SDK s Annual Tax Update

Transcription

1 Welcome SDK s Annual Tax Update Welcome from your host Dennis Bidwell dbidwell@sdkcpa.com Agenda Tax Rate Changes (Jennifer Stavish) New 3.8% Medicare Tax (Ryan Churness) Repair Regulations (Laurie Waterman) Estate and Gift Tax (Jill Abrahamson) ROTH Conversions (Nicole Brown) Closing Comment (Dennis Bidwell) 1

2 Tax Rate Changes Jennifer Stavish, CPA 2013 Tax Increases Federal Tax Rate Increases Minnesota Tax Rate Increases Additional Medicare Tax Personal Exemption phase-out Itemized Deduction phase-out Medical Expense Reduction Payroll Holiday 2013 Federal Tax Rates New Highest Tax Bracket 39.6% Single $400,000 Head of Household $425,000 Married filing joint $450,000 Married filing separate $225, Highest Rate - 35% 2

3 2013 Federal Tax Rates 2013 Dividend and Capital Gains Rate 20% Single $400,000 Head of Household $425,000 Married filing joint $450,000 Married filing separate $225, Rate - 15% 2013 Minnesota Tax Rates New Highest Tax Bracket 9.85% Single $150,000 Head of Household $200,000 Married filing joint $250,000 Married filing separate $125, Highest Rate % 2013 Minnesota Minimum Fees 2012 Minnesota Apportionment 2012 Minnesota Minimum Fee 2013 Minnesota Apportionment < 500,000 $0 < 930,000 $0 500,000 $ ,000 $ ,999 1, ,000,000 4,999,999 5,000,000 9,999,999 10,000,000 19,999,999 20,000,000 and above $300 1,870,000 9,339,999 $1,000 9,340,000 18,679,999 $2,000 18,680,000 37,359,999 $5,000 37,360,000 and above 2013 Minnesota Minimum Fee $560 $1,870 $3,740 $9,340 3

4 Additional Medicare Tax 0.9% Effective 1/1/2013 Additional 0.9% Medicare tax on wages and selfemployment income above threshold Thresholds Single/Head of Household $200,000 Married Filing Joint $250,000 Married Filing Separate $125,000 Additional Medicare Tax 0.9% Tax will be collected by employers when wages are over $200,000 regardless of filing status Additional tax is only applicable to employees, there is no match for employers Reconciliation done on Form 8959 and included with Form 1040 Additional Medicare Tax 0.9% Example 1: A and B file MFJ. A has wages of $100,000. B has wages of $250,000. A s wages are not in excess of $200,000 As wages are not in excess of $200,000 threshold, so employer will not withhold B s employer will withhold 0.9% tax on amount over $200,000 or $50,000 ($450 withheld) In total - wages of $100,000 are subject to 0.9% tax Tax Increase = $900 ($450 was withheld) 4

5 Additional Medicare Tax 0.9% Example 2: C and D file MFJ. C has wages of $150,000. D has self-employment income of $175,000. C s wages are not in excess of $200,000 threshold, so employer will not withhold Total earned income less threshold is subject to 0.9% tax $150,000 + $175,000 - $250,000 = $75,000 Tax increase = $675 Personal Exemption Phase-out Effective 1/1/ Personal exemption amount - $3,900 Phase-out is 2% for each $2,500 (or portion thereof) of AGI above Single $250,000 Head of household $275,000 Married filing joint $300,000 Full phase-out at AGI of Single $372,500 Head of household $397,500 Married filing joint $422,500 Personal Exemption Phase-out Example 3: E and F file MFJ. Their AGI is $325,000. E&F ti ld b d d b 20% E&F s exemptions would be reduced by 20% $325,000 - $300,000 = $25,000 over threshold $25,000 /$2,500 = 10 increments 10 x 2% = 20% reduction of personal exemption $7,800 ($7,800 x 20%) = $6,240 5

6 Itemized Deduction Phase-out Effective 1/1/2013 Phase-out aims to reduce the benefit of Charitable Contributions Mortgage Interest State, Local and Property Taxes Miscellaneous Itemized Deductions Phase-out does not include Medical expenses Investment interest deduction Casualty, theft or gambling losses Itemized Deduction Phase-out Phase-out is lesser of: 3% of the AGI above the threshold Single $250, Head of household $275,000 Married filing joint $300,000 80% of the amount of itemized deductions otherwise allowable Itemized Deduction Phase-out Example 4: Married couple with AGI of $670,000 and itemized deductions of $45,000 (all subject to phaseout) Phase-out would be LESSER of: 3% x $370,000 = $11,100 reduction OR 80% x $45,000 = 36,000 reduction Itemized deduction = $33,900 6

7 Medical Expense Reduction 10% threshold for allowable medical and dental expenses in 2013 (and going forward) 2012 threshold h was 7.5% Transition period for taxpayers 65 or older during the tax year Reduced rate of 7.5% through 12/31/2016 Medical Expense Reduction Example 5: Taxpayer turns 65 on June 10, % threshold in 2013 and % threshold in 2015 and % threshold in 2017 and thereafter Payroll Holiday Expired 12/31/2012 Social Security tax for employees went back to 62% 6.2% on wages Payroll holiday rate was 4.2% 7

8 Questions? Next speaker: Susan Byrnes New 3.8% Medicare Tax Ryan Churness, CPA 3.8% Medicare Tax What is it? Effective for the first tax year beginning on (or after) January 1, 2013 Applies a Net Investment Income Tax at a rate of 3.8% to certain investment income Affects tax returns of individuals, estates, and trusts that have income above statutory threshold amounts 8

9 3.8% Medicare Tax Effect on rates Makes the highest marginal rate potentially 43.4% (39.6% plus 3.8%) for Federal purposes With Minnesota ss new highest rate of 9.85%, a taxpayer could be paying over 50% in combined Federal and Minnesota taxes Long-term capital gains rates potential increased to 23.8% (20% + 3.8%) compared to only 15% in 2012 (an 8.8% increase). 3.8% Medicare Tax - Defined For individuals, a 3.8% tax imposed on the lesser of: 1. Net Investment Income (NII), or 2. Excess of MAGI over $250k MFJ/$200k Single 3.8% Medicare Tax - NII Net Investment Income (3 Categories) 1. Interest, dividends, annuities, royalties and rents 2. Passive income from trades or businesses as defined in IRC Sec Net gain from distribution of property (i.e. capital gains, etc.) other than active business assets to the extent taken into taxable income These categories of income are reduced by deductions allocable to such income 9

10 3.8% Medicare Tax - NII Excluded from Net Investment Income Earned income (Wages & SE income) Active trade or business income Retirement plans & IRA distributions Tax exempt interest (muni bonds) Even though excluded from NII, they may still be included in MAGI calculation 3.8% Medicare Tax - NII Deductions only allowed to the extent allowed under regular tax Investment interest expense Other investment expenses - 2% floor State taxes attributable to NII Capital losses can only offset capital gains NOLs are not allowed 3.8% Medicare Tax - Examples Single Taxpayer - $110k Salary, $70k NII 3.8% on the lesser of: NII of $70k MAGI over $200k for single taxpayer Since MAGI is only $180k, the amount in excess of $200k is zero. No 3.8% tax in this case. 10

11 3.8% Medicare Tax - Examples Married (MFJ), $200k salary, $160k NII 3.8% on the lesser of: NII of $160k MAGI over $250k for MFJ Since MAGI is $360k, the amount in excess of $250k is $110k. Lessor $110k X 3.8% = $4,180 of tax 3.8% Medicare Tax - Examples MFJ, $150k salary, $30k rents, $20k taxable interest, $25k tax-exempt interest, $60k IRA, $60k Roth IRA, $50k net gains = $395k gross income: NII = $100k ($30k + $20k + $50k) MAGI = $310k (excludes Roth IRA & muni int) $60k X 3.8% = $2,280 Note: some items are both NII & MAGI while others are neither NII nor MAGI. 3.8% Medicare Tax - Planning Consideration should be given to the following: Tax-Exempt bonds Tax Deferred Annuities Life Insurance Timing of estate & trust distributions Timing of IRA distributions Timing of capital losses and gains 11

12 Questions? Next speaker: Scott Johnson Depreciation & Repair Regulations Laurie Waterman, CPA Bonus Depreciation 50% first year bonus depreciation eligible for entire 2013 tax year Assets placed in service 1/2014 are no longer eligible Property with a MACRS recovery period of 20 years or less Qualified Leasehold Improvements Placed into service in current tax year New property Original user of property No AMT adjustment necessary Taxpayer must elect out if they wish not to take bonus depreciation 12

13 Bonus Depreciation Summary Date acquired & placed in service Bonus depreciation % 1/1/ /31/ % 1/1/2014 and after 0% Example: Purchase on 1/1/2013 $500,000 of eligible equipment (5 Year equipment) 50% bonus is $250,000 deduction plus depreciation on remaining basis ($50,000) 500, purchase price (250,000) 50% bonus 250,000 Remaining basis 20% First year depreciation MACRS 50,000 Regular depreciation on remainder Section 179 Maximum deduction is $500,000 for 2013 The Section 179 phase-out threshold has increased to $2 Million and is then reduced on a dollar-for-dollar basis Can be used in combination with Bonus Depreciation Can include up to $250,000 of qualified real property Tax Year beginning in $25,000 13

14 Example: without Section 179 Eligible for bonus depreciation $1.2 million of regular depreciation under MACRS $2,000,000 Basis (1,000,000) 50% bonus 1,000,000 Remaining Basis 20 % First Year depreciation 200,000 Regular Depreciation on Remainder Example: with Section 179 All property in previous example was purchased on or before December 31, 2013 Eligible for bonus depreciation $2 million of regular depreciation under MACRS $2,000,000 Remaining Basis ($1,000,000) 50% bonus 1,000,000 Remaining Basis 1,000,000 Section Remaining basis Section Vehicle Expensing Parameters: 6,000 pounds or less $11,160 for new vehicles $3,160 for used vehicles Depreciation on new heavy SUVs: Section 179 deduction, combined with 50% bonus depreciation can result in writing off a large percentage of an expensive vehicle s depreciable cost in the first year 14

15 Section 179, Bonus in Minnesota Minnesota does not follow expanded Section 179 expensing for 2013 $25,000 limit with $200,000 threshold Minnesota does not conform to bonus depreciation 80% add back of amount taken for federal return Prior year add back is deductible over next 5 years (20% each year) New Repair and Maintenance Regulations Issued The IRS recently issued final regulations governing the tax treatment of repair and maintenance expenses. The regulations are complex and result in significant changes for how taxpayers should account for these expenditures. Action Needed by December 31, 2013 De Minimis Safe Harbor A written policy must be in place by January 1, 2014 A taxpayer with an applicable financial statement (AFS) may expense immediately up to $5,000 per invoice i or per item Must report qualifying expenditures consistently for both tax purposes and financial statement purposes. 15

16 What is an AFS? Audited Financial Statement Submitted to the SEC Submitted to federal or state government or regulatory agency If you do not have an AFS: The de minimis threshold is reduced to $500 per invoice or per item. While not required by the regulations, we strongly encourage taxpayers without an AFS to establish a written policy to support expensing these items. Failure to have a policy may result in disallowance of the deduction. Written policies must provide how amounts will be expensed for financial statement purposes (for items costing less than $5,000/$500 or for items with an economic useful life of 12 months or less) 16

17 Sample: Accounting Capitalization Policy for Taxpayers With or Without an Applicable Financial Statement (AFS) (as defined by Reg (a)-1(f)(4)) Accounting Capitalization Policy for 1. This accounting capitalization policy is effective as of, and treats as an expense for non-tax purposes: (a) The amount paid for property that does not exceed $ per invoice (or per item as substantiated by the invoice); or (b) The amount paid for property with an economic useful life of 12 months or less. 2. Pursuant to this policy, the amounts described in (1) above will be treated as an expense on the books and records. Signed: Date: (Taxpayer or Officer of Taxpayer) Repair Regulations Effective for tax years on or after January 1, 2014 Affects all taxpayers who acquire, produce or improve tangible property May require accounting method changes in 2014 Taxpayer has the option to elect early adoption for years beginning on or after January 1, 2012 Repair Regulations (cont) Still waiting for revenue procedures for guidance on automatic accounting method changes procedures Material and supplies $200 de minimis rule Non-incidental materials and supplies deducted as used/consumed Incidental materials and supplies are deducted when purchased (provided taxable income is clearly reflected) 17

18 Repair Regulations (cont) Taxpayer may elect annually to capitalize or depreciation rotable, temporary or stand by spare parts Safe harbor rule for routine maintenance for buildings If reasonably expect to do once every 10 years Small taxpayer safe harbor for building Taxpayer with gross receipts less then $10,000,000 Total amount paid on improvements, repairs and maintenance does not exceed the lesser of $10,000 or 2% of the adjusted basis of the building Repair Regulations (cont) Capitalization versus deduction Capitalization of betterments Capitalize improvement if a betterment Betterment t ameliorates a material condition or defect that existed at the time of acquisition Is for a material addition Reasonably expected to materially increase productivity, efficiency Repair Regulations (cont) May elect to capitalize repair and maintenance costs You can follow book treatment Annual election Election is irrevocable 18

19 Dispositions Decisions affecting how to and whether to account for partial dispositions are deferred until the disposition actually occurs, rather than in the year the property was acquired. If the taxpayer disposes of less than the entire building, the partial disposition rules would allow ignoring the partial disposition. The taxpayer can elect to recognize the partial disposition for tax purposes as long as the property is not held in a general asset account. Dispositions (cont) This would allow the taxpayer to recover the remaining basis and costs of replacing the portion of the property would be capitalized. Election is made on original year for the year in which the partial disposition iti occurs. This avoids the need to separately identify and track components of buildings in the year of acquisition. As long as not held in a general asset account, decisions regarding how to account for any partial disposition will be deferred until the year the disposition occurs. Questions? Next speaker: Ronald Kelner 19

20 Estate and Gift Tax Jill Abrahamson, CPA Overview Federal Overview Minnesota Update Gift Tax Estate Tax Federal Overview 2014 Applicable Exclusion $5,340,000 Portability Gift Tax Annual Exclusion $14,000 20

21 Minnesota Gift Tax: Beginning in 2013 Effective for taxable gifts made after June 30, 2013 $14,000 Annual Exclusion (same as federal) Direct payments of tuition and medical expenses excluded (same as federal) Minnesota Gift Tax: Lifetime Exemption $1,000,000 lifetime exemption Not unified with estate tax exemption Tax rate of 10% Example Joe gifts $1,514,000 cash to his daughter Jane on January 1, He makes no further gifts during 2014 and has not made prior substantial gifts. Gift $1,514,000 Less: Annual Exclusion ( $ 14,000) Less: Lifetime Exemption ($1,000,000) Amount subject to tax $ 500,000 21

22 Minnesota Estate Tax Update Real Estate inside an LLC, Partnership, etc. Taxable gifts within prior three years brought back into estate Planning Annual Exclusion Gifts, direct medical and tuition payments Gifting to use the $1,000,000 Gift Tax Exclusion Income tax is an important consideration Questions? Next speaker: Ryan Churness 22

23 Roth conversion Nicole Brown, CPA What is a Roth Conversion? Moving assets from: A Traditional IRA SIMPLE IRA SEP IRA OR Another qualified retirement plan into a Roth IRA Who is eligible for a Roth Conversion? Since 2010, there haven t been any restrictions on who is able to convert Even taxpayers age 70 ½ or older who are already Even taxpayers age 70 ½ or older who are already receiving required minimum distributions are able to convert 23

24 What is the tax cost of a Roth Conversion? Any amount that is converted to a Roth IRA is included in gross income in the year of conversion, as long as it doesn t represent basis (non-deductible contributions) Example If a taxpayer converts his only traditional IRA with a $10,000 balance to a Roth IRA and The taxpayer made a total of $4,000 of nondeductible contributions to the traditional IRA, then the taxable conversion amount would be $6,000 What are the tax benefits of Roth Conversion? All qualified distributions out of a Roth IRA are tax free regardless of whether they are paid to the IRA owner or the owner s beneficiary Roth IRA owners aren t required to take required minimum distributions (although beneficiaries must take RMDs) 24

25 What makes a distribution qualified? Distribution must satisfy the five year holding period Distribution must have a qualifying reason 5 Year Holding Period The 5 Year Holding Period is met on the fifth anniversary of the first day of the plan year that the initial Roth contribution (or Roth conversion contribution) was made EXAMPLE If a taxpayer made a $200 initial Roth IRA contribution on January 2, 2011 the taxpayer would meet the 5 year requirement on January 1,

26 Qualifying Distribution Reasons Attainment of age 59 ½ Disability First time home purchase Death Is a Roth Conversion right for you? Do you have the ability to pay the tax due on the conversion from other funds, or will you need to take money out of the tax deferred account to pay for the conversion? Are you going to need the tax deferred account to pay for your living expenses during retirement? Do you think your future tax rate is going to increase or decrease? Special Rules / Considerations In order to convert a SIMPLE IRA to a Roth IRA you must have at least two years of participation in the SIMPLE IRA You must withdraw your required minimum distributions before you convert When calculating the basis on your Roth conversion you must consider all of your Traditional IRAs and Conduit IRAs 26

27 EXAMPLE If a taxpayer has: a traditional IRA with a balance of $50,000 and a basis of $25,000 a second IRA with a balance of $100,000 and a basis of zero and the taxpayer decides to convert the $50,000 traditional IRA to a Roth The taxable conversion amount will be $41, ($50,000 - ($25,000 / $150,000) x $50,000) Special Rules / Considerations When converting a traditional IRA to a Roth IRA: you aren t required to convert 100% of the traditional IRA balance EXAMPLE If you have a traditional IRA with a balance of $100,000: You don t have to convert the whole $100,000 balance to Roth You can convert $10,000 (or any other amount) 27

28 Special Rules / Considerations If you have Conduit IRAs: you may want to consider rolling the Conduit IRA into your employer s qualified plan prior to conversion EXAMPLE A Conduit IRA with: a balance of $100,000 and a basis of zero and A Traditional IRA with: a balance of $50,000 and a basis of $45,000 By rolling the Conduit IRA into the taxpayer s qualified plan, the taxpayer has taken the $100,000 Conduit IRA out of the basis calculation and will only pay tax on $5,000 ($50,000 - $45,000) Can a Conversion be Recharacterized? You can recharacterize, if the conversion was made from: a Traditional IRA a SIMPLE IRA OR a SEP IRA The election to recharacterize must be made by the tax return due date + the six month extension period 28

29 EXAMPLE The deadline to recharacterize a Roth Conversion that occurred in 2013 is October 15, 2014 Internal Roth Conversions and In-Plan Roth Transfers The recharacterization of non-roth funds held in a qualified retirement plan (401(k) plan) into Roth funds Retirement plan must be amended to allow for either Participant pays tax on the amount that is transferred to the Roth source that is not made up of basis (After-tax contributions) Other Noteworthy Changes IRS modification of Use it or lose it rule for health FSAs (flexible spending arrangements) Stand-alone HRA changes 29

30 Questions? Next speaker: Eric Wille Closing comment Dennis Bidwell Thank you to our door prize providers Elsie s Restaurant Bar and Bowling Center Fantasy Flight Games Peace Coffee Tuttle s Bowling Bar and Grill 30