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Federal and Virginia Tax UpdatePresented To
The Commonwealth Association of Financial ProfessionalsFebruary 21, 2013
Michael [email protected]
804.282.7636
IRS Compliance
Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties imposed under the Internal Revenue Code or applicable state or local tax law or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.
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Agenda
- American Taxpayer Relief Act of 2012- Individual - Business
- Patient Protection of 2010- Increased Medicare Tax- Tax on Net Investment Income- Insurance Mandate
- Virginia Legislative Update
- Credits To Consider
- Hill Watch
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American Taxpayer Relief Act of 2012
Fiscal Cliff Crisis Averted
Key Provisions
• Permanently extends the Bush tax cuts for individual filers with AGI of $400,000 or less and MFJ filers with AGI of $450,000 or less.
• Phase out of personal exemptions and itemized deductions is reinstated for single filers with AGI of $250,000 or more and MFJ filers with AGI of $300,000 or more.
• Permanently Increases the Alternative Minimum Tax exemption and indexes for inflation.
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Individual Marginal Tax Rates
AGI 2012 AGI 2013 +
$0 - $17,000 10% $0 - $17,850 10%
$17,001 - $69,000 15% $17,851 - $72,500 15%
$69,001 - $139,350 25% $72,501 - $146,400 25%
$139,351 - $212,300 28% $146,401 – $223,050 28%
$212,301 - $379,150 33% $223,051 - $398,350 33%
$379,151 - 35% $398,351 - $450,000 35%
$450,000 - 39.6%
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Capital Gains / Dividends
AGI 2012
N/A 15%
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AGI 2013
$0 - $450,000 15% ***
$450,001 - 20% +
Medicare Tax 3.8%
Total Tax 23.8%
*** Medicare tax applies to AGIabove $250,000
Other Individual Changes
• Extends through 2013 the election to claim an itemized deduction for state and local general sales tax in lieu of income taxes.
• Extends permanently the $1,000 child tax credit.– Phase out begins at $110,000
• Extends permanently the Bush-era enhancements including 35% credit rate with $3,000 cap on expenses.
• Extends through 2017 the American Opportunity Tax Credit (100% of first $2,000 / 25% of next $2,000).
• Max $2,500 on student loan interest deduction and permanently suspends 60-month rule.
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Other Individual, Cont.
• Permanently extends all existing marries penalty relief for taxable years beginning after 2012.
• Above the line educator deduction ($250).• Extends for 2012 and 2013 the 50% and 100%
limitations and 15-year carryover period for Qualified Conservation Contributions.
• Nontaxable IRA transfers to eligible charities
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Changes to Depreciation
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2012 2013 2014
Bonus Depreciation 50% 50% N/A
Section 179 $500,000 $500,000 $25,000
Qualified LH Improvements? Yes Yes No
Energy Incentives
• Individual– Credits for Energy Efficient
Improvements to taxpayers existing residence.
– $500 lifetime limit• Business
– Alternative fuel refueling credit– Energy efficient new homes credit– Energy efficient commercial building
deduction
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Key Business Changes
• 100% exclusion on gain on sale of small business stock– Extended through 2013– Qualified small business stock is stock of a C
Corporation with aggregate gross receipts not exceeding $50 million at any time.
• Reduced recognition period for S Corporation built-in gains tax.– 5 year recognition period if S election made at least
five years prior to 2012 or 2013
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Federal Estate Tax
• Permanently provides for a maximum federal estate tax rate of 40 percent with an annually inflation-adjusted $5 million exclusion.
• Portability of unused exemption between spouses made permanent.
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Estate and Gift Tax Exclusion
Year Estate Gift GST
2009 $3,500,000 $1,000,000 $3,500,000
2010 $5,000,000 $1,000,000 N/A
2011 $5,000,000 $5,000,000 $5,000,000
2012 $5,120,000 $5,120,000 $5,120,000
2013 $5,250,000 $5,250,000 $5,250,000
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Estate and Gift Tax Max Rates
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Year Estate Gift GST
2009 45% 45% 45%
2010 35% 35% N/A
2011 35% 35% 35%
2012 35% 35% 35%
2013 45% 45% 45%
Patient Protection Act
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Patient Protection Act
• 2013– Increased Medicare tax – Tax on Net Investment Income
• 2014– Individual insurance mandate– Shared responsibility payments
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Increased Medicare Tax
• 0.9% of wages (employee portion)• Applies to self-employed taxpayers• Threshold
– MFJ $250,000
– MFS $125,000
– Other $200,000
• What is the employer responsibility for the increased withholding?
The employer is not required to verify other sources of income.
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Tax on Net Investment Income • Beginning January 1, 2012, imposes tax of 3.8%
on the lesser of – An individuals
• Net investment income and,• Modified AGI in excess of threshold amount
– An estate’s or trust’s • Undistributed Net Investment Income• AGI in excess of threshold amount
– Threshold• S $200,000• MFJ $250,000
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Net Investment Income (NII)
• Sum of the following three items, less allowed deductions:1) Gross income from interest, dividends, annuities,
royalties, and rents, other than such income derived in the ordinary course of a trade or business
2) Gross income from a passive trade or business or from the trade of business of trading financial instruments or commodities
3) Net Gain from the disposition of property
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Background for the NII
• SECA tax applies to “net earnings from self-employment”
• SECA Tax Exclusions– Rentals from real estate– Dividends and interest– Certain gains and losses from the disposition of
property– Partnership retirement benefits– Distributive share of a limited partner
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NII Exclusions
• Wages• Self-employment income• Income derived from a partnership and S-
corporations where the taxpayer materially participates.
• Investment income if the income is derived in the ordinary course of the trade or business and the taxpayer materially participates.
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Planning for the NII
• May need to increase quarterly estimated tax payments beginning in April 2013.
• Review partnership tax distribution provisions.
• Consider requiring making trust distributions to avoid NII tax at the trust level.
• A new spin on some old planning opportunities…
– Direct IRA distribution to Charity
– Like-kind exchange
– Donate LTCG property directly to Charity
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Additional Planning
• New Grouping Election?– Review passive versus material participation for all
entities and consider making new grouping elections. Regulations allow a fresh start.
• Possible conversion to C Corporation?– NII does not apply to C Corporations. Highest
marginal tax rate for C Corporations in now lower than highest marginal individual rate. Consider conversion to C for lower marginal rate and to avoid NII.
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Shared Responsibility
• Law of the Land• Decisions, Decisions - Play or Pay
– Employers with 50 or more Full-Time Equivalents (FTE’s)– 12 month look-back for large employer determination– Companies should be evaluating cost/benefit of required
coverage versus penalties.– Review FT/PT classifications
• IRS Notice 2012-58 Safe Harbor
– Adjust employer contributions based on income• Employee must pay less than 9.5% of W-2
– Coverage for spouse is not required• Required for eligible children under age 26
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Virginia Legislative Update
VA Update
• Federal Conformity– Exceptions – bonus depreciation and 100% DPAD
• Income from Rehab Credits– Subtraction to the extent of any income recognized
• Single factor apportionment for retail companies
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Credits to Consider
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Federal
• Research and Development
• Work Opportunity Tax Credit
• New Markets Tax Credit
• Energy Credits – Buildings
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Virginia
• Livable Home Tax Credit
• Neighborhood Assistance Tax Credit
• Research and Development
• Telework Expense Tax Credit
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Hill Watch
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Gazing Into the Crystal Ball
• Individual Tax Reform– Buffett Rule– Itemized Deduction Limitations
• Corporate Tax Reform– Loopholes– Earnings Repatriation– Carried Interest– Lower Corporate Rates
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Corporate Tax Rate Comparison
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Michael Hanger
Dixon Hughes Goodman, LLP
4510 Cox Road, Suite 200
Glen Allen, VA 23060
840.282.7636
