American Taxpayer Relief Act of 2012 Workshop John Kilroy, CPA, CFP May 14, 2013
Agenda Estate, Gift and GST provisions Individual Income Tax provisions Trust and Estate Income Tax provisions Business Income Tax provisions Other Tax Law Changes Taking Effect in 2013 Are We Done With the Cliff?
Estate, Gift and GST provisions Sunset repeal Permanent extension of exemption at $5 million (adjusted for inflation) Estate and Gift; GST 2012 $5.12 million ($10.24 million per married couple) 2013 $5.25 million ($10.5 million per married couple) Clawback moot yea!!! Tax rate above the exemption 2012 35% 2013 permanent change to 40% (this may be the only change in the law) Portability between spouses extended (Estate and Gift) Deceased Spousal Unused Exclusion Amount (DSUEA) clarified Election on timely filed return required DSUEA used first Only from last deceased spouse State Death Tax deduction continues
Estate, Gift and GST provisions Heads Up GST exemption not portable Planning Opportunity $130,000 increase in Gift and GST exemption in 2013 Inflation adjustment after 2013 Tax exclusive vs. tax inclusive Income Tax vs. Estate Tax Lifetime use of DSUEA Gotcha Federal and State Estate Tax could be close to 50% 2012 Gifts Regret? Gift Tax returns
Individual Income Tax provisions Sunset Repeal Permanent Rate Changes (Taxable Income) Rate 2012 (MFJ) 2013 (MFJ) 10% $0 - $17,400 $0 - $17,850 15% $17,401 - $70,700 $17,851 - $72,500 25% $70,701 - $142,700 $72,501 - $146,400 28% $142,701 217,450 $146,401 - $223,050 Marriage Penalty Relief 33% $217,451 - $388,350 $223,051 - $398,350 35% $388,350 + $398,351 - $450,000 39.6% N/A $450,001 + Inflation Adjustment After 2013
Individual Income Tax provisions Qualified Dividend Income (QDI) Long Term Capital Gain (Investment Assets) Marginal Tax Bracket 2012 2013 Be careful: 10% 0% 0% 15% 0% 0% 25% 15% 15% 28% 15% 15% 33% 15% 15% 35% 15% 15% 39.6% N/A 20% AMT Considerations may increase actual cost to possibly 22-27% Stealth features return Phaseout of Itemized Deductions Phaseout of Personal exemptions
Individual Income Tax provisions Heads Up Remember layering or stacking Understand filing status Planning Opportunities Income shifting Use tax bracket (acceleration/deferral) Gotcha Threshold is taxable income (for this issue) Underpayment penalty
Individual Income Tax provisions Return of Pease limitation Itemized Deduction Phaseout Excludes Medical Expenses; Investment Interest Expense; Casualty and Theft Losses; Gambling Losses 3% of AGI above threshold, not to exceed 80% of itemized deductions 2013 threshold (inflation adjustment after 2013) MFJ and QW $300,000 HH $275,000 Single $250,000 MFS $150,000 Not applicable to AMT
Individual Income Tax provisions Return of Personal Exemption Phaseout (PEP) 2% of exemption phases out for each $2,500 of AGI ($1,250 for MFS) above threshold 2013 threshold (inflation adjustment after 2013) MFJ and QW $300,000 HH $275,000 Single $250,000 MFS $150,000 Remember - No personal exemption allowed for AMT
Individual Income Tax provisions Heads Up Subtract Pease add back for AMT $125,000 above threshold no personal exemption Planning Opportunities Who can claim exemption? Timing of itemized deductions Gotcha Threshold is AGI (for these issues)
Individual Income Tax provisions AMT Patch 2012 married filing jointly taxpayers: Marginal rates AMT Regular <$78,750 0% 0% 25% $78,751 $150,000 26% 25% 28% $150,001 $233,000 32.5% 28% 33% $233,001 $465,000 35% 33%-35% >$465,000 28% 35% Source: IRS, www.irs.gov
Individual Income Tax provisions AMT Patch 2013 married filing jointly taxpayers: Marginal rates AMT Regular <$80,800 0% 0% 25% $80,801 $153,900 26% 25% 28% $153,901 $239,020 32.5% 28% 33% $239,021 $473,000 35% 33%-39.6% >$473,000 28% 39.6%
Individual Income Tax provisions Heads Up AMT Patch AMT Land still exists but is likely shorter Planning Opportunities AMT Sweet Spot still exists Sweeter Shorter Gotcha Most tax preparers and taxpayers don t understand AMT AMT on; AMT off
Individual Income Tax provisions Extenders through 2013 Above the line deductions: Up to $4,000 qualified tuition and expenses Up to $250 out of pocket teacher expenses Below the line deductions: State and Local sales tax (in lieu of income tax) Qualified mortgage insurance premium Exclusions: Transit and parking fringe benefit Principal residence debt forgiveness (reduces basis) $500 lifetime Energy Credit
Individual Income Tax provisions Qualified Charitable Distribution (QCD) from IRA Extended through 2013 Same rules for qualification Options for 2012 QCD: Actual QCD 1/1 11/30/12 QCD from IRA in January 2013 IRA distribution in December 2012 can be given to charity by 1/31/13 Presumably to be disclosed on 2012 1040 QCD on line 15 of 1040; No 1099R Code for QCD Payroll Tax Holiday expires return to 6.2% employee portion of OASDI in 2013 AMT Refundable Credit?
Individual Income Tax provisions Extended through 2017: Earned Income Tax Credit American Opportunity Tax Credit $2,500 maximum; 40% refundable Enhanced Child Tax Credit Lower earnings threshold ($3,000) increases opportunity for credit
Individual Income Tax provisions Permanent extensions: Child Tax Credit Adoption Credit/Exclusion for Reimbursed Adoption Expenses Child and Dependent Care Credit Student Loan Interest above the line deduction Coverdell ESA Employer Provided Education Assistance
Individual Income Tax provisions Heads Up QCD may not be best option Planning Opportunities Best use of education options (deduction/credit) Best taxpayer to use education break (parent/student) Credits can reduce regular tax and AMT Gotcha Not all extenders permanent Lifetime limit on energy credit
Rates: Trust and Estate Income Tax 2012 Provisions 15%, 25%, 28%, 33%, 35% 2013 Permanent 15%, 25%, 28%, 33%, 39.6%
Trust and Estate Income Tax Heads Up Provisions 39.6% bracket at $11,950 taxable income (2013) Medicare Surtax at $11,950 taxable income (2013) Planning Opportunities Fiscal YE for estate of 2012 decedent (up to 11/30/13) Trustees reviewing distribution options Gotcha Beneficiary tax situation
Business Tax Provisions Extension of a host of tax credits through 2013 Extension of immediate deduction opportunities for qualifying property through 2013 50% Bonus depreciation $500,000 Section 179 expense Extension of shorter depreciation period (15 yrs.) for qualified leasehold/retail improvements; qualified restaurant property Extends 100% exclusion for Qualified Small Business Stock acquired through 12/31/13 C Corp held five years
Business Tax Provisions Expansion of In Plan Roth Conversions Removes requirement to otherwise be eligible to take a distribution from a qualified plan Qualified Plan must have: Roth feature In Plan Roth Conversion option Remember In Plan Roth Conversion cannot be recharacterized
Business Tax Provisions Heads Up Section 179/Bonus Depreciation from multiple entities No loss from immediate expensing Creditor protection for in plan Roth Planning Opportunities Perhaps only Roth conversion opportunity Use tax bracket Gotcha 5 year clock RMD from QP Roth
Other Tax Law Changes Taking Effect in 2013 Medicare Surtax 3.8% on Net Investment Income Above MAGI threshold ($200,000/$250,000) 0.9% on Earned Income Above Earned Income threshold ($200,000/250,000) Includes Self Employment Income No above the line deduction for 0.9% tax Surtax is added to greater of regular tax or AMT FSA Health - $2,500 maximum Medical Expense AGI floor increased to 10% 65 and older retain 7.5% floor until 2016
Other Tax Law Changes Taking Heads Up Effect in 2013 Definition of net investment income (NII) Either spouse on joint return age 65 7.5% AGI floor Planning Opportunities FSA Health instead of out of pocket 3.8% Surtax lesser of NII or MAGI above threshold 3.8% Surtax on; 3.8% Surtax off Gotcha 3.8% Surtax MAGI threshold (AGI plus foreign income exclusion) 0.9% Surtax AGI threshold (combined earned income MFJ)
Are We Done With the Cliff? Politics aside: Debt Ceiling Sequestration Budget Other tax possibilities: Itemized deductions (bucket; cap; rate) AMT reform Carried Interest Corporate Income Tax - May see more C Corp Estate and Gift Issues GRATs; Grantor Trusts; Discounts