Post on 18-Jan-2015
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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.
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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
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What is the Fiscal Cliff
Sequester March ‘13
Tax IncreasesJanuary ‘13
Debt Ceiling2012
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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
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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
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The Result
The American Taxpayer Relief Act of 2012
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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
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American Taxpayer Relief Act of 2012
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
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American Taxpayer Relief Act of 2012
Individual Provisions
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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
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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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Individual Provisions
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
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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%
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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%
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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
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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
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American Taxpayer Relief Act of 2012
Business Provisions
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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
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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
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American Taxpayer Relief Act of 2012
Healthcare Reform
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Health Care Legislation
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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”
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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 %.
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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
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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
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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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American Taxpayer Relief Act of 2012
Closing Comments
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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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American Taxpayer Relief Act of 2012
Questions?