THOMAS, HEAD & GREISENo c

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1 THOMAS, HEAD & GREISENo c Kevin E. Branson, CPA John A. Letourneau, CPA Debra K. Mason, CPA/CFF, CFE Erich R. Lamirand, CPA Cindy L. Hulquist, CPA CERTIFIED PUBLIC ACCOUNTANTS Ronald E. Greisen, CPA/ABWCFF 2013 November Year-End Tax Planning: Personal Tax Considerations Dear Clients & Friends: As January 1, 2014 gets closer, year-end tax planning considerations should be starting to take shape. New tax legislation has brought greater certainty to year-end planning, but has also created new challenges. The number of changes made to the Tax Code and the opportunities these changes bring may seem overwhelming. However, early planning will help you to maximize your potential tax savings and minimize your tax liability. This letter is intended to be a mile-high view of some key year-end tax planning strategies. Changes for 2013 and beyond In 2012, year-end planning was complicated by the great uncertainty over the fate of the Bushera tax cuts. For more than 10 years, individuals had enjoyed lower income tax rates, but these rates were scheduled to expire after Moreover, many tax credits and deductions that had been made more generous were also set to expire after In January 2013, Congress passed the American Taxpayer Relief Act of 2012, which made permanent many, but not all, of the Bush-era tax cuts and also some tax benefits enacted during the Obama administration. Congress also permanently "patched" the alternative minimum tax (AMT) to prevent its encroachment on middle income taxpayers. The result is much greater certainty in year-end tax planning for 2013 because we know what the individual tax rates are in 2014, how many tax credits and deductions are structured, and much more. Of course, there are always complexities in the Tax Code. In 2013, two new Medicare taxes kicked-in (a 3.8 percent net investment income (Nil) surtax and a 0.9 percent Additional Medicare Tax). In addition, the U.S. Supreme Court ruled that the federal government s denial of recognition of same-sex marriage was unconstitutional, opening the door to allowing married same-sex couples to file joint federal tax returns and take advantage of other tax benefits available to married couples. Beginning in 2014, some of the most far reaching provisions of the Affordable Care Act will become effective: the individual mandate, the start of Marketplaces to obtain insurance and a special tax credit to help offset the cost of insurance. Planning for expiring tax incentives First, do not lose the benefit of some generous, but temporary tax incentives that are available in 2013 but may not be in Are you planning to purchase a big-ticket item such as a new car or boat? The state and local sales tax deduction (available in lieu of the deduction for state and local income taxes) is scheduled to expire after 2013, and you may want to accelerate that purchase to take advantage of the tax break. A valuable tax credit for making certain energy efficient home improvements, including windows and heating and cooling systems, and a deduction for teachers classroom expenses are also scheduled to expire after These are just some of many incentives that will sunset after 2013 unless extended by Congress. The window for maximizing your tax savings for 2013 is closing. Please contact our office for more details. T.(907) F.(907) West Benson Blvd. Suite400, Anchorage, Alaska I

2 Planning for new taxes and rates Some individuals may be surprised that they owe additional taxes in 2013, even with the extension of the Bush-era tax cuts. Three new taxes are in effect for 2013: the Nil surtax, the Additional Medicare Tax and a revived 39.6 percent tax bracket for higher income individuals. The 3.8-percent Nil surtax very broadly applies to individuals, estates and trusts that have certain investment income above set threshold amounts. These amounts include a $250,000 threshold for married couples filing jointly; $200,000 for single fliers. One strategy to consider is to keep, if possible, income below the threshold levels for the Nil surtax by spreading income out over a number of years or finding offsetting above-the-line deductions. If you are considering the sale of your home, and the proceeds will exceed the home sale exclusion, please contact our office so we can discuss any possible Nil surtax. The Additional Medicare Tax applies to wages and self-employment income above threshold amounts including $250,000 for married couples filing joint returns and $200,000 for single individuals. If you have not already reviewed your income tax withholding for 2013, now is the time to do it. One way to reduce the sting of any Additional Medicare Tax liability is to withhold an additional amount of income tax. As discussed, ATRA extended the Bush-era tax rates for middle and lower income individuals. ATRA also revived the 39.6 percent top tax rate. For 2013, the starting points for the 39.6 percent bracket, for 2013 are 450,000 for married couples filing jointly and surviving spouses, $425,000 for heads of households, $400,000 for single fliers, and $225,000 for married couples filing separately. ATRA also revived the personal exemption phase-out and the limitation on itemized deductions for higher income individuals. Starting in 2013, ATRA also sets the top rate for capital gains and dividends to 20 percent. This top rate aligns itself with the levels at with the new 39.6 percent income tax rate bracket starts: capital gains and dividends to the extent they would be otherwise taxed at the 39.6 percent rate as marginal ordinary income will be taxed at the 20 percent rate. ATRA did not change the application of ordinary income rates to short-term capital gains. However, individuals should plan for the possibility of being subject to a higher top rate (39.6 percent). Planning for health care chanqes Before year-end, individuals need to review how the Affordable Care Act will impact them. The Affordable Care Act brings a sea-change to our traditional image of health insurance. The law requires individuals, unless exempt, to either carry minimum essential health care coverage or make a shared responsibility payment (also known as a penalty). Most employer-sponsored health insurance is deemed to be minimum essential coverage, as is coverage provided by Medicare, Medicaid, and other government programs. Self-employed individuals and small business owners should revisit their health insurance coverage, if they have coverage, before year-end and weigh the benefits and costs of obtaining coverage in a public Marketplace (or a private insurance exchange) for themselves and their employees. Small businesses may be eligible for a tax credit to help pay for health insurance. Individuals may qualify for a premium assistance tax credit, which is refundable and payable in advance, to offset the cost of coverage. Please contact our office for more details about the Marketplaces, and health insurance coverage for small businesses and individuals. Individuals with health flexible spending accounts (FSAs) and similar arrangements should take a look at their spending habits for 2013 and predict how they will use these tax-favored funds in the future. In 2013, the maximum salary-reduction contribution to a health FSA is $2,500. Remember that health FSAs have strict "use it or lose it" rules, and the cost of over-the-counter Members of Western Association of Accounting Firms Associate Offices in: Bellevue, Chico, Colusa, Eugene, Fresno, Laguna Hills, Palo Alto, Pasadena, Phoenix, Pleasanton, Portland, Rancho Cucamonga, Redding, Reno, San Francisco, and Westlake

3 drugs cannot be reimbursed with health FSA dollars unless you obtain a prescription (there are some exceptions). Individuals who itemize their deductions also need to keep in mind the 10 percent floor for qualified medical expenses. This change took effect at the beginning of It means that you can only claim deductions for medical expenses when they reach 10 percent of adjusted gross income (for regular tax purposes and for alternative minimum tax purposes). There is a temporary exception for individuals over age 65 for regular tax purposes. Planning for gifts Gift-giving is often overlooked as a year-end planning strategy. For 2013, individuals can make tax-free gifts (no tax consequences for the giver or the recipient) of up to $14,000 to any individual. Married couples may "split" their gifts to each recipient, which effectively raises the tax-free gift to $28,000. Gifts between spouses are always tax-free unless one spouse is not a U.S. citizen. In that case, the first $143,000 in gifts made in 2013 are tax-free. There are special rules for gifts made for medical care and education that can be a valuable component of a year-end tax strategy, especially for individuals who want to help a family member of friend. Monetary gifts given directly to a college to pay tuition or to a medical service provider are tax-free to the person making the gift and the person benefitting from education or medical care. Gifts to charity also are frequently made at yearend. Through the end of 2013, taxpayers age 70 ½ and older can make a tax-free distribution from individual retirement accounts to a charity. The maximum distribution is $100,000. Individuals taking this option cannot claim a deduction for the charitable gift. Planninq for retirement savings Year-end is a good time to review if your retirement savings plans and tax strategies complement each other. For 2013, the maximum amount of contributions that can be made to an IRA is $5,500, with a $1,000 catch-up amount allowed for individuals over age 50. Keep in mind that the maximum amount that can be contributed to a Roth IRA begins to decrease once a taxpayer s adjusted gross income crosses a certain threshold. For example, married couples filing jointly will begin to see their contributions begin to phase out when their AGI is $178,000. Once their AGI reaches $188,000 or more, they can no longer contribute to a Roth IRA. For single filers the corresponding income thresholds for 2013 are $112,000 and $127,000. Please note that 2013 contributions, for tax purposes, may be made until April 15, Traditional IRAs and Roth IRA.s are very different savings vehicles. A traditional IRA or Roth IRA set up years ago may not be the best savings vehicle today or for the immediate future if employment and other personal circumstances have changed. Some individuals may be contemplating rolling over a workplace retirement plan into an IRA. Very complex rules apply in these situations and rollovers should be carefully planned. The same is true in converting a traditional IRA to a Roth IRA and vice-versa. Every individual has unique goals for retirement savings and no one size fits all. Please contact our office for a more detailed discussion of your retirement plans. We have reviewed only some of the many yearend tax planning strategies that could help you minimize your 2013 tax bill and maximize savings. Please contact our office to schedule an appointment to personalize your 2013 year-end tax planning. ~ww.th.qcpa.com Members of Western Association of Accounting Firms Associate Offices in: Bellevue, Chico, Colusa, Eugene, Fresno, Laguna Hills, Palo Alto, Pasadena, Phoenix, Pleasanton, Pot[land, Rancho Cucamonga, Redding, Reno, San Francisco, and Westlake T.(907) F.(907) t 1400 West Benson Blvd. Suite400, Anchorage, Alaska I

4 INSIDE TH&G I~ I~ I~ I, Our staff attended the following classes for Continuing Professional Education (CPE) credit: AKCPA Complete Guide to Depreciation - Staff members attended this class that provided an in-depth analysis of the latest cases and rulings involving depreciation and amortization issues and how they impact clients, along with useful planning opportunities. Additional information was given on how to correctly handle depreciation on purchases / trade-ins of business vehicles and how to account for a change in the use of an asset. They also reviewed detailed coverage of the greatly increased 179 expense election and how to maximize its use. Attendees: Jane Anderson; Jeffrey Jackson; Ben Persinger; and Joseph Toussant, CPA AKCPA PIGS & PALS - Deciphering the Passive Loss Rules - Staff members attended a workshop that provided a comprehensive overview of the Passive Activity Loss (PAL) rules. Some key issues included understanding the PAL re-characterization rules, rentals of non-depreciable properties, rentals involving 7 days or less on average, identical ownership and insubstantiality tests, identifying if PAL rules apply to business sub-letting excess space, and sales of substantially appreciated rental properties. Attendees: Kevin Branson, CPA; Thomas Hartshorn, CPA, EA; Jeffrey Jackson; Louanne Lum, CPA; and Joseph Toussant, CPA AKCPA Tax Advisors Update - Staff members reviewed information on key federal tax developments, including the latest information on proposed federal tax legislation. They also reviewed IRS pronouncements, treasury regulations and court cases. Additional class topics included were practical tax planning tips for individuals and businesses, important estate and gift, tax-exempt, payroll tax, and other federal developments. Attendees: Kevin Branson, CPA; Jon Brewer, CPA; Cindy Hulquist, CPA; Audrey Lance, CPA; Louanne Lum, CPA; and Melanie O Rourke Members of Western Association of Accounting Firms Associate Offices in: Boise, Chico, Denver, Eugene, Fresno, Klamath Falls, LaJolla, Medford, Ogden, Oroville, Ca., Pasadena, Phoenix, Pleasanton, Portland, Rancho Cucarnonga, Redding, San Francisco, San Jose, San Mateo, and Seattle

5 THOMAS, HEAD & GREISENo c CERTIFIED PUBLIC ACCOUNTANTS TM November 2013 s you approach retirement age, you must Adecide whether to begin taking reduced social security benefits early or wait until full benefit retirement age (FBRA), or even later. In many cases, this decision will depend on factors other than trying to receive the greatest lifetime benefit from social security. Remember the break-even point to make up for the years of that while you have the option of receiving payments that were not received. social security benefits as early as age 62, the eligibility age for Medicare remains at 65. Example: Receiving social security benefits So, although you may be able to replace a at age 62 versus the FBRA. sufficient amount of your earned income with social security benefits beginning at age 62, you may not be able to adequately replace your employer-provided health insurance. Even if you have sufficient funds to live on without considering social security, many people prefer to begin receiving benefits as soon as possible. For 2013, the benefits at age 62 are reduced by 25% of what they would b.e at age 66 (i.e., the FBRA); but, you will receive more social security checks if benefits are drawn early. In addition, drawing early social security benefits may allow you to leave taxdeferred retirement accounts untouched and growing for longer periods. Another reason to receive benefits early is if you have children living at home. Children under age 18 (or up to 19 if a full-time student) may be eligible for benefits if you are also receiving social security benefits. Furthermore, if you wait until the FBRA to draw benefits, it will take several years to reach Deciding When to Start Receiving Social Security Benefits Curt is single and plans to begin receiving social security benefits on his 62nd birthday in 2013 when his benefit, based on his earnings history, is $1,000. He will receive monthly social security retirement benefits of $750, or 75% of his benefit. Therefore, he will receive 48 benefit checks of $750 each (not considering annual inflation adjustments), a total of $36,000, by the time he reaches age 66 (his FBRA). Curt s benefit would have been $1,000 if he had waited until age 66 to begin receiving benefits. Therefore, it would take him 12 years (starting at age 66) before the additional.s250 per month ($1,000 - $750) benefit caught up to the $36,000 he would have received between ages 62 and 66. (Continued on Page 3.) E

6 Using an S Corporation to Hold Stock in Other Corporations in this return. In summary, S corporations can own and operate one or more chains of subsidiary C corporations or brother/sister C corporations, but cannot join in the filing of a consolidated return. Qualified Subchapter S Subsidiaries. Because hen choosing an entity for your business,an S corporation cannot have a corporate keep in mind there are opportunities shareholder, subsidiary corporations cannot to use an S corporation to hold stock in other be treated as S corporations. However, an S corporations, but not corporation can have one or more qualified the stock of other S Subchapter S subsidiaries (QSubs) if it owns corporations. If any 100% of the subsidiary corporation and makes "~ corporation acquires the required election.! the S corporation s stock, that S A QSub is ignored for federal tax purposes, corporation becomes and its operations are reported as part of the a C corporation, parent S corporation s income tax return. which is generally In addition to the efficiency of eliminating detrimental. The truth is that taxpayers with multiple tax returns, the shareholders gain the S corporations have a great deal of flexibility ability to offset losses from one or more QSub in structuring their corporate holdings. This entities against the income of other members flexibility allows an S corporation to hold of the parent S corporation/qsub group. C corporation subsidiaries and qualified Furthermore, QSubs generally limit the parent Subchapter S subsidiaries, as explained below. company s legal liability. The use of multiple corporate entities helps prevent problems in Regular C Corporation Subsidiaries. S one business or location from affecting others. corporations can own up to 100% of the stock in another corporation. A corporation that A QSub is not treated as a separate corporation. owns more than 50% of the stock of another Instead, its assets, liabilities, income, corporation has the right to control that deductions, etc., are treated as those of the corporation. Ownership of 80% or more of parent S corporation. The QSub s accumulated the stock of another corporation establishes earnings and profits, passive investment an affiliated group relationship. Thus, S income, and built-in gains are also treated as corporations may have 80%-or-more-owned those of the parent. Other tax consequences regular C corporation subsidiaries. These relating to QSubs can be complex. C corporation subsidiaries are allowed to file a consolidated return with any other C Please contact us if you would like us to corporations they are affiliated with. However, analyze the benefits and costs of using a QSub arrangement. O the parent S corporation cannot be included W responsibilities for individuals, employers, and other organizations. In addition, it provides information about tax provisions that are in effect now and those that will go into effect in 2014 and beyond. Topics include he IRS has a new website that provides premium tax credits for individuals, new information on the Affordable Care Act benefits and responsibilities for employers, ( tax provisions for insurers, tax-exempt Provisions). The site explains tax benefits and organizations, and other types of businesses. I RS Affordable Care Act Website T

7 When the present value of future social security benefits is considered, it could be more favorable to start the benefits as soon as possible (if the money is going to be invested). However, if you are simply using early social security benefits to replace a similar amount of earned income, the short-term financial position will not be improved and the longterm outlook could suffer. Replacing Lower-wage Years. Your social security benefits are calculated based on your highest 35 years of indexed earnings. If you can replace lower-wage years early in your career with higherwage years after age Another factor to consider in taking retirement benefits early is the increased tax cost. With a smaller social security retirement benefit, you may need to work or draw on other resources to meet expenses. If the additional taxable income you generate exceeds certain thresholds, 50% to 85% of your social security benefits will be taxable. Life Expectancy. Your life expectancy may be the biggest factor in deciding whether to receive benefits early. By age 62, you should have a good handle on your own life expectancy based on your current health and the longevity of your parents. In general, 77 years might be a good cutoff point. If you reasonably expect to reach that age, waiting until FBRA may be a wise choice. Shortening the Retirement Period. A significant factor in retirement planning projections is the length of the retirement period. For example, if you want to retire at age 62 and you have a life expectancy of 85, you have a 23-year retirement period to fund. By working past age 62, you are shortening the retirement period and lowering the amount of money needed to fund your retirement regardless of longevity. Deciding When to Start Receiving Social Security. Benefits (Continued from Page 1.) 62, the benefit can ~ be increased. This ~ can lead to a greater benefit when you retire. Inflation Adjustments. Social security benefits receive an annual inflation adjustment. By taking early benefits, your starting base for You might carefully consider the long-lasting these annual adjustments is smaller. For advantages of waiting until FBRA based on the following factors. example, if your benefit was $1,000, but you retired early and received only $750, each year you would miss out on the compounded inflation adjustment of that $250 in lost benefits. In other words, the gap between the early retirement benefit you receive and the amount you would have received by waiting will get bigger and bigger. The Effect on Your Spouse. Your decision to start receiving social security benefits before reaching FBRA may also affect your spouse s benefits. If your spouse does not have a personal earnings record, he or she will only receive half of your retirement benefit. After FBRA. If you delay receiving benefits until after your FBRA, you will receive larger benefits because of the delayed retirement credit. You may receive a credit of up to 8% per year for each year you delay receiving benefits until age 70. The Earnings Test. If you are considering If you are able to wait, the delayed retirement receiving retirement benefits before your FBRAcredit can have a significant impact. In addition but you intend to keep working, you must consider the earnings test. For 2013, social to the higher retirement benefit you will receive, you will also shorten your retirement security benefits are reduced $1 for every $2 in period and increase your spouse s survivor s earnings above the exempt amount of $15,120. benefit. O

8 THOMAS HEAD & GREISEN PC 1400 W BENSON BLVD STE 400 ANCHORAGE AK 99503,3677 The information contained in this newsletter was not intended or written to be used and cannot be used for the purpose of (I) avoiding tax-related penalties prescribed by the Internal Revenue Code or (2) promoting or marketing any tax-related matter addressed herein. The Tax" and Business Alert is designed to provide accurate information regarding the subject matter covered. However, before completing any significant transactions based on the information contained herein, ~lease contact us for advice on how the information applies in your specific situation. Tax and Bushzess Alert is a trademark used herein under license. Copyright New Tax Rules for Legally Married Same-sex Couples he U.S. Supreme Court s decision in the T 4 Edith Windsor Case, invalidating a key gift, and estate taxes) where marriage is a provision of the Defense of Marriage Act, raisedfactor. The ruling applies to filing status, many questions personal and dependency exemptions, the regarding the federal standard deduction, employee benefits, IRA income tax rights contributions, and the earned income and child and responsibilities tax credits. of same-sex couples. The U.S. Department For 2013, legally married same-sex couples of the Treasury and must file their tax return using either the the IRS recently married filing jointly or married filing ruled that samesex couples, legally these couples may, but are not required to, separately filing status. For years prior to 2013, married in a jurisdiction that recognizes their file amended returns choosing to be treated marriages, will be treated as married for federalas married for federal tax purposes for one or tax purposes. This ruling applies regardless of whether the couple fives in a jurisdiction that recognizes same-sex marriage or a jurisdiction that does not. However, the ruling does not apply to registered domestic partnerships, civil unions, or similar formal relationships recognized under state law. Same-sex couples will now be treated as married for all federal tax purposes (income, more prior tax years still open under the statute of limitations. O