2013 Year-End Tax Planning – Plan NowSeptember 24, 2013
Corey C. Veneziano, CPA, MSAT
It is never too late to start strategizing for year-end tax planning. Due to recent tax legislation (or lack thereof) along with new IRS rules and regulations, 2013 personal and business tax planning is vital. Looking ahead to year-end 2013, there are many planning strategies to explore and evaluate.
ATRA Brings Certainty
The American Taxpayer Relief Act of 2012 (ATRA) permanently extended the Bush-era individual income tax rate cuts for most taxpayers but also put in place a top income tax bracket of 39 percent for higher-income taxpayers. We now know the brackets are 10, 15, 25, 28, 33, 35 and 39.6 percent for 2013 and beyond.
ATRA patches the AMT for 2013 and subsequent years by increasing the exemption amounts and allowing nonrefundable personal credits to the full amount of the individual's regular tax and AMT. In the estate tax area, ATRA brings some certainty to tax planning. ATRA set the maximum estate tax rate at 40 percent, provided for portability and more.
ATRA extended—but did not make permanent—countless tax incentives. They range from incentives targeted to individuals, such as the state and local sales tax deduction, the teachers' classroom expense deduction and the higher education tuition deduction, to incentives for businesses, including the research tax credit, bonus depreciation and enhanced small business expensing. If history repeats itself, the fate of the extenders will not be decided by Congress until late 2013, or worse, early 2014. Late tax legislation means that the IRS will likely have to delay the start of the 2014 filing season.
Net Investment Income Surtax
On January 1, 2013, the new 3.8 percent net investment income (NII) surtax took effect. The surtax is imposed on the net investment income of higher-income individuals, estates and trusts that exceed certain thresholds. Generally, it applies to passive income but can also reach capital gains from the disposition of property. Some taxpayers may have sold property or changed their source of income in 2012 to avoid the surtax. Now that the surtax is effective, new strategies should be considered to minimize the surtax, if possible. There is also a new 0.9 percent Additional Medicare Tax that reaches higher income individuals.
Traditional Year-End Considerations
Let’s not forget traditional year-end planning considerations that should not be overlooked. Timing the recognition of capital gains and losses is important to maximize offsetting short-term gains taxed at ordinary income tax rates, with short-term losses. ATRA raised the top qualified dividend and capital gain rate to 20 percent for certain higher-income taxpayers whose income exceeds the thresholds for the 39.6 percent income tax rate (the capital gain rate was 15 percent in 2012, with some taxpayers qualifying for a zero percent rate).
Gift-giving is another valuable year-end tool. For 2013, the annual gift tax exclusion is $14,000 ($28,000 for married couples making split gifts). Qualified individuals can also make a gift to charity from IRA funds, but only through the end of 2013.
If possible, taxpayers may want to project what the amount of their 2013 itemized deductions will be and time them accordingly. For some taxpayers, medical expenses may make up a large percentage of their itemized deductions. The floor on deductible medical expenses is 10 percent of adjusted gross income in 2013 (7.5 percent for senior citizens). Others should compare the state and local sales tax deduction (especially taxpayers who have made or may make big ticket purchases in 2013) with the state and local income tax deduction to maximize their savings. Don't forget the education tax incentives. For 2013, the American Opportunity Tax Credit and the Lifetime Learning credit, along with others, are available to qualified taxpayers.
Additional Business Strategies
Businesses also should be aware of the final regulations on the capitalization of tangibles (called "repair regs" for short). The rules go far beyond "repairs". One important item to planning under the repair regs is the provision for de minimis expensing. This rule can be helpful if the tax year in which the cost of qualified materials and supplies is paid or incurred before the tax year of use or consumption.
The window for bonus depreciation is also closing, unless extended by Congress. ATRA extended 50 percent bonus depreciation through 2013 (some transportation and longer period production property may be eligible for 50 percent bonus depreciation through 2014). Qualified property must be placed in service before January 1, 2014 (or January 1, 2015 if applicable).
Affordable Care Act
One huge divide between the White House and the GOP is the Affordable Care Act (ACA), including its many tax provisions. Before leaving for the August recess, the House of Representatives voted to repeal the ACA. Knowing that the Senate will not take up the House bill, some GOP lawmakers have turned to another tactic: defunding the ACA.
On October 1, health insurance marketplaces for individuals are scheduled to open. Small employers (generally employers with fewer than 50 workers) can purchase insurance through the Small Business Health Options Program (SHOP), which also opens October 1. Coverage will begin January 1, 2014.
January 1, 2014 is the start date for many provisions of the ACA. The Obama administration has postponed the so-called employer mandate until 2015 but other requirements—including the individual mandate—continue to apply. For example, the ACA limits annual salary reduction contributions to a health flexible spending arrangement under a cafeteria plan to $2,500 (adjusted for inflation after 2013). The IRS is also asking that employers voluntarily comply with information reporting requirements for health insurance coverage for 2014.
Uncertainty Lies Ahead
Unless changed by Congress, automatic spending reductions are scheduled to take effect for the government's fiscal year (FY) 2014, effective October 1, 2013. The Budget Control Act of 2011 generally requires that $109 billion in spending, divided equally between defense and non-defense spending, must be reduced in FY 2014. The across-the-board spending cuts will be similar to the ones in effect for FY 2013, which resulted in furlough days for IRS and other federal employees, reductions in certain non-refundable tax credits and more.
House Speaker John Boehner, R-Ohio, has repeatedly said that the GOP will not vote to increase the nation's debt ceiling without more spending cuts. President Obama, on the other hand, has said that he will not negotiate over the debt limit like he did in 2011, which ultimately led to the passage of the Budget Control Act. At this time, the two sides seemed far apart, but reportedly there have been behind-the-scenes discussions between Administration officials and some Republican lawmakers. Unlike past years, the federal deficit is projected to shrink this year because of increasing revenues which could make some lawmakers more receptive to raising the debt ceiling. Some tax measures, such as the tax extenders, could be linked to an increase in the debt ceiling.
Two lawmakers have taken on leadership roles in tax reform: Rep. Dave Camp, R-Michigan, Chair of the House Ways and Means Committee, and Sen. Max Baucus, D-Montana, chair of the Senate Finance Committee. Both lawmakers spent the summer drumming up support for tax reform, but it is unclear how many of their colleagues share their enthusiasm. House Speaker Boehner and his Senate counterpart, Majority Leader Harry Reid, D-Nevada, have expressed, at best, lukewarm support for comprehensive tax reform in 2013.
Since May, Daniel Werfel has been temporarily leading the IRS. Werfel has been a frequent witness at Congressional hearings looking into the agency's treatment of conservative groups and others seeking tax-exempt status. Werfel has also been championing increased funding for the IRS.
President Obama has nominated John Koskinen to be the next Commissioner of Internal Revenue. Koskinen previously served as the nonexecutive chair of the Federal Home Loan Mortgage Corporation. The Senate Finance Committee is expected to take up Koskinen's nomination this fall. Lawmakers are certain to ask Koskinen how he intends to oversee the agency and what reforms he may make.
As you can see, 2013 is certainly an exciting year for tax planning, on many fronts. There is certainty in some areas, but, as usual with tax law, others are subject to change. We will keep you updated as developments arise. Contact our office to further discuss any of these topics, along with planning options that may be available to you.
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.