2013 Planning Opportunities Tax Law Changes Make Planning Both Complicated and Critical Presented by: Jennifer F. Flinchum, CPA, CFP Partner IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction(s) or tax related matter(s) addressed herein. Copyright Keiter 2013. All Rights Reserved Agenda Where are we now? Tax planning basics Individual Tax planning basics Business Estate planning 1
Where are we now? 2009 slide Tax rates will increase Current tax rates are scheduled to sunset at the end of 2010 Maximum rate on ordinary income goes to 39.6% Long-term capital gains tax rates goes to 20% Health care proposals could increase marginal rates even higher-surtaxes on higher income taxpayers Where are we now? 2010 slide (October 2010) Health care reform has passed will it stick? New taxes and reporting to come (post 2010) Some tax relief Bonus depreciation extended for 2010 Increased Section 179 deduction (2010 and 2011) Current tax rates are scheduled to sunset at the end of 2010 Estate tax returns in 2011 2
Where are we now? 2011 slide (October 2011) President Proposes $447 Billion Jobs Package Employee-side FICA tax rate would drop from 4.2% for calendar year 2011 (down from 6.2% for calendar year 2010) to 3.1% for calendar year 2012 Similar reduction for self-employed individuals Employer-side FICA tax rate would also drop for the first $5 million of wages (3.1% vs. 6.2% currently) for calendar year 2012 Employers would receive a payroll increase credit in cases of payroll growth (credit of up to 6.2% of FICA wages on up to $50 million of wages) Applies also to 10/1/11 to 12/31/11 period (up to $12.5 million o f wages) Also as part of WOTC - incentives to hire long-term unemployed (up to $4,000) and Veterans (up to $5,600) Bonus Depreciation extended at 100% through 2012 Where are we now? 2011 slide (October 2011) President Proposes $447 Billion Jobs Package REVENUE ESTIMATES FOR AMERICAN JOBS ACT OF 2011 Cost of Selected Provisions Employee-Side Payroll Tax Cut $175 billion Tax Credits For Hiring Long-Term Unemployed $8 billion 100 Percent Bonus Depreciation $5 billion Revenues from Selected Provisions Limiting Itemized Deductions to 28 Percent $400 billion Taxing Carried Interest as Ordinary Income $18 billion Repeal of Oil and Gas Preferences $40 billion Closing Corporate Jet Loophole $3 billion 3
Presidential Election 2012 How the Candidates Differ on Taxes? Obama Romney Ryan 2013 individual No change for Reduce all tax Simplify: 10% up rates AGI < $250,000; raise top two brackets from 33% to 36% and 35% to 39.6% rates by 20% - top rate from 35% to 28% (as of Aug 15 maybe not reduction for high income individuals) to $50k; 25% for more than $50k (need to cut certain deductions/ exclusions/ credits) Dividend Income 15% for AGI < No tax for AGI < No tax and Capital Gains $250,000; 000; 20% for others $200,000; 000; 15% for others 3.8% Medicare No change Repeal Repeal surtax Carried Interest Tax as ordinary income No specific mention No specific mention Presidential Election 2012 How the Candidates Differ on Taxes? Obama Romney Ryan AMT Buffet rule families making more than $1 Repeal Repeal million per year pay at least 30% tax Estate Tax 45% rate after $3.5 Repeal Repeal million exemption Corporate Tax Top rate 28%, minimum Top rate 25%; Top rate 25%; move tax on foreign profits move to to territorial system and 20% credit to move territorial operation back to the system US End: accelerated depreciation, inventory accounting and changes to foreign tax loopholes What to do about tax breaks that benefit millions of Americans in all brackets Limited specifics No specifics No specifics 4
Regardless of who is elected (2012) What will happen if nothing happens? Expiration of the 2003 Bush tax cuts scheduled for 2013 Taxes go up! Obamacare taxes in 2013! 3.8% tax 0.9% tax Pressure to reduce budget deficits American Taxpayer Relief Act of 2012 (ATRA) 2013 Law Last minute action or after the fact action? Last minute action or after the fact action? Passed by the United States Congress on January 1, 2013 Signed into law by President Obama the next day. 5
A Quieter 2013?...Hardly Implementation of ATRA 2012 New taxes from the Patient Protection and Affordable Care Act of 2010 0.9% surtax on wages 3.8% Net Investment Income Tax (NII) Defense of Marriage Act (DOMA) Government shut down did anyone win? Debt ceiling Tax Planning Basics Individual Should Tax Law Changes Affect Your Planning this Year? 6
Who is Affected by Return of the 39.6% Rate? The rate does not apply to everyone who was previously in the top bracket of 35%. Rather, the 39.6% applies when taxable income exceeds: $400,000 for singles $425,000 for heads of households $450,000 for married filing jointly $225,000 for married filing separately For certain filing statuses, the income range to which the 35% rate applies is now very small Increase in Top Tax Rate for Qualified Dividends and Capital Gains Top 20% long-term rate returns in 2013 Applies when taxable income exceeds: $400,000 for singles $425,000 for heads of households $450,000 for married filing jointly $225,000 for married filing separately Some dividends subject to ordinary-income rates Real estate investment trusts (REITs) Regulated investment companies (RICs) Money market mutual funds Certain foreign investments 7
Additional 0.9% Medicare Tax Starting in 2013, this additional tax applies to FICA wages and self-employment income exceeding these thresholds: $200,000 for singles and heads of households $250,000 for married filing jointly $125,000 for married filing separately Employers are obligated to withhold the tax beginning in the pay period when wages exceed $200,000 for the calendar year This is regardless of filing status or income from other sources The tax could be withheld even if you do not owe it The tax might not be withheld even though you do owe it New 3.8% Medicare Tax on Investments Under the health care act, starting in 2013, this net investment income tax (NIIT) applies to net investment income to the extent MAGI exceeds these thresholds: $200,000 for singles and heads of households $250,000 for married filing jointly $125,000 for married filing separately Net Investment Income includes: Interest, dividends, capital gains, annuities, rents, royalties, and passive income. Applies to income received from S-corporations and partnerships where owner does not materially participate. Does not apply to income subject to the SE tax 8
New 3.8% Medicare Tax on Investments Tim and Mary earned $280,000 in wages and $20,000 of investment income in 2013. Assuming their filing status is MFJ, how much of their income will be subject to the 3.8% surtax in 2013? Modified AGI $300,000 Threshold ($250,000) Excess $50,000 $20,000 investment income < $50,000 excess, so the 3.8% surtax will apply to their entire $20,000 amount of investment income. The taxpayers will incur an additional $760 tax as a result 0.9% Medicare tax applies to $30,000 of wages for an additional tax of $270 Total additional taxes of $1,030 9
Capital Gains Tax and Timing Time not timing is generally the key to long-term investment success. Timing can have a dramatic impact on tax consequences of investment activities. Cutting Tax on Gain Appreciating investments that do not generate current income are not taxed until sold Defers tax Possibly allows you to time sale to your advantage Such as in a year when you have capital losses to absorb the capital gain If you have cashed in big gains: Look for unrealized losses in your portfolio Sell them to offset gains Remember to utilize loss carryforward Be aware of the Wash Sale Rule that may defer loss recognition WARNING: Substantial net long-term capital gains can trigger the AMT. 10
The 0% Rate (some good news) ATRA made permanent the 0% rate for long-term gain that would be taxed at 10% or 15% based on the taxpayer s ordinary- income rate If you have adult children in these tax brackets, consider transferring appreciated assets to them They can enjoy the 0% rate Even more powerful strategy if you would be subject to the 3.8% Medicare contribution tax or the 20% long-term capital gains rate WARNING: If the child will be under age 24 on Dec. 31, first make sure he or she will not be subject to the kiddie tax. Also consider any gift tax consequences. Paying Attention to Details If you do not pay attention, tax consequences may not be what you expect Trade date, not the settlement date, of publicly traded securities determines the year in which you recognize the gain or loss Be sure to specifically identify which block of shares is being sold if you: Bought the same security at different times and prices and Want to sell high-tax-basis shares to reduce gain or increase a loss and offset other gains 11
Home Sales When selling principal residence, you can exclude up to $250,000 ($500,000 for joint filers) of gain To support tax basis, keep thorough records You must meet certain tests, and gain that is allocable to a period of nonqualified use generally is not excludable Gain qualifying for exclusion will also be excluded from new 3.8% Medicare contribution tax Losses on principal residence generally are not deductible Second homes are ineligible for gain exclusion Consider converting to rental use before selling Defer tax on gains via an installment sale or Section 1031 exchange Passive Activities Passive activity income may be subject to the 3.8% Medicare contribution tax Passive activity losses generally are deductible only against income from other passive activities Carry forward disallowed losses to the following year, subject to the same limits To avoid passive activity treatment: Participate in a trade or business more than 500 hours/year Demonstrate that your involvement constitutes substantially all of the participation in the activity 12
If You Do Not Pass the 500-Hour Test Increase your involvement to exceed 500 hours For companies structured as LLCs, proposed IRS regulations may make it easier to meet the material participation requirement Group activities together Can allow you to exceed the 500-hour limit Dispose of the activity Generally allows you to deduct all passive losses including any loss on disposition (subject to basis and capital loss limitations) Look at other activities to increase passive income Limit participation in another activity that is generating income so that you do not meet the 500-hour test Invest in another income-producing trade or business that will be passive to you Real Estate Activity Rules Income and losses are typically passive Passive income may be subject to 3.8% Medicare tax Passive losses are deductible only against passive income; excess is carried forward Real estate professionals qualify for active tax treatment Perform more than 50% of personal services in real property trades or businesses and meet material participation requirements Spend more than 750 hours of service in such businesses Increase hours to meet the test Special rules for spouses may also help WARNING: Each year stands on its own, and there are other nuances to be aware of. 13
Education Deductions Tuition and fees deduction If you do not take an education-related credit, you may be eligible to take an above-the-line deduction of up to $4,000 of qualified higher education tuition and fees Income-based limit may reduce your maximum possible deduction to $2,000 or eliminate your deduction Student loan interest deduction Deduct up to $2,500 of interest per tax return Income-based phaseout may reduce or eliminate your deduction Joint filers: $125,000 - $155,000 MAGI WARNING: Expenses paid with tax-free distributions from ESAs or 529 plans can not be used to claim the tuition and fees deduction, and ATRA extended the deduction only through 2013 Itemized Deductions Phase-Out Returns for 2013 AGI thresholds for triggering the reduction are: $250,000 for singles $275 000 f h d f h h ld $275,000 for heads of households $300,000 for married filing jointly $150,000 for married filing separately Reduces otherwise allowable deductions by 3% of amount by which AGI exceeds applicable threshold Does not apply to deductions for medical expenses, investment interest, or casualty, theft or wagering losses 14
Exemptions Phase-Out Returns for 2013 Kicks in at same AGI thresholds as the itemized deduction reduction: $250,000 for singles $275,000 for heads of households $300,000 for married filing jointly $150,000 for married filing separately Reduces exemptions by 2% for each $2,500 (or portion thereof) by which a taxpayer s AGI exceeds the applicable threshold 2% of each $1,250 for married taxpayers filing separately Health-Care-Related Deductions If medical expenses exceed 10% of AGI (up from 7.5% before 2013), you can deduct the excess amount Consider bunching non-urgent medical procedures into one year to exceed the 10% floor Eligible expenses include: Health insurance premiums Long-term care insurance premiums (limits apply) Medical and dental services Prescription ec drugs Taxpayers age 65 and older can still enjoy the 7.5% floor through 2016 Expenses reimbursed by insurance or an HSA or FSA are not deductible 15
Health Savings Accounts (HSAs) HSAs allow contributions of pretax income: $3,250 for self-only coverage in 2013 $6,450 for family coverage in 2013 Additional $1,000 for those age 55 or older Bear interest or are invested Can grow tax-deferred similar to an IRA Withdrawals for qualified medical expenses are tax-free Carry over balances from year to year Medical - Flexible Spending Accounts (FSAs) Redirect pretax income to employer-sponsored account Employer determines limit Limit cannot exceed $2,500 for plan years beginning in 2013 Plan reimburses employee for qualified medical expenses What you do not use by the end of the plan year, you generally lose If you have an HSA, the FSA is limited to funding certain permitted expenses 16
Child care- Flexible Spending Accounts (FSAs) Contribute up to $5,000 to employersponsored child and dependent care FSA Plan pays or reimburses you for expenses You cannot use those same expenses to claim a tax credit Cash Donations Easy to make; the key is to substantiate them Under $250: gift supported by canceled check, credit card receipt or written communication from charity $250 or over: gift must be substantiated by the charity Deduction limits Can not exceed 50% of AGI (30% for gifts to nonoperating private foundations) Excess can be carried forward up to five years WARNING: Charitable deductions are allowed for AMT purposes, but your tax savings may be less. 17
Stock Donations Publicly traded stock held more than one year can be one of the best charitable gifts Can deduct current fair market value Avoid tax on gain from selling the property Especially beneficial if you face the new 3.8% Medicare tax on investment income or the return of the top 20% long-term capital gains rate this year Deduction limits Can not exceed 30% of AGI (20% for non-operating private foundations) Excess can be carried forward up to five years WARNING: Do not donate stock worth less than your basis. Instead, sell it so you can deduct the loss. Then donate the proceeds. Direct IRA Distributions to Charity If you are age 70½ or older, you can distribute up to $100,000 from your IRA directly to charity in 2013 No charitable deduction is allowed for any amount that otherwise would have been taxable, but you save the tax you otherwise would have owed Can help satisfy your required minimum distribution WARNING: ATRA extended this break only through 2013. 18
Making Gifts Over Time Private foundation gives you significant control over how your donations will be used Donor-advised fund (DAF) enables you to influence how your donations are spent; avoids a foundation s tight rules and high expenses WARNING: To deduct a DAF contribution, you must obtain written acknowledgment from the sponsoring organization that it has exclusive legal control over the assets contributed. Other Charitable Giving Utilizing Trusts Charitable Remainder Trust Benefits a charity while ensuring your financial future For a given term, it pays an amount to you (some of which generally is taxable) At term s end, remaining assets pass to one or more charities You receive a deduction for the present value of amount going to charity Property is removed from your estate Charitable Lead Trust Benefits charity while transferring assets to loved ones at reduced tax cost For a given term, it pays an amount to one or more charities At term s end, remaining assets pass to remainder beneficiaries You make a taxable gift equal to the present value of the amount going to remainder beneficiaries Property is removed from your estate 19
Investment Interest Expense Interest on debt used to buy assets held for investment is deductible Deduction can not exceed net investment income Net investment income, for this deduction, doesn t include long-term capital gains or qualified dividend income Deduction is reduced by other investment expenses Disallowed interest is carried forward Payments a short seller makes to the stock lender in lieu of dividends may be deductible Interest on debt used to buy securities that pay tax-exempt income is not deductible Passive interest expense becomes part of your overall passive activity income or loss, subject to limitations Miscellaneous Itemized Deductions Many expenses that qualify are deductible for regular tax purposes only to the extent they exceed 2% of AGI: Deductible investment expenses, including advisory fees, custodial fees and publications Professional fees, such as tax planning and preparation, accounting, and certain legal fees Unreimbursed employee business expenses, including travel, meals, entertainment and vehicle costs Bunching expenses may allow you to exceed the 2% floor WARNING: Miscellaneous itemized deductions subject to the 2% floor aren t deductible for AMT purposes. Don t bunch them into a year you may be subject to the AMT. 20
Home Office Deduction Deduct portion of expenses allocable to the portion of home used for the office Mortgage interest and property taxes Insurance and utilities Depreciation Alternatively, take the new, simpler safe harbor deduction Deduct direct expenses Miscellaneous itemized deduction subject to 2% floor If self-employed, use deduction to offset self-employment income; no floor WARNING: The home office must be for your employer s benefit (unless you are self-employed), and that use must be the only use. Alternative Minimum Tax - Triggers State and local income tax deductions Real estate and personal property tax deductions Interest on home equity loan or line of credit not used to buy, build or improve your principal residence Miscellaneous itemized deductions subject to 2% of AGI floor Long-term capital gains and dividend income Accelerated depreciation adjustments and related gain or loss differences when assets are sold Tax-exempt interest on certain private-activity municipal bonds Incentive stock option exercises 21
Avoiding AMT or Reducing its Impact Timing income and deductions can allow you to: Avoid the AMT Reduce its impact Take advantage of its lower maximum rate Planning for AMT is now a little easier ATRA makes AMT exemptions permanent AMT system will be regularly adjusted for inflation Claim Credit in subsequent years (credit available on deferral items) The kiddie tax Applies to children under age 19 and full-time students under age 24 Unless the student provides more than half of his or her support from earned income Any unearned income beyond $2,000 (for 2013) is taxed at the parents marginal rate Keep this in mind before transferring income-generating assets to children 22
Credits Education Credits American Opportunity credit For first four years of postsecondary education Up to $2,500 per student per year Income-based phaseout may reduce or eliminate your credit Joint filers: $160,000 - $180,000 MAGI Lifetime Learning credit For postsecondary education expenses, even beyond the first four years Up to $2,000 per tax return per year Income-based phaseout may reduce or eliminate your credit Joint filers: $107,000 - $127,000 MAGI Child tax credit Increased credit to $1,000 Phase out begins when AGI exceeds $110,000 Dependent care credit Adoption tax credit Energy Efficient Home Improvements (lifetime max $500) All this sounds terrible What can I do? Reduce AGI 1. Defer bonus payments 2. Defer consulting or other self-employment income 3. Utilize equity compensation (stock options, restricted stock) 4. Take advantage of IRC 83(b) election 5. Utilize NQDC plans 6. 2013 Utilize IRA distribution of up to $100,000 7. Maximize retirement contributions (utilize employer programs/ set up SE plan) 8. Maximize deductible IRA (really consider ROTH) 9. Maximize FSA contributions (utilize employer programs) 10. Maximize HSA contributions 23
All this sounds terrible What can I do? Reduce AGI 11. Defer Retirement plan distributions, to the extent not RMD 12. Consider type of investment income and related tax rate (ordinary vs. flat 15% or 20%) 13. Consider use of Tax Exempt Bonds 14. Time Capital Gains maximize LT holding period rates 15. Be specific as to which stock sold minimize current gain 16. Track basis in mutual funds or K1 investments 17. Utilize losses (both current year loss and loss carryforwards) 18. Utilize IRC 1031 (Like Kind Exchange) 19. Utilize installment sale treatment 20. Utilize $250,000/ $500,000 exclusion of gain on sale of main home (keep track of basis) All this sounds terrible What can I do? Maximize Benefit of Deductions 1. Bunch deductions if AGI threshold applicable (medical and 2%) 1. Remember that Long Term Care Premiums are considered medical (may be limited) 2. Remember to include travel expense for medical 2. Time State tax payment (especially if in AMT) 3. Time RE and PP tax deductions (if possible, especially if in AMT) 4. Donate appreciated stock for charitable contributions 5. Time charitable contributions if income is fluctuating 6. 2013 Utilize IRA distribution of up to $100,000 to charity 24
All this sounds terrible What can I do? Maximize Benefit of Deductions 7. Have employer reimburse out of pocket expenses vs. 2% deduction 8. Utilize employer provided education plans (up to $5,250 tax free annually for education) 9. 2013 Teacher s $250 above the line deduction for out of pocket expense 10. Utilized bonus depreciation / IRC Section 179 11. Organization: keep documentation of your expenses and deduction All this sounds terrible What can I do? Other 1. If a business owner, reconsider choice of entity 2. If a C corporation consider lower wages, pay a dividend? 3. If a business owner, consider hiring your children 4. Understand passive vs. active classification 5. Utilize 529 plans to control income recognized when funds needed for college / no income taxed as you go 6. ROTH IRA contributions (no eventual RMD) and any distributions not taxable (help to reduce AGI) 7. Back Door current year ROTH contributions 8. ROTH 401(k) contributions 9. ROTH conversion if low income year to help future years (no eventual RMD) and any distributions not taxable (help to reduce AGI) 25
All this sounds terrible What can I do? Other 10. Undo ROTH conversion if not advantageous 11. N/D IRA contribution 12. Convert a vacation home to a principal residence before sale 13. Energy efficient home improvement - $500 lifetime credit 14. Avoid early IRA / retirement plan distributions 15. Be sure to start RMD at 70 ½ - avoid penalty of 50% 16. Delay receipt of Social Security 17. Gift assets to others who may not be in the top tax bracket 18. Through gifting, help others make IRA (especially ROTH IRA contributions) eventual income tax deferred or tax free 19. Getting married/ divorced watch the timing How and when to pay the tax man! Estimated Payments and Withholding Make sure estimated payments and withholding equal at least 90% of 2013 tax liability or 110% of 2012 tax liability 100% if 2012 AGI was $150,000 or less or, if married filing separately, $75,000 or less Use annualized income installment method Best for those who have large variability in income per month especially if it is skewed toward the end of the year Estimate tax liability If you have underpaid, have the tax shortfall withheld from your salary or year end bonus 26
Tax Planning Basics Business A Mix of Good and Bad Tax News Requires Careful Planning Healthcare post PPACA Exchanges open and working? Are you a large employer (more than 50?) Required to offer health insurance to all FT EEs No penalty until 2015 Work now with your provider to meet coverage/ manage costs. Small employer (50 or less) S a e p oye (50 o ess) Not required to offer health insurance May obtain employee health insurance through the Small Business Health Options Program (SHOP) 27
Final Repair/ Capitalization Regulations September 2013 IRS released final repair regulations Apply to tax years beginning on or after 1/1/14 Can apply early 2011 to 2013 Allow de minimis expensing of up to $5,000 per invoice If Applicable Financial Statement (AFS), written accounting procedures and treat book and tax same Allow de minimis expensing of up to $500 per invoice Applies to smaller businesses without AFS 50% Bonus Depreciation ATRA extended this first-year depreciation allowance Qualifying assets acquired and placed in service in 2013 2014 for certain long-lived and transportation property Qualified assets New tangible property with recovery period of 20 years or less Office furniture Equipment Company-owned vehicles Off-the-shelf computer software Water utility property Qualified leasehold-improvement property 28
Sec. 179 Expensing Election Allows you to deduct rather than depreciate asset purchases New or used assets qualify, such as: Equipment Furniture Off-the-shelf computer software ATRA extended higher expensing limit of $500,000 through 2013 Phases out dollar-for-dollar when 2013 asset purchases exceed $2 million Can not reduce net income below zero to create a net operating loss WARNING: Sec. 179 expensing limit and phaseout threshold are scheduled to drop to $25,000 and $200,000, respectively, in 2014. Sec. 179 Expensing vs. Bonus Depreciation Sec. 179 Advantages May allow you to deduct 100% of an asset s cost Available for used property Must have taxable income Bonus Depreciation Advantages Is not subject to an asset purchase limit Is not subject to a net income requirement Must be new property 29
Cost Segregation Study Identifies property components and related costs that can be depreciated faster Increases current deductions (tax deferral) Qualifying assets include: Decorative fixtures Security equipment Parking lots Landscaping WARNING: Benefit may be limited in certain circumstances, such as if the business is subject to the AMT or located in a state that does not follow federal depreciation rules. Vehicle-Related Tax Breaks Deduct actual out-of-pocket expenses (fuel, insurance, depreciation, etc.) or mileage 56.5 cents per business mile driven in 2013 Purchases of new or used vehicles may be eligible for Sec. 179 expensing New vehicles may be eligible for bonus depreciation Passenger automobiles are subject to lower limits If a vehicle is used for both business and personal purposes, the associated expenses must be allocated between deductible and nondeductible use Many additional rules and limits apply 30
Manufacturers Deduction Deductible amount is 9% of the lesser of qualified production activities income or taxable income, limited by W-2 wages paid Available also to businesses engaged in certain nonmanufacturing activities, such as: Construction Engineering Architecture Computer software production Agricultural processing Can not be used in determining selfemployment income Generally can not reduce net income below zero Can be used against the AMT Employee Benefits Qualified deferred compensation plans Pension, profit-sharing, SEP and 401(k) plans, SIMPLEs Receive tax deduction for contributions to employees accounts HSAs and FSAs Fringe benefits Not included in employee income (and not taxed) Receive tax deduction NQDC plans Usually not subject to nondiscrimination i i rules No deduction for plan contributions until employee recognizes income WARNING: Beginning in 2015, if you are considered a large employer and do not offer full time employees sufficient health care coverage, you could be at risk for penalties under the health care act. 31
2013 Year End Planning Start Early Allows you to time income and deductions to your advantage Deferring income to next year If using cash method of accounting, defer billing for products or services If using accrual method, delay shipping products or delivering services Accelerating deductions into current year If cash-basis taxpayer, make estimated state tax payment before December 31, but beware of the AMT Charge expenses on a credit card and deduct them in the year charged Taking the opposite approach May save you more tax if it is likely you will be in a higher bracket next year WARNING: Do not let tax considerations get in the way of sound business decisions. Minimize Tax Utilize Net Operating Loss (NOL) Can be carried back two years to generate current tax refund Any loss not absorbed is carried forward up to 20 years Carrying back an NOL may provide a needed influx of cash You can elect to forgo the carryback if carrying the entire loss forward is more beneficial Credits Health Care Tax Credit (through 2013) Maximum is 35% of premiums paid by employer SMALL EMPLOYERS Work Opportunity Credit (through 2013) Research & Experimentation Credit (through 2013) 32
Estate Planning More Certainty Comes to Estate Planning Transfer Tax Exemptions and Rates 33
Gift Tax Gift tax follows estate tax exemption and top rate Any gift tax exemption used during life reduces estate tax exemption available at death Exclude certain gifts of up to $14,000 per recipient in 2013 $28,000 per recipient i if your spouse splits gift with you or you re giving community property Up from $13,000/$26,000 in 2012 GST Tax Generally applies to transfers made to people two generations or more below you Is in addition to any gift or estate tax due Follows the estate tax exemption and top rate ATRA preserved certain GST tax protections: Deemed and retroactive allocation of exemption Relief for late allocations Ability to sever trusts for GST tax purposes 34
Portability Between Spouses Now Permanent If spouse dies and leaves unused exemption, estate can permit surviving spouse to use that exemption Simple and provides flexibility if proper planning hasn t been done Portability does not protect future growth on assets from estate tax like applying the exemption to a credit shelter trust does Consider making asset transfers and setting up marital trusts t Transfers to a spouse are tax-free under the marital deduction, assuming he or she is a U.S. citizen WARNING: Portability is available only for the most recently deceased spouse, doesn t apply to the GST tax exemption, is not recognized by some states and must be elected on an estate tax return even if no tax is due. Tax-Smart Giving: Choose Gifts Wisely To minimize estate tax, gift property with the greatest future appreciation potential To minimize your beneficiary s income tax, gift property that has not already appreciated significantly since you have owned it To minimize your own income tax, do not gift property that has declined in value Sell the property so you can take the tax loss Gift the sale proceeds 35
Tax-Smart Giving: Choose Gifts Wisely Plan gifts to grandchildren carefully Annual exclusion gifts are generally exempt from GST tax For gifts that do not qualify for the exclusion to be entirely tax-free, apply both your GST tax exemption and gift tax exemption Pay tuition and medical expenses Payments will not be treated as a taxable gift if you make them directly to the provider Make gifts to charity Donations to qualified charities are not subject to gift taxes and may provide an income tax deduction Gift Business or FLP Interests Leverage your annual exclusions and lifetime exemption, because interests may be eligible for valuation discounts For example: If discounts total 30%, you can gift an ownership interest equal to as much as $20,000 because the discounted value doesn t exceed the $14,000 annual exclusion The IRS may challenge the value, so a professional appraisal is strongly recommended. With a family limited partnership, you fund the FLP and then gift limited partnership interests, which may be eligible for a discount WARNING: The IRS scrutinizes FLPs, so be sure to set up and operate yours properly. 36
Jumpstarting a 529 Plan To avoid gift taxes on ESA and 529 plan contributions, you must apply your gift tax annual exclusion or lifetime exemption A special break just for 529 plans allows you to front-load five years worth of annual exclusion gifts in one year This adds up to $70,000 $140,000 if you and your spouse split the gift This is per beneficiary For grandparents, this can be a powerful estate planning strategy Can significantly reduce the size of their taxable estates while preserving their lifetime exemptions Avoids the generation-skipping transfer tax without using up any of their GST tax exemption Trusts Provide Many Benefits Potentially significant tax savings Some control over what happens to the assets Credit shelter trust Helps minimize estate tax by taking advantage of both spouses estate tax exemptions Qualified terminable interest property trust (QTIP) Is good for benefiting first a surviving spouse and then children from a prior marriage 37
Thank you Questions? Contact: Jennifer F. Flinchum, CPA, CFP Tax Partner Keiter jflinchum@keitercpa.com 804.273.6258 38