Uncertain Centroid based Partitional Clustering of Uncertain Data
Planning for Taxes in an Uncertain Environment James F. Knight, CPA.
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Transcript of Planning for Taxes in an Uncertain Environment James F. Knight, CPA.
![Page 1: Planning for Taxes in an Uncertain Environment James F. Knight, CPA.](https://reader036.fdocuments.in/reader036/viewer/2022081516/551c00a9550346b24f8b4bfb/html5/thumbnails/1.jpg)
Planning for Taxes in an Uncertain Environment
James F. Knight, CPA
![Page 2: Planning for Taxes in an Uncertain Environment James F. Knight, CPA.](https://reader036.fdocuments.in/reader036/viewer/2022081516/551c00a9550346b24f8b4bfb/html5/thumbnails/2.jpg)
• “This is a question too difficult for a mathmatician. It should be asked of a philosopher”.– Albert Einstein, about filling out his tax form in
1944
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What we’ll talk about
• Expiration of President Bush’s 2001 & 2003 tax cuts
• Immediate(1/1/13) impact of the Patient Protection and Affordable Care Act (PPACA) & Health Care and Education Reconciliation Act of 2010 (HCERA)
• Long-term implementation of PPACA & HCERA
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Expiration of Bush tax cuts
• Originally extended in December of 2010• Set to expire December 31, 2012
– Political uncertainty vs. conventional wisdom
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Expiration of Bush tax cuts
• Some key notable changes include;– Top rates increase from 33% to 36% and from
35% to 39.6%– Top long-term capital gains tax rate will
increase from 15% to 20%– Qualified dividends will no longer be subject
to preferred tax rate of 15%. They will be subject to ordinary tax rates.
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Expiration of Bush tax cuts
• Some key notable changes include;– Itemized deductions will again be phased out
by the lesser of (a) 3% of the excess of adjusted gross income over an applicable amount or (b) 80% of the amount of the itemized deductions otherwise allowable for such taxable year.
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Expiration of Bush tax cuts
• Some key notable changes include;– Estate, gift and generation-skipping transfer
tax exemptions will be reduced from $5.12 million to $1million and maximum transfer rates will increase from 35% to 55%
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2013 Impact of PPACA
• Key Provision– Addition of FICA Hospital Insurance Payroll
Tax• High-income earners will be subject to an
additional payroll tax of 0.9% on wages received in excess of the following threshold amounts;
– Married filing jointly - $250,000– Married filing separately -$125,000– Single or head-of-household - $200,000
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2013 Impact of PPACA
– Addition of FICA Hospital Insurance Payroll Tax• FICA (Federal Insurance Contributions Act)
– Social Security portion (4.2% of wages up to $110,000)– Medicare portion (1.45% on all wages)
» Employer “match” -6.2% SS, 1.45% Medicare
• New 0.9% added to Medicare tax on wages earned in excess of the applicable threshold amounts for a combined employee Medicare rate of 2.35%
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Addition of FICA Hospital Insurance Payroll Tax
• The additional tax applies to wages and self-employment income
• It will not be adjusted for inflation• It will not qualify for the above-the-line
deduction for 50% of SE tax.• Need to be considered for estimated tax
purposes.
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Addition of the 3.8% Medicare Contribution Tax
• Beginning in 2013, a new 3.8% Medicare tax will be imposed on certain unearned income of individual, trusts, and estates.
• This tax is in addition to any other income taxes a taxpayer may owe.
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Addition of the 3.8% Medicare Contribution Tax
• For individuals, the tax is calculated by multiplying the 3.8% rate by the LESSER of;– Net investment income for the year, or – Modified adjusted gross income (MAGI)
exceed the threshold amount
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Addition of the 3.8% Medicare Contribution Tax
• Net investment income is unearned income including;– Interest, dividends, capital gains– Annuities, rents and royalties– Passive income from a business– Net gain on the sale of a principal residence
in excess of the current exclusion amounts– Gain on the disposition of passive activity
property
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Addition of the 3.8% Medicare Contribution Tax
• Net investment income does NOT include;– Pension, IRA, Profit sharing plan distributions– Tax-exempt income– Income subject to self-employment tax– Royalties from oil and gas production, with
exceptions
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Addition of the 3.8% Medicare Contribution Tax
• Lessor of Net investment income or MAGI over the threshold amounts;– Married filing jointly - $250,000– Married filing separately - $125,000– Single or head-of-household - $200,000
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Addition of the 3.8% Medicare Contribution Tax
• If a taxpayer has net investment income but their MAGI is below the threshold amounts, they will not be subject to the tax
• If a taxpayer has MAGI above the threshold but has no net investment income, they will not be subject to the tax.
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Addition of the 3.8% Medicare Contribution Tax
• Example– Harry and Teri, a married couple filing a joint
return, have 2013 MAGI of $350,000 and $60,000 of net investment income.
– They will owe 3.8% medicare contribution tax on $60,000 or $2,280.
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Addition of the 3.8% Medicare Contribution Tax
• The MC tax also applies to estates and trusts.– 3.8% applies to the lesser of (a) the
undistributed net investment income or (b) the AGI over the amount at which the highest trust and estate tax bracket begins • Over $11,650 for 2012
– Tax doesn’t apply to trusts that don’t have undistributed income (simple trusts)
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Combined effect on tax rates
Source of income 2012Maximum Maximum Total maxumum tax rate Total maximum tax rate if Rates Rates If subject to additional subject to additional 0.9%
3.8% MC Tax FICA-HI taxLong-term capital gains 15% 20% 23.80% N/AQualified dividends 15% 39.60% 43.40% N/AOrdinary income(excluding wages) 35% 39.60% 43.40% N/AWages (includes wage earner's 36.45% 41.05% N/A 41.95%1.45% Medicare payroll tax)
2013
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Strategies in anticipation of higher rates
• Accelerate income– Bonuses, commissions– Convert to a ROTH in 2012
• Not subj to minimum distribution requirements
– Consider exercising nonqualified stock options
– Sell appreciated property prior to year end• Stocks, principal residence, other real estate
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Strategies in anticipation of higher rates
• Reset low basis positions– Wash sale rules don’t apply to gains
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Strategies in anticipation of higher rates
• Defer income– Increase retirement contributions
• IRA contributions reduce MAGI and future distributions are not considered net investment income
• 401(k) contributions reduce MAGI and wages subject to MC tax
• Consider tax-deferred annuities• Life insurance-tax deferred growth free from
current income tax and MC tax.
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Strategies in anticipation of higher rates
• Reduce income– Municipal bonds– Growth investments– Consider gifting assets that produce net
investment income
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Estate planning strategies
• Take advantage of current $5.12 million exclusion– Important even if estate is not in $5 million
range– Consider correcting gifting inequities– Trusts help keep control if beneficiaries not
ready
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Business planning
• Expiration of bonus depreciation• Reduction of Sec. 179 limit
– Current $139,000 with $560,000 investment ceiling
– Drops to $25,000 with a $200,000 investment ceiling
• Entity selection to reduce SE tax.
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Other effects of the legislation
• 2012 - Disclosure of health benefits on employees W-2
» Supposed to be effective in 2011 but mandator in 2012
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Other effects of the legislation
• 2013– Medical expense threshold
» Under 65 –increases to 10% of AGI» Over 65 -remains 7.5%
– Fee imposed on health plans» $1 per covered person in 2013, $2 in 2014
– Maximum flexible spending provision for medical expenses capped at $2,500
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Other effects of the legislation
• 2014– Premium assistance credit
• Refundable credit for individuals with HH income between 100% and 400% of federal poverty level.
– Excise Tax on Uninsured• New law requires citizens and legal residents to
maintain minimum health insurance coverage.– Penalties will be greater of 2.5% of amount by which
household income exceeds amount requiring filing of return or $695 per uninsured adult in household
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Other effects of the legislation
• Excise Tax on Uninsured(cont’d)– Individuals or employers will be offered a
variety of optional coverage packages with different deductibles, copays, etc. but all offerings will meet federally mandated minimum coverage requirements.
– Federal government will subsidize cost for those with relatively low income.
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Other effects of the legislation
• 2014 (cont’d)– Expanded employer/administrator reporting– “Qualified benefit” through exchange
• Individual pays and claims credit or fed pays credit directly to the exchange and individual pays the difference.
– Employer penalty• “applicable large employer” that fails to provide
affordable “minimum essential coverage”
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Questions/Comments
• Thank you for being a valued friend of St. Clair CPAs