233 S. Wacker Drive – Suite 6825, Chicago, IL.

Tony is an Attorney and Certified Public Accountant who focuses in the areas of Estate Planning and Administration, All Aspects of Business Planning from Start to Finish, Corporate Law, and Taxation.

Tony has a Bachelor of Arts degree in Accounting from the University of Illinois and a Juris Doctorate from John Marshall Law School.

He teaches Estates & Trusts and Estate Planning & Drafting as an adjunct faculty member at John Marshall Law School.

He is a member of the American Bar Association, the American Association of Attorney-CPAs, and the Justinian Society of Lawyers.

He has served as Chairman of the Asset Protection Committee of the Chicago Bar Association.

FEDERAL INCOME TAX RATES

ADDITIONAL MEDICARE TAX

Starting this year, the Additional Medicare Tax increases the employee-share of Medicare tax by an additional 0.9% of covered wages in excess of certain “higher income-level” threshold amounts. $200,000 for single taxpayers $250,000 for married taxpayers filing jointly

Unlike Social Security tax, there is no cap on the amount of compensation subject to the Medicare tax.

Also applies to self-employment income.

NET INVESTMENT INCOME TAX

Starting this year, higher income taxpayers may be liable for a 3.8% Net Investment Income Tax (NII).

The NII tax on individuals equals 3.8% of the lesser of: Net investment income for the tax year or The excess, if any of:

The individuals modified adjusted gross income for the tax year, over

The threshold amount. $200,000 for single taxpayers $250,000 for married taxpayers filing jointly

Net investment income includes capital gains, dividends, interest, annuities, royalties, net rental income, and all income from a business in which the taxpayer is a passive participant.

ILLINOIS INCOME TAX RATES

The Illinois personal income tax rate is currently 5%.

Barring any future legislative action, this rate will revert to 3.75% on January 1, 2015.

The rate will drop again to 3.25% starting on January 1, 2025.

The corporate income tax rate is similar – it will stay at 9.5% until December 31, 2014, drop to 7.75% until December 31, 2024, then revert to 7.3% starting on January 1, 2025.

ALTERNATIVE MINIMUM TAX: WHEN DOES IT APPLY?

Applies when income, as adjusted for certain preference items, exceeds certain exemptions, but the rate applied to that income falls below the Alternative Minimum Tax (AMT) rate.

The AMT essentially functions as a tax leveling mechanism.

ALTERNATIVE MINIMUM TAX: RATES AND EXEMPTION AMOUNTS

Note: these exemptions are phased out for higher income taxpayers.

PERSONAL EXEMPTION PHASEOUT

You can generally claim one personal exemption for yourself, your spouse (if joint filing), and any qualifying dependents.

Each exemption reduces your taxable income.

However, beginning in 2013, higher income taxpayers will see their exemptions begin to phase out.

Reduced by 2% for each $2,500 by which AGI exceeds threshold.

PEASE LIMITATION ON ITEMIZED DEDUCTIONS

The Pease Limitation reduces the total amount of a higher-income taxpayer’s otherwise allowable itemized deductions by 3% of the amount by which AGI exceeds applicable threshold.

Amount of itemized deductions is not reduced by more than 80%.

Utilizes same thresholds as those used to determine the personal exemption phaseout.

Certain deductions – medical expenses, investment interest, casualty losses – are excluded.

ITEMIZED DEDUCTIONS SUBJECT TO “FLOORS”

Certain types of itemized deductions are subject to “floor” amounts set by law.

For these deductions, only amounts over and above the floor are deductible.

You can “bunch” two years of expenses into one year by accelerating or delaying deductible expenses so that you exceed the deduction floor and gain the tax advantage.

YEAR-END TAX PLANNING

STRATEGIES FOR INDIVIDUALS

LIFE CYCLE CHANGES IMPORTANT TO YEAR-END TAX PLANNING

STRATEGIES Change in filing status: marriage, divorce, death, etc. Birth of a child Child no longer young enough for child credit Child has outgrown “kiddie” tax on unearned income Casualty losses Changes in medical expenses Moving College and other tuition expenses Employment changes Retirement Bankruptcy Large inheritance Business successes or failures

TIMING OF INCOME AND PAYMENTS

For those taxpayers who can control when they receive income or when deductible expenses are paid, an opportunity exists to reduce tax liability by postponing income and/or accelerating deductions, particularly for taxpayers who are:

In different tax brackets in 2013 compared with 2014;

Subject to the AMT in one year and not the other;

Subject to the 3.8% NII tax in one year and not the other; or

Subject to the 0.9% Additional Medicare tax in one year but not the other.

POSTPONING INCOME AND ACCELERATING DEDUCTIONS

Postpone income until 2014 and accelerate deductions into 2013 to lower your 2013 tax bill.

May enable you to claim larger deductions, credits and other tax breaks for 2013 that are phased out over varying levels of AGI. Child tax credits High education tax credits Student loan interest

HOW TO: POSTPONE INCOME Arrange with your employer to have a bonus delayed until

2014

Delay billable services

Delay debt forgiveness income

Hold onto appreciated assets

Structure or avoid mandatory like-kind exchange treatment

Minimize retirement distributions

Take an eligible rollover distribution from a qualified retirement plan

No part of the distribution will be includible in income for 2013, but the withheld tax will be applied over the full 2013 tax year to reduce previous underpayments of estimated tax.

HOW TO: POSTPONE INCOME Postpone a conversion from a traditional IRA to a

Roth IRA

Enter into installment contracts

Hold onto U.S. Savings Bonds

Purchase qualified small business stock No tax on gain from the sale if it is purchased after

September 27, 2010 and before January 1, 2014 and is held onto for more than five years. For stock acquired outside of this period, a taxpayer may exclude 50% of gain realized.

Stock must be issued by a regular C corporation with total gross assets of $50 million or less.

HOW TO: POSTPONE INCOME Take advantage of the cancellation of indebtedness

exclusion. Taxpayers facing debt modification, a short sale, or

a foreclosure can exclude from income any cancellation of mortgage debt up to $2 million.

Must be from qualified principal residence Expires in 2013

If you become eligible to make health savings account contributions in December, you can make a full year’s worth of deductible HSA contributions for 2013. However, note that the Affordable Care Act caps

annual contributions to health FSAs at $2,500. Any salary reductions in excess of this cap will

subject the employee to tax on distributions from the health FSA.

HOW TO: POSTPONE INCOME If you are over age 70 ½, you can make a tax free

distribution of up to $100,000 from your IRA to a qualified charity before December 31, 2013. Under current law, this opportunity will not be

available for 2014. The IRA is not included in your Modified AGI, so you

may be able to reduce exposure to the new NII tax.

HOW TO: ACCELERATE DEDUCTIONS AND CREDITS

Bunch itemized deductions into 2013

Use a credit card to prepay expenses that can generate deductions for this year.

Match passive activity income and losses

Settle an insurance or damage claim in order to maximize casualty loss deduction.

Make energy saving improvements to a home, such as installing energy saving windows or a new corn stove. Credit is 10% of the cost of building materials, up to

$500. Credit is cumulative back to 2006.


Prepay state and local income taxes Helpful to use deduction now if you anticipate it could

be lost through the AMT in 2014 Can also have employer increase withholding of state

and local taxes

Prepay real estate taxes Be mindful of the AMT – real estate taxes on your

residence or other personal real estate are not deductible for AMT purposes.

However, real estate tax on rental property is deductible whether or not you are subject to the AMT.

Pay contested taxes this year while continuing to contest them next year


Utilize the plug-in elective drive motor vehicle credit Credit limited to $7,500 For 2 or 3-wheeled vehicles, cap is the lesser of

$2,500 or 10% of its cost. Eligible vehicles include:

2012-2014 Ford Focus Electric 2013 Ford Fusion Energi 2013 Ford C-MAX Energi 2011-2012 Nissan Leaf

Original use of the vehicle must start with the taxpayer.

Credit begins to phase out for a manufacturer’s vehicles when at least 200,000 of its vehicles have been sold for use in the United States.


Consider contributing appreciated securities that you have held for more than one year to a charity. You will receive a charitable deduction for the full value of

the securities and will avoid the capital gains tax that would have incurred upon sale.

If selling a significant asset, consider a charitable remainder trust. Avoids capital gains tax on the sale Retains income from investing sale proceeds Secures a charitable deduction for at least part of the value

of the asset

Prepay eligible higher education expenses to take advantage of the up-to-$4,000 above the line deduction. Can use for expenses paid in 2013 or for an academic period

beginning in 2013 or first 3 months of 2014.

ESTATE AND GIFT TAX CONSIDERATIONS

Maximum federal unified estate and gift tax rate of 40%

Inflation adjusted $5,250,000 lifetime exclusion amount for gifts and estates Projected to increase to $5,340,000 in 2014

Inflation adjusted $14,000 annual gift tax exclusion Allows taxpayers to give up to $14,000 each year to any

individual, gift tax free, and without counting toward lifetime exclusion.

Maximum Illinois inheritance tax rate is 16% Exemption, which is not indexed for inflation, is $4 million

YEAR-END TAX PLANNING

STRATEGIES FOR BUSINESSES

BONUS DEPRECIATION DEDUCTIONS

50% bonus depreciation deduction available for qualified property. Qualified property = new business equipment placed

in service by end of 2013. Consider buying equipment you plan to purchase in the

next few years now to take advantage of this deduction.

Set to expire for 2014.

Luxury car depreciation caps: Additional $8,000 first-year depreciation cap for

passenger automobiles placed into service before year-end 2013.

Scheduled to expire for 2014.

BUSINESS PROPERTY EXPENSING OPTION

Businesses should consider making expenditures that qualify for the business property expensing option. i.e. machinery, equipment

For tax years beginning in 2013, the expensing limit is $500,000 and the investment ceiling limit is $2 million. Limited amount of expensing for real property.

Deduction limit set to be drastically reduced in 2014. Expensing limit will drop to $25,000 and the beginning

of the phaseout amount will be $200,000. No expensing for real property.

OTHER BUSINESS TAX CREDITS

Work opportunity tax credit – can be used if you hire qualifying workers (such as veterans) before the end of 2013 Expiring after 2013 under current law

Research credit for qualified research expenses before the end of 2013 Expiring after 2013 under current law

Small employer health insurance credit Available to employers with no more than 25 full time

employees earning, on average, not more than $50,000 annually who contribute at least 50% of total premium cost

Employer-provided child care credit

COMMENTS OR

QUESTIONS