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2013 – Flashback to 2000

December 17, 2013

Andrew S. Lattimer, CPA
Partner

This year has brought many changes to the tax landscape.  The top rates have been increased and deductions are being phased out.  Although we knew this was coming, reality has set in and it is time to deal with it.  As we compare 2013 to 2012 it is very likely that if you are affected by the higher tax rates and phase-out of deductions, you could see a 15% to 20% increase in your tax bill. As 2013 comes to an end there are three numbers you should keep in mind.  Please note these are the amounts for taxpayers that are married filing jointly.

  • $450,000 – the amount of taxable income in which the increased tax rates for ordinary  income of 39.6% and the 20% capital gains tax rate kick in
     
  • $250,000 – the amount of modified adjusted gross income in which the two additional Medicare surtaxes apply (0.9% on self-employment income and 3.8% on net investment income)
     
  • $300,000 – the amount of adjusted gross income in which itemized deductions and personal exemptions begin to get phased out

Are you affected by the above numbers?  If so it is time to call your tax advisor.  The question now is — what can we do to minimize the tax impact of the increased tax rates?  Although not everyone fits every situation, there are a few things you can do to help reduce your income below the amounts listed above or help minimize the impact of the new higher tax rates.

  • As 2013 comes to a halt review your portfolio.  Although the market has been kind to us this year you might have losses that you can recognize in order to offset the gains you recognized during the year.
  • Use the installment method to spread out your taxable gain over several years.  By spreading out your gain, you may be able to reduce your income below the magic numbers mentioned above and be taxed at the lower rates.
  • Use a like-kind exchange to defer gain until a year that you are in a lower tax bracket.  The taxpayer may be able to defer the gain on one property until they sell the second property for which they exchanged the first one. The like-kind rules are very complex and you should consult your tax advisor before entering into this type of agreement.
  • Make sure the companies you invest in qualify for qualified dividend treatment.  Non-qualified dividends are taxed as ordinary income with rates as high as 39.6%, whereas qualified dividends are taxed at a maximum of 20%. The tax rate difference between a qualified and non-qualified dividend may be as high as 19.6%. 
  • You might want to consider converting traditional IRAs to Roth IRAs.  As of today, Roth IRAs are able to grow tax-free and the earnings are not subject to the minimum distribution rules.
  • If you are 70½ you might want to consider using your IRA distributions to make charitable contributions.  The tax provision that allows taxpayers to use up to $100,000 of IRA distributions to be excluded from adjusted gross income if made to a charitable organization is set to expire at the end of 2013.
  • Make charitable gifts of appreciated property such as publicly traded securities.  The taxpayer will get a charitable deduction for the fair market value of the security, and the taxpayer will also avoid paying capital gains tax on the appreciation.
  • Take advantage of the many energy tax credits that are out there.  This includes energy efficient appliances and solar panels.  The credit for solar panels is equal to 30% of the cost.

As a business owner you should ensure you are taking advantage of the following taxpayer friendly provisions:

  • §179 Depreciation – Allows taxpayers with trade or business net income currently to expense new and used capital expenditures up to $500,000.  If you place in service fixed assets in excess of $2 million the amount of the §179 Depreciation is reduced
  • Real Property Expensing – A taxpayer may elect to treat up to $250,000 of qualified real property as §179 property.
  • Bonus Depreciation – Allows taxpayers to currently expense 50% of the cost in the current year on new capital expenditures.  There is no phase-out for bonus depreciation.
  • Qualified Leasehold Improvements – This type of property still qualifies for bonus depreciation
  • QPAI Deduction - Qualified Production Activities Income (QPAI) is the difference between the manufacturer's domestic gross receipts and aggregate cost of goods and services related to producing the domestic goods. §199 allow manufactures to deduct 9% of their QPAI from taxable Income.  This reduced tax is intended to reward manufacturers for producing goods domestically instead of overseas.   Check with your tax advisor for all taxpayers for whom this may apply.

If there is one thing you should get out of the above is that the year end is almost here and you should sit down with your tax advisor now to determine if you have any tax planning opportunities to minimize the impact of the increased tax rates.

Disclaimer: Under U.S. Treasury Department guidelines, we hereby inform you that (1) any tax advice contained in this communication is not intended or written to be used, and cannot be used by you, for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service (or state and local or other tax authorities), and (2) no part of any tax advice contained in this communication is intended to be used, and cannot be used, by any party to promote, market or recommend any transaction or tax-related matter(s) addressed herein without the express and written consent of Blum, Shapiro & Company, P.C.

 

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