©2012 CliftonLarsonAllen LLP 1 111 Tax Policy Outlook for 2013 Marni J. Spence, CPA 407-802-1205 [email protected]

©2012 CliftonLarsonAllen LLP1 111

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Tax Policy Outlook for 2013

Marni J. Spence, CPA407-802-1205

[email protected]

mailto:[email protected]

©2012 CliftonLarsonAllen LLP2

The Fiscal Cliff

Federal taxes are scheduled to rise in 2013 for six reasons:1. Expiration of Bush-era tax cuts from 2001 and 20032. Expiration of Obama tax cuts from the 2009 and 2010

Tax Acts.3. Many short-term tax breaks are set to expire if not

extended by Congress.4. Expiration of the payroll tax cut.5. New taxes from the Affordable Care Act6. Alternative Minimum Tax (AMT) more prevalent due to

the above changes and the expiration of the patch in 2011.


AMERICAN TAX RELIEF ACT OF 2012Passed on January 1, 2013


2% Payroll Tax Cut

• Employee share of OASDI cut from 6.2% to 4.2% for 2011 and 2012

• SE tax rate also cut (12.4% to 10.4%)• No high income phase-out; 2012 max savings of

$2,202 (2% x $110,100)• Income tax deduction of 50% of SE tax unchanged at

full 6.2% (= employer share)• 2012 ATRA did not extend this for 2013


Rate Brackets

• Brackets and rates continued from 2012– No expiration date– 15% bracket of MFJ is double that of a single person

• Added 39.6% bracket, effective on taxable income above– $450,000 (MFJ and Surviving Spouse)– $425,000 (H of H)– $400,000 (Single)– $225,000 (MFS)


Pease Reinstated

• 3% of overall itemized deduction phase-out• Reduces itemized deductions by 3% of AGI in excess of threshold

levels– $300,000 MFJ– $275,000 H of H– $250,000 Single– $150,000 MFS

• Does not include itemized deductions for investment interest, medical, casualty or theft losses and gambling losses

• Cannot reduce itemized deductions by more than 80%• Effective rate increase is 3% of stated tax rate

– 1.188% for those in the 39.6% bracket


PEP Reinstated

• Phase-out of personal exemption deductions for taxpayers with AGI above the same threshold level as the Pease reduction– Reduces personal exemption by 2% for each $2,500 (or

portion thereof) by which AGI exceeds the threshold• Effective increase in tax rate varies based upon

number of personal exemptions– 4.37% for four exemptions in the 35% bracket– Note that MFJ are fully phased out before being subject to

the 39.6% bracket


Capital Gains and Qualified Dividends

• Continued at 0% and 15% levels• Increased to 20% for taxpayers in the 39.6% bracket

– Only to the extent that ordinary income would have been taxed in the 39.6% bracket

• Stated capital gain rates (ignoring 3.8% NIIT):– 0% for taxpayers in 10% and 15% brackets– 15% for taxpayers in 25% to 35% brackets– 20% for taxpayers in 39.6% bracket– 25% for “unrecaptured” Section 1250 depreciation– 28% for gains on collectibles


New Marginal Tax Rates

Taking into account the 3.8% net investment income tax, personal exemption and overall itemized deduction phase-outs

Married Couple with Two ChildrenFor 2013

Marginal MarginalAdjusted Ordinary Capital Gross Taxable Income GainsIncome Income Tax Rate Tax Rate

Less than $250,000 Greater than zero, but less than $72,500 15.000% 0.000%Greater than $250,000, but less than $300,000 Greater than zero, but less than $72,500 18.800% 3.800%Greater than $300,000 Greater than zero, but less than $72,500 21.122% 6.122%

Less than $250,000 Greater than $72,500, but less than $223,050 28.000% 15.000%Greater than $250,000, but less than $300,000 Greater than $223,050, but less than $398,350 36.800% 18.800%Greater than $300,000, but less than $425,000 Greater than $223,050, but less than $398,350 41.908% 23.908%Less than $425,000 Greater than $398,350, but less than $450,000 44.218% 24.218%Greater than $425,000 Greater than $398,350, but less than $450,000 39.850% 19.850%

Greater than $450,000 44.590% 24.990%


Alternative Minimum Tax

• Rates unchanged at 26% and 28%• Exemption increased for 2012

– $78,750 MFJ– $50,600 for unmarried (i.e., Single and H of H status)– $39,375 for MFS– Phases out at 25% beginning at AMTI of $150,000

◊ Thus, MFJ is fully phased-out at $465,000 – Indexed for inflation after 2012– No sunset clause


IRA to Charity Relief Extension

• Had expired at end of 2011• Allows for direct distribution of IRA to qualified

charity for IRA owner over age 70½ – Avoids AGI, so that phase-outs aren’t affected– Benefit for those who don’t itemize

• Extended for 2012 and 2013, important due to– Pease and PEP phase-outs– 3.8% NIIT trigger based upon MAGI


Bonus Depreciation

• 2012’s 50% bonus depreciation extended to assets placed in service prior to 2014– Calendar year provision– Extension to 2014 for certain long-production assets and

aircraft• Applies to “new” (i.e., original use) property only• Cost recovery periods 20 years and shorter


Bonus Depreciation: Bouncing %

Acquired & Placed in Service Bonus %1/1/08 – 9/8/10 50%9/9/10 – 12/31/11 100%1/1/12 – 12/31/12 50%1/1/13 – 12/31/13 50%2014 and after 0%• Qualified leasehold improvement

– Interior improvements, lease arrangement, >3 yrs. in service, not an enlargement, no related parties (but using 80% or more definition)

– Eligible for 50%


Bonus Depreciation for Autos and Trucks

• The $8,000 deduction allowed for the placing in service of a new autos is extended through December 31, 2013– Previously was to expire December 31, 2012

• Applies to light trucks or vans, including SUVs, built on a truck chassis if rated 6,000# loaded vehicle weight or less


Section 179 for 2012 and 2013

• Retroactively increased for tax years beginning in 2012 and 2013 to $500,000– Maximum applies unless taxpayer places in service more

than $2 million of qualifying Section 179 property– No provision for tax years beginning after 2013

◊ “Permanent” law lowers Section 179 deduction to $25,000

• Extends off-the-shelf computer software as eligible• Extends ability to amend or change specification of

property to be expensed• Extends “qualified real property” provision


Section 179 and Qualified Real Property

• Up to $250,000 of qualified real property may be expensed– Qualified leasehold improvement– Qualified restaurant– Qualified retail improvement

• SL 15 year writeoff continues for assets placed in service before January 1, 2014


Research Credit Extended

• Credit had expired for amounts paid or accrued after December 31, 2011

• Credit extended for amounts paid or accrued through 2013


Work Opportunity Tax Credit

• Was to expire at end of 2012 for the hiring of qualified veterans – Requires submitting Form 8850 to the appropriate state

agency within 28 days of hire• Had expired for all other categories at end of 2011• WOTC extended through 2013 for all categories

retroactive to January 1, 2012– No guidance on certification issue


S Corporation Built-In Gain

• C corporations electing S status are subject to 35% tax on built-in gains recognized during the “recognition period”– Recognition period is normally 10-years

• For years beginning in 2012 and 2013, the recognition period is 5-years (i.e., 60 months) beginning with the first day of S status– For 2012, if the S election was effective January 1, 2007 or

earlier, gains recognized are not subject to the BIG tax


Planning Opportunities

• Increasing qualified dividends in 2012– Applies to S corporations which have C corporation

accumulated earnings and profits– Elect a deemed dividend of a specific amount for 2012

◊ Changes all 2012 distributions from AAA to be qualified dividends– Especially useful if shareholders plan to sell soon– Requires consent of all shareholders

• Elect out of 2012 installment sales• IRA to charity for January 2013, to be treated as a

2012 IRA distribution


Estate and Gifts

2012 2013• Estate exemption $5.12M $5.25M• Top rate 35% 40%• Gift exemption $5.12M $5.25M

[All made permanent]

• Gift annual exclusion $13,000 $14,000


Portability

• Portability provisions no longer expire– Decedent spouse’s unused exemption amount may be

transferred to surviving spouse◊ Requires Form 706 to be filed, even though not otherwise

required◊ Applies only to unused exemption of the last decedent spouse of

the surviving spouse


Other Extenders Temporarily Extended

• Retroactive for 2012, and through 2013– State and local sales tax deduction – Teacher’s classroom expense deduction ($250 of supplies)– Qualified tuition and related expenses– Deductibility of mortgage insurance premiums– Contribution of capital gain real property for conservation

allowed against 50% of AGI– Parity in transit fringe benefits

• One year extension through 2013– Exclusion of cancellation of indebtedness on principal

residence


Five-Year Extenders, Through 2017

• American Opportunity Tax Credit (enhancement to the Hope Credit)– First $2,000 of qualified tuition and related expenses plus– 25% of the next $2,000

• Enhancements to Earned Income Tax Credit– Other aspects have been extended permanently


Permanent Changes of Extender Items

• $1,000 child tax credit (will not drop to $500)• Adoption credit and income exclusion for employer-

paid or reimbursed adoption expenses up to $10,000 (indexed)

• Child and dependent care credit ($3,000/$6,000 cap)• Deductibility of student loan interest no longer stops

after 60 months• Coverdell Education Savings Accounts fixed at $2,000• Employer-provided education assistance < $5,250


NET INVESTMENT INCOME TAXSection 1411


Net Investment Income Tax

• Starting January 1, 2013• 3.8% tax rate on net investment income• Modified AGI exceeds a threshold amount• Marginal tax rate

\ Thus, a taxpayer in the 39.6% tax bracket (i.e. the highest marginal income tax rate in 2013) will have a federal marginal rate of 43.4% on NII


Net Investment Income--Buckets

• Investment• Trade or business• Net gain on disposition of property


Applicable Threshold Amounts

• Individuals, Modified AGI– Married taxpayers filing jointly - $250,000– Married taxpayers filing separately - $125,000– All other individual taxpayers - $200,000– Nonresident aliens are not subject to the tax

◊ Special rules if married to US citizen and election is made to be treated as a resident alien

Documents

©2012 CliftonLarsonAllen LLP 1 111 Tax Policy Outlook for 2013 Marni J. Spence, CPA 407-802-1205 [email protected]