American Taxpayer Relief Act

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American Taxpayer Relief Act

Michael L. Minotti, CPA

February 21, 2013

SKODA MINOTTI TEAM

Michael Minotti, CPA Partner

Steven Hartstein, CPA, JD Partner

Jim Forbes, CPA Principal

Jenna Staton, EA Manager

Anna Marie RicciardiMarketing Specialist

Matt SofulBusiness Development

Mike Trabert, CPA, CVA, CMAP, CEPA

Partner

THE FISCAL CLIFFExpired tax breaks = revenue

$

TIME

THE FISCAL CLIFF

Mandatory spending cuts = savings

$

TIME

THE FISCAL CLIFF

LEADS TO$

TIME

THE FISCAL CLIFF

Balanced Budget

The American Taxpayer Relief Act of 2012

• Senate vote 89-8, House 257-167• Signed into law on January 2, 2013• Retains “Bush Tax Cuts” for all but higher income taxpayers• Increased tax on Qualified dividend and capital gains for most

taxpayers• Many extensions for expiring provisions• Delay in sequester

TODAY’S AGENDA• Business Tax Changes• Personal Tax Changes• Medicare Tax Changes

Permanent ExtensionsVarious temporary tax provisions enacted as part of Economic Growth and Tax Relief Reconciliation Act of 2001 were made permanent:

• The exclusion for employer-provided educational assistance (Sec. 127);

• The employer-provided child care credit (Sec. 45F); • Repeal of the collapsible corporation rules (Sec. 341); • Special rates for accumulated earnings tax and personal

holding company tax (Secs. 531 and 541); and • Modified tax treatment for electing Alaska Native Settlement

Trusts (Sec. 646)

BUSINESS TAX CHANGES

TODAY’S AGENDA

Temporary ExtensionsAlso extended are many business tax credits and other provisions:

• Temporary minimum low-income tax credit rate for non-federally subsidized new buildings (Sec. 42);

• Housing allowance exclusion for determining area median gross income for qualified residential rental project exempt facility bonds (Section 3005 of the Housing Assistance Tax Act of 2008);

• Indian employment tax credit (Sec. 45A); • New markets tax credit (Sec. 45D); • Railroad track maintenance credit (Sec. 45G); • Mine rescue team training credit (Sec. 45N);


TODAY’S AGENDA

Temporary Extensions

• Employer wage credit for employees who are active duty members of the uniformed services (Sec. 45P);

• Work opportunity tax credit (Sec. 51); • Qualified zone academy bonds (Sec. 54E); • Fifteen-year straight-line cost recovery for qualified leasehold

improvements, qualified restaurant buildings and improvements, and qualified retail improvements (Sec. 168(e));

• Accelerated depreciation for business property on an Indian reservation (Sec. 168(j));

• Enhanced charitable deduction for contributions of food inventory (Sec. 170(e));

• Election to expense mine safety equipment (Sec. 179E);



• Special expensing rules for certain film and television productions (Sec. 181);

• Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico (Sec. 199(d));

• Modification of tax treatment of certain payments to controlling exempt organizations (Sec. 512(b));

• Treatment of certain dividends of regulated investment companies (Sec. 871(k));

• Regulated investment company qualified investment entity treatment under the Foreign Investment in Real Property Act (Sec. 897(h));

• Extension of subpart F exception for active financing income (Sec. 953(e));



• Look through treatment of payments between related controlled foreign corporations under foreign personal holding company rules (Sec. 954); Temporary exclusion of 100% of gain on certain small business stock (Sec. 1202);

• Basis adjustment to stock of S corporations making charitable contributions of property (Sec. 1367);

• Reduction in S corporation recognition period for built-in gains tax (Sec. 1374(d));

• Empowerment Zone tax incentives (Sec. 1391); • Tax-exempt financing for New York Liberty Zone (Sec. 1400L);



• Temporary increase in limit on cover-over of rum excise taxes to Puerto Rico and the Virgin Islands (Sec. 7652(f)); and

• American Samoa economic development credit (Section 119 of the Tax Relief and Health Care Act of 2006, P.L. 109-432, as modified).


• Bonus Depreciation

• Section 179 – Expensing Election


Bonus Depreciation

• 50% first-year bonus depreciation• Qualified property is tangible property depreciated under MACRS

with a recovery period of 20 years or less• Must meet original use, timely acquisition, and timely placed in

service requirements• Extended retroactively for property placed in service before

January 1, 2014• Applies automatically; must opt-out by asset class• Can create a loss


Section 179 – Expensing Election

• Dollar Limitations− Was scheduled to go down to $139,000 for 2012 and $25,000 for 2013− Increased to $500,000 retroactively for 2012 and for 2013

• Reduction in Limitations− Was scheduled to go down to $560,000 for 2012 and $200,000 for 2013− Increased to $2,000,000 retroactively for 2012 and for 2013

• Section 179 cannot create a loss

• Available for used property


First Year Depreciation Cap for Autos & Trucks

• For 2012 the luxury auto limit was scheduled to be $3,160 for autos and $3,360 for light trucks and vans

• The applicable first-year depreciation limit has been increased by $8,000− $11,160 for autos− $11,360 for light trucks and vans


Section 179 Example


Cap-Ex2012 Deduction

Old Law2012 Deduction

New Law

$50,000 $50,000 $50,000

$150,000 $139,000 $150,000

$500,000 $139,000 $500,000

$700,000 -0- $500,000

TODAY’S AGENDA

MACRS Bonus 179

2012 $10,000 $30,000 $50,000

2013 16,000 8,000 -

2014 9,600 4,800 -

2015 5,760 2,880 -

2016 5,760 2,880 -

2017 2,880 1,440 ___-___

$50,000 $50,000 $50,000

Depreciation Example• Purchase 50,000 computers in 2012 (Assume 5-year life.)


TODAY’S AGENDA

MACRS Bonus 179

2012 $150,000 $450,000 $650,000

2013 240,000 120,000 40,000

2014 144,000 72,000 24,000

2015 86,400 43,200 14,400

2016 86,400 43,200 14,400

2017 43,200 21,600 7,200

$750,000 $750,000 $750,000

* $500,000 Section 179, $125,000 Bonus, $25,000 MACRS

Depreciation Example• Purchase $750,000 Machine ( Assume 5-year life.)


Personal Tax Changes

Highlights

• Bush tax cuts retained for most taxpayers• Raises top rate for dividends and capital gains• Expiration of payroll tax holiday• Permanently “patches” AMT• Return of phase outs of itemized deductions and personal

exemptions

PERSONAL TAX CHANGES

Tax Rates

• Obama initially proposed $250K/$200K threshold for higher rates

• Boehner proposed an increase on those making more that $1 million


TODAY’S AGENDA

NEW TAX RATES2013 Taxable

Income2013 Taxable

IncomeTaxpayer Capital Gains

Single MFJ Tax Rate Tax Rate

$0-$8,925 $0-$17,850 10% 0%

$8,925-$36,250 $17,850-$72,500

15% 0%

$36,251-$87,850 $72,501-$146,400 25% 15%

$87,851-$183,250 $142,401-$223,051 28% 15%

$183,251-$398,350 $223,051-$398,350 33% 15%

$388,351 -$400,000 $388,351 -$450,000 35% 15%

$400,000 + $450,001 + 39.6% 20%

Payroll Taxes

• Started January 1, 2011

• Employee FICA rate reduced from 6.2% to 4.2%

• Extended for 2012

• Expired as of January 1, 2013


TODAY’S AGENDA

AMT Permanent Patch

Alternative Minimum Tax (AMT) Relief

• Increased exemption for 2012• $50,600 Single, $78,750 MFJ• Without fix - $33,750 Single, $45,000 MFJ• Indexed for inflation


TODAY’S AGENDA

Future of AMT

• Could be abolished in the future• Obama proposed to replace part of the AMT with the so-called “Buffet

Rule• Buffet Rule would ensure taxpayer making over $1 million would pay

an effective rate of at least 30 percent.• 2012 – Senate rejected the “Paying a Fair Share Act”


TODAY’S AGENDA

Return of Phase Outs

Itemized Deduction Phase Out

• Reduces itemized deductions by 3% of the amount by which AGI exceeds threshold, not to exceed 80%

• Single $250,000 MFJ $300,000

Personal Exemption Phase Out

• Reduces exemption by 2% for each $2,500 (or portion thereof) by which AGI exceeds threshold

• Single $250,000, MFJ $300,000


TODAY’S AGENDA

PERSONAL TAX CHANGESIndividual Tax Credits Available in 2012

Adoption Credit – Available if you adopted a child and paid-out-of-pocket expenses relating to the adoption

• Amount of credit is directly related to the amount of money spent on the adoption

• Adoption of special needs child allows for the full amount of the credit even If out-of-pocket expenses are less than the credit amount

• The maximum value of the credit is $12,650 per eligible and it is non-refundable

• Phase-out is between $189,710 - $229,710• Need to file FORM 8839 to claim

TODAY’S AGENDA


• Child and Dependent Care Credit – Available if child is under 12 years of age, or a dependent of any age who cannot care for themselves. To qualify, you must have earned income and the care must enable you to work or look for work

− Must reduce deduction by any amount provided by employer through a dependent care benefits plan

− The value of the credit depends on AGI and is between 20% - 35% of qualified expense

− The maximum amount of qualified expenses that can be claimed is $3,000 for one child and $6,000 for two or more children

− Must file Form 2441 to receive credit• Planning Opportunity – Flex spending Account

− Can set aside a portion of paycheck, up to $5,000 tax free to pay for dependent care expense

TODAY’S AGENDA


• Retirement Savings Credit – Credit available for low to moderate income workers who contribute to a qualified plan. AGI must be less than:

− $57,500 Married filing jointly− $43,125 Head of Household− $28,750 Single

o Amount of credit varies depending on AGI and amount of contribution made

• Work Opportunity Credit – Rewards employers that hire individuals from targeted groups. The value of the credit can be as high as $9,600 for qualified veterans. This credit is a general business credit.

− Examples of these target groups:o Veteranso Felons

TODAY’S AGENDA

PERSONAL TAX CHANGESEnergy Credits

• For taxpayers who have not utilized their energy credit for energy saving biomass stoves, heating, ventilating, and air conditioner unit, insulation, roofs, water heaters (non solar), and windows and doors, a tax credit of 10% of up to $500 (for all tax years after 2005 and only $200 can be used for windows) is still available.

− Qualifying improvements must be placed into service to the taxpayer’s personal residence located in the United States

− Claim of Form 8695

• The 30% (with no upper limit) credit for geothermal heat pumps, small wind turbines, and solar energy systems does not expire until December 31, 2016

Medicare Tax Changes

TODAY’S AGENDA

MEDICARE TAX CHANGESPatient Protection and Affordable Care Act

• Two Parts

− 0.9% increased Medicare tax due on wages and self-employment earnings

− 3.8% surtax on at least a portion of investment income such as capital gains, dividends and net rental income

TODAY’S AGENDA

Tax Earnings

An additional 0.9% surtax on higher income households

The tax applies to wages andself-employment income inexcess of threshold

There is no employer match onthe 0.9 percent tax

Thresholds

Single Taxpayer $200,000

Married Taxpayers Filing Jointly $250,000

MEDICARE TAX CHANGES

Tax Earnings

Ron• Single Taxpayer• Employee• $500,000 Earnings

Excess of Earning Threshold

$500,000- 200,000 $300,000

Single ax Payer $200,000

Married taxpayers filing\jointly

$250,000

.9% Surtax Would APPLY

to $300,000=

$2,700 Additional Tax


TODAY’S AGENDA

2012 2013

FICA Withholding $4,624 $7,049

Medicare Withholding 7,250 7,250

Medicare Surtax - 2,700

Ron’s Cost $11,874 $16,999

A Bit of a Hidden Increase


FICA Withholding $6,826 $7,049

Medicare Withholding 7,250 7,250

Employer’s Cost $14,076 $14,299

Funds for Social Security System

$25,950 $31,298




$250,000

A Bit of a Hidden Increase

• Ron’s increased cost $5,125 and 43%

• Increased funds to Social Security System $5,348 and 21%




$250,000

3.8% Medicare ‘Surtax’ Overview

Investment Income

• Beginning with the 2013 tax year, a new 3.8% Medicare “surtax” will apply to all taxpayers whose income exceeds a certain “threshold amount”

• This new “surtax” will, in essence, raise the marginal income tax rate for affected taxpayers

• Thus, a taxpayer in the 39.6% tax bracket (i.e. the highest marginal income tax rate in 2013) would have a marginal rate of 43.4%!



$250,000

Current Tax Rate Tax Rate in 2013 Tax Rate in 2013 + (with surtax)

10% 15% 15%

15% 15% 15%

25% 28% 28%

28% 31% 34.8%

33% 36% 39.8%

35% 39.6% 43.4%

NOTE: The chart above assumes that the 3.8% Medicare surtax would not begin to apply until a person’s taxable income reaches the 31% tax bracket (based on certain net investment income and itemized deduction assumptions). However, there are times when the 3.8% could apply to a person in a lower tax bracket (i.e. 15%, 28%) or may not apply to a person in higher tax brackets (31%, 36%, 39.6%).

3.8% Medicare ‘Surtax’ Overview





$250,000

3.8% X the lesser of

1. Net Investment Income OR

2. The Excess (if any) of – • “Modified Adjustable Gross

Income (MAGI)• “Threshold Amount

3.8% Medicare ‘Surtax’ Overview – Individuals



$250,000

3.8% Medicare ‘Surtax’ Overview – Critical Terms

Three critical terms associated with the 3.8% Medicare surtax

• “Net investment income” (NII)

• “Threshold amount” (TA)

• “Modified adjusted gross income” (MAGI)

3.8% MEDICARE ‘SURTAX’ OVERVIEW – NII


$250,000

Subject to Surtax:• Taxable Interest• Dividends• Annuity Income• Passive Royalties• Rents

Exempt from Surtax:• Wages• Exempt Interest• Active Royalties• IRA Distributions• 401(k) Distributions• Pension Income• RMDs• Social Security Income



$250,000

3.8% Medicare ‘Surtax’ Overview – Threshold Amount

“Threshold Amount”

• Is the key factor in determining the “lesser of” formula for purposes of calculating the surtax

Threshold Amounts

• Single taxpayers — $200,000• Married taxpayers — $250,000



$250,000

3.8% Medicare ‘Surtax’ Overview – MAGI

“Modified Adjusted Gross Income”• Is the amount that is compared to the “threshold amount” to

determine the “net investment income” that is subject to the surtax

MAGI Equals• Adjusted gross income

− i.e., Form 1040, Line 37• PLUS Net foreign earned income exclusion

− i.e., gross income excluded under the foreign earned income exclusion less certain deductions or exclusions that were disallowed due to the foreign earned income exclusion



$250,000



$250,000

3.8% Medicare ‘Surtax’ Example

John

• Single Taxpayer

• $100,000 of Salary

• $50,000 Net Investment Income

MAGI is $150,000

Threshold is $200,000

3.8% Surtax Would NOT

Apply

MAGI is Less Than

Threshold



$250,000


Linda

• Single Taxpayer

• $0 Employment Income


Excess of MAGI Over Threshold

$225,000- 200,000 $ 25,000

3.8% Surtax Would Apply

to $25,000

Tax = $950



$250,000


Tina & Terry

• Married, Filing Jointly

• $300,000 Combined Salary

• $0 net Investment Income

MAGI is $300,000Threshold is $250,000

Excess is $50,000

3.8% Surtax Would NOT

Apply

Wages Exempt



$250,000


Peter & Paula

• Married, Filing Jointly

• $400,000 Salary Income



$450,000- 250,000 $200,000 But $50,000 < $200,000

3.8% Surtax Would Apply

to$50,000

Tax = $1,900



$250,000


Sarah & Scott

• Married, filing jointly

• $200,000 salary income

• $150,000 net investment income


$350,000- 250,000 $100,000

3.8% Surtax would apply to $100,000

Tax = $3,800



$250,000

PLEASE NOTE

• A taxpayer should never pay both the 0.9% tax on earned income and the 3.8% surtax on net investment income on the same item of income!



$250,000

What Else is Exempt?

• S Corp distributions to owners who materially participate

• Rents received by “real estate professionals” who materially participate in underlying rental activity

• Grouping of rental activities with businesses in which owners materially participate

• Re-characterized rents received from businesses in which owner materially participates (whether or not PAL grouping election has been made)


$250,000

Applications to S Corp Earnings

• K-1 profits for S Corp owners who materially participate are not subject to either the 0.9% tax on earned income OR the 3.8% surtax on net investment income

• Distinguish portfolio income which is separately stated

• Passive owners would still be subject to the 3.8% surtax




$250,000

Applications to S Corp Interest

• For material participants, only net gain or loss attributable to property held by the entity which is not “property attributable to an active trade or business” is taken into account (e.g. stocks, bonds, other investment property) for the 3.8% surtax

• For passive investors, any and all gain or loss will be included in calculating net investment income



$250,000

Applications to Partnership Earnings

• Earnings for partners who materially participate are not subject to the 3.8% tax on net investment income BUT will be subject to the 0.9% tax on earned income

• Passive owners are just the opposite

− They would be subject to the 3.8% surtax on NII, but not the 0.9% tax on earned income



$250,000

Applications to Partnership Interest

• For material participants, only net gain or loss attributable to property held by the entity which is not “property attributable to an active trade or business” is taken into account (e.g. stocks, bonds, other investment property) for the 3.8% surtax

• For passive investors, any and all gain or loss will be included in calculating Net Investment Income


Entity Materially Participate

3.8% Tax .9% Tax

S-Corp Yes No No

S-Corp No Yes No

Partnership Yes No Yes

Partnership No Yes No

Trade or Business Activity

Understanding the ‘Surtax’ Code 469 PAL Rules

SINGLE TAXPAYER


$250,000

2012 2013 Change

Wages $200,000 $200,000

Itemized Deductions (8,900) (8,900)

Exemptions (3,800) (3,900)

Taxable Income $187,300 $187,200

Federal Income Tax $ 46,337 $ 45,907 ($430)

SINGLE TAXPAYER


$250,000

2012 2013 Change

Wages $250,000 $250,000


Exemptions (3,800) (3,900)



Surtax - 450 450

Total $ 61,957 $ 61,895 ($ 62)

Surtax is .9% on excess wage of $250,000 - $200,000 threshold.

SINGLE TAXPAYER


$250,000

2012 2013 Change

Wages $200,000 $200,000

Rents 50,000 50,000


Exemptions (3,800) (3,900)



Surtax -___ 1,900 1,900

Total $ 61,957 $ 63,345 $1,388

Surtax of 3.8% on rents of $50,000 No surtax if married filing joint return.

SINGLE TAXPAYER 2012 2013 Change

Wages $450,000 $450,000

Capital Gains 100,000 100,000

Itemized Deductions (29,589) (20,589) (9,000)

Exemptions 3,800 -___ (3,800)

Taxable Income $516,611 $529,411 $12,800

Federal Income Tax $137,575 $147,811 $10,236

Surtax 3.8% -___ 3,800 3,800

$137,575 $151,611 $14,036

Surtax of 3.8% on capital gains of $100,000.Additional $2,250 in the .9% surtax with held at source.

SINGLE TAXPAYER


$250,000

2012 2013 Change

Retirement Income $150,000 $150,000

Social Security 17,000 17,000

Dividends 50,000 50,000


Exemption (3,800) (3,900)



Surtax 3.8% -___ 646 646

Total $ 44,557 $ 44,676 $119

MARRIED TAXPAYERS


$250,000

2012 2013 Change

Wages $280,000 $280,000

Interest 10,000 10,000

Dividends 30,000 30,000

Business Income 90,000 90,000


SE Tax Deduction (1,205) (1,205)

Itemized Deductions (24,065) (19,301) (4,764)

Exemptions (7,600) -____ (7,600)

Taxable Income $427,130 $439,494 $12,364

MARRIED TAXPAYERS 2012 2013 Change

Federal Income Tax $103,459 $106,946 3,487

AMT 10,669 6,456 (4,213)

114,128 113,402 (726)

Self-Employment Tax 2,410 2,410 -

Surtax 3.8%Surtax .9%

- -____

3,420 1,080

3,420 1,080

$116,538 $120,312 $3,774

Surtax of 3.8% on NII of $90,000 ($10,000 + $30,000 + $50,000)

Surtax of .9% on wages of $280,000 + profits of $90,000 less threshold

MARRIED TAXPAYERS


$250,000

2012 2013 Change

Wages $280,000 $280,000

Interest & Dividends 40,000 40,000

Business Income 200,000 200,000


Rental 200,000 200,000

SE Tax (2,678) 2,678

Itemized (42,345) (28,325) $14,020

Exemption (7,600) -____ 7,600

Taxable Income $717,377 $738,997 $21,620

MARRIED TAXPAYERS


$250,000

2012 2013 Change

Federal Income Tax $204,221 $224,609 $20,388

SE Tax 5,356 5,356 -

Surtax 3.8% - 11,020 $11,020

Surtax .9% ___ -___ 2,070 2,070

$209,577 $243,055 $33,478

Surtax of 3.8% on NII of $40,000 + 50,000 + 200,000

Surtax of.9% on $280,000 + 200,000 less threshold $250,000

QUESTIONS?Contact Us:

Mayfield Village Officeph 440-449-6800

Michael Minotti, [email protected]

Steven Hartstein, CPA, [email protected]

Mike Trabert, CPA, CVA, CMAP, [email protected]

Akron Officeph 330-668-1100

Jim Forbes, [email protected]

Jenna Staton, [email protected]

mailto:[email protected]





Thank You Very Much

American Taxpayer Relief Act

Business

Transcript of American Taxpayer Relief Act