American taxpayer relief act

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Presented by

Tom Ritchie

Fiscal Cliff & Falling Rocks

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IRS CIRCULAR 230 NOTICE

Any tax advice expressed in this communication is not intended to be used, and cannot be used, for the purpose of avoiding penalties imposed on the taxpayer

by any governmental taxing authority or agency. In addition, if any such tax advice is made available to any person or party other than the party to whom the advice was originally directed, then such advice, under IRS Circular 230, is

to be considered as being delivered to support the promotion or marketing (by a person other than Eide Bailly LLP) of the transaction or matter discussed or

referenced. Thus, each taxpayer should seek specific tax advice based on the taxpayer’s particular circumstances from an independent tax advisor.

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Eide Bailly

• Top 25 CPA firm in the US

• One of the Largest CPA firms in Oklahoma

• Prepare more than 80,000 returns annually

• Help our clients manage their taxes through planning, business advice, tax research and IRS audit support.


Tom Ritchie

• 25 years experience • OSU Alum• Head of Eide Bailly Tax Credit Division

"To me, client service is bringing value to my clients by providing them with great service

and progressive thinking, while still managing to save them money." ~ Tom


What is the Fiscal Cliff

Sequester March ‘13

Tax IncreasesJanuary ‘13

Debt Ceiling2012


What is the Fiscal Cliff

• At Midnight, December 31, 2012 the following took place:• Expiration of 2% payroll tax holiday• Expiration of various tax breaks for businesses• Shifts in AMT• Rollback of “Bush Tax Cuts”• Beginning of taxes related to Health Care• Scheduled spending cuts of $1.2 Trillion


We went OVER the Cliff

• We did, in fact, go “over the cliff”• 3 hours before midnight, Senate agreed to a deal• 2 hours after the deadline, Senate passed its version• 21 hours later, House approved the deal• Signed by the President on January 2, 2013

• Although we went over the cliff, however the changes were retroactive to January 1, 2013.

• Had almost 1.5 years to deal with the “Fiscal Cliff”• The “deal” dealt mostly with revenue (taxes) and

postponed spending cuts discussions (sequester) until March 1


The Result

The American Taxpayer Relief Act of 2012


American Taxpayer Relief Act of 2012

Highlights•Averts the tax “fiscal cliff” for many taxpayers•Signed into law on January 2, 2013•Extended many lapsed tax breaks prospectively and retroactively•Impacts individual and business taxpayers•Increases tax rates for defined high income taxpayers•Does not continue 2% payroll tax holiday



Highlights - Continued•Permanently “patched” and indexed AMT exemption•Estate and gift tax exemption $5 million with annual inflation adjustment•Extends sequester to March 1, 2013•Extends many energy credits•Extends permanently research credit•Extends earned income tax credit for 5 years



Individual Provisions



• Increased Tax Rates for Higher-Income Taxpayers (incomes above$400,000 single / $450,000 joint)• 39.6% top bracket

• Personal exemption phaseout and itemized deduction limitation

• Increase of 5% on capital gains and qualified dividends • only on incomes above $400,000 single/$450,000

joint


Marginal Tax Rate

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1958

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

Source: Pension Protection Act of 2006

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Wage Income

Interest Income

QualifiedDividends

Capital Gains

2013 Top Rate 39.6% 39.6% 20.0% 20.0%

2013 Phase-Out of Itemized Deductions 1.2% 1.2% 1.2% 1.2%

2013 Medicare Surtax 0.9% 3.8% 3.8% 3.8%

Top Combined Rate 41.7% 44.60% 25.00% 25.00%

Individual Tax Rates


Married with 50,000 taxable income

MARRIED FILING JOINTLY2012 2013

WAGES 68,600 68,600 INTEREST & DIVIDENDS 4,000 4,000 TOTAL INCOME 72,600 72,600

PERSONAL EXEMPTIONS 7,600 7,800 PHASEOUT OF EXEMPTIONS - -

7,600 7,800

ITEMIZED DEDUCTIONS 15,000 15,000 3 % AGI FLOOR - - NET ITEMIZED DEDUCTIONS 15,000 15,000

TAXABLE INCOME 50,000 49,800

REGULAR TAX 6,034 5,978 HIGH INCOME MEDICARE & OTHER - - TOTAL FEDERAL TAX 6,034 5,978

2 % MEDICARE HOLIDAY (1,372) - NET TAXES PAID 4,662 5,978

DIIFERENCE 1,316 28.2%


Married with 500,000 taxable income

MARRIED FILING JOINTLY2012 2013

WAGES 500,000 500,000 INTEREST & DIVIDENDS 40,600 40,600 TOTAL INCOME 540,600 540,600

PERSONAL EXEMPTIONS 7,600 7,600 PHASEOUT OF EXEMPTIONS - (7,600)

7,600 -

ITEMIZED DEDUCTIONS 33,000 33,000 3 % AGI FLOOR - (7,218)NET ITEMIZED DEDUCTIONS 33,000 25,782

TAXABLE INCOME 500,000 514,818

REGULAR TAX 144,140 151,514 HIGH INCOME MEDICARE & OTHER - 3,793 TOTAL FEDERAL TAX 144,140 155,307

2 % MEDICARE HOLIDAY (2,202) - NET TAXES PAID 141,938 155,307

DIIFERENCE 13,369 9.4%


Estate Tax

• The estate tax individual exemption is permanently set at $5 million as of • Indexed for inflation

• Maximum estate and gift tax rate permanently increased to 40%

• Spousal portability of exemption permanently extended

• Deduction for state estate tax extended

• Gift tax exemption continues unification with $5 million estate tax exemption


Other Individual Provisions

• Two-percent payroll tax holiday terminated

• Higher individual AMT exemption amounts indexed for inflation• Were set at a 1993 index!

• Educator Expense Deduction Reinstated

• Dependent and Education Credits



Business Provisions


Business Provisions

Depreciation•Bonus Depreciation Extended

• Additional 50% depreciation for property acquired and placed service before January 1, 2014.

• MACRS life of 20 years or less

• Qualified leasehold improvements – 15-year through December 31, 2013 (restaurant and retail as well)

• Defined Indian Depreciation


Business Provisions

Depreciation - Cont•179 Limits Increased

Year Dollar Limit Property Limit

2007 $ 125,000 $ 500,000

2008 250,000 800,000

2009 250,000 800,000

2010 500,000 2,000,000

2011 500,000 2,000,000

2012 139,000 560,000

2013 500,000 2,000,000



Healthcare Reform


Health Care Legislation


US Supreme Court Opinion

• National Federation of Independent Businesses v. Sebelius, 132 S. Ct. 2566 (2012) (individual mandate)• The individual mandate is unconstitutional

• “The Commerce Clause does not support the individual mandate.”

• “Even if the mandate if necessary, such an expansion of federal power in not a proper means for making those reforms effective”

• It is a tax:• Roberts “saving construction”: Roberts chose “to read the

mandate not as ordering individuals to buy insurance, but rather as imposing a tax on those who do not buy that product.”• “If a tax is properly paid, the Government has no power to compel

or punish individuals subject to it.”• “If it were read as a command, it would be unconstitutional because

the Federal Government does not have the power to order people to buy health insurance”


Constitutional Challenges

• Liberty University, et al v Geithner (employer mandate)

• Sissel v. United States Department of Health and Human Services et al (Sept 11, 2012)• Congress violated the Origination Clause (supposed to

start in House, not Senate) – House Ways and Means Committee

• Remains open question

• There is no legal obligation to purchase health insurance under the Court’s ruling

• Only the penalty was upheld under the taxing power• Court ruled that case may proceed

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2013 Provisions

• Medicare tax for high wage earners (.9%)• Net investment income tax for high wage earners (3.8%)

• Medical device excise tax (2.3%)• Improving preventive health coverage• Medical itemized deductions increases from 7.5% to 10%

• Limitation on health flexible savings accounts

• Reporting value of insurance on W-2

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Medical Itemized Deduction

Floor will increase from 7.5% to 10% for all taxpayers under 65.

Taxpayers age 65 in 2012 can still use the 7.5% threshold for 4 more years.

Only one spouse on a jointly filed return need be age 65 to use the lower %.


2013 Medicare Tax Changes

Currently 1.45% or 2.9%

For “wealthy” taxpayers, a new 3.8% on investment income (MTUI) and a .9% tax on earned income (MEII)

MAGI threshold $200,000/$250,000

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Health Care 2013

Example: Harry and Sharie, a married couple, earn wages of $125,000 and $175,000 respectively. For the first $250,000 of combined wages the Medicare tax is:

$250,000 × 1.45% = $3,625

The next $50,000 is taxed at the higher rate of 2.35% (1.45% + .09)

$50,000 × 2.35% = $1,175

The combined Medicare tax is: $3,625 + $1,175 = $4,800

The new additional tax is .09 × $50,000 = $ 450

Observation: The employer is not required to withhold the additional $450.

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Medicare Earned Income Increase

Extra .9% withheld on every wage earner that makes over $200,000/ yr.

Thresholds of $200,000/$250,000

“Settle-up” on the 1040


Investment Income Includes

Interest and dividends

Annuities (1099-R)

Rents and royalties

Passive trades or businesses

Gains from other than business property

Passive K-1 income


Not Included

IRA’s, pensions, etc. (1099-R)

Tax-exempt bond interest

Veterans’ benefits

Gain from sale of principal residence up to §121 limits

Capital gains from sale of non-passive business assets

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Health Care 2013

Observations:• Top tax bracket will be : 39.6%+3.8%=43.4%

• Invest in municipal bonds

• Invest in retirement plans

• Passive income planning

• Capital Losses before capital gains !!

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Closing Comments


Tax Strategies

Things To Consider For Future•Stay Single•Stay below 50 employees •Elect out of installment sales•Tax Credits !!!!•Reduce Depreciation•Extend your return•Pay your kids•Identify Tax Leakage



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