Sarah Brown August 7 2013 Agenda What has passed 2013 Tax Planning Opportunities What is on horizonTax Reform Questions Each righthand bar shows what did happen under ALTRA The average increase in federal tax rates will be less than 2 percent this yearnot even half the ID: 698660
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Slide1
Fiscal Cliff: Tax Planning and Reform
Sarah Brown
August 7, 2013Slide2
Agenda
What has passed?
2013 Tax Planning Opportunities
What is on
horizon—Tax
Reform
?
Questions?Slide3
Each right-hand bar
shows what did happen under ALTRA. The average increase in federal tax rates will be less than 2 percent this year–not even half the increase if we’d tumbled over the edge.
The
bars on the left
for each income group show what would have happened if we had toppled over the cliff.
Each bar
also shows the elements of that tax hike—how much would have come from the end of the Bush-era tax cuts, the expiration of the payroll tax cut etc.Slide4
What has Passed?Slide5
American Taxpayer Relief Act of 2012
Health Care Taxes
Top Individual Tax Rates
Capital Gain & Dividend Rates
Alternative Minimum Tax
Itemized Deduction LimitationPhase-out of Personal ExemptionsEstate & Gift Tax
R&D Credit
50% bonus depreciation extended thru 2013
Section 179 expensing Limitation
Energy Provisions
Exclusion for Gain on Sale of Qualified Small Business Stock
Major Individual Tax Provisions
Major Business Tax ProvisionsSlide6
New Medicare Taxes in Effect
for
incomes above $200,000 single/$250,000 joint
Increase of 0.9% in the employee share of tax
(from 1.45% to 2.35%) Employee and employer combined tax rate of 3.8% on wages below threshold.Rate increase of 0.9% applies also to self-employment income (from 2.9% to 3.8%)
3.8% tax on net investment income
Applies to lesser of investment income or MAGI above threshold.
Includes interest, dividends, rents, royalties, capital gains and business income from passive activities
.
Earned IncomeUnearned IncomeSlide7
NII—Example
:
Married couple filing jointly has MAGI of $300,000; $10,000 of which is net investment income. Because the couples MAGI is above the $250,000 threshold, the new tax applies.
How much is the tax?
The tax is an additional $380.00Slide8
2013 Top Individual Tax Rates
for incomes above $400,000 single/$450,000 joint
Wage Income
Interest Income
Dividends
Capital Gains
2013 Top Rate
39.6%
39.6%
20.0%
20.0%
Base High Income Payroll Tax (Employee Share)
+1.45%
-
-
-
2013
Phase Out of Itemized Deductions (“Pease”)
+1.2%
+1.2%
+1.2%
+1.2%
2013 High Income Surtax+0.9%+3.8%+3.8%+3.8%2013 Combined Top Rate43.15%44.6%25.0%25.0%
Note:
Rates shown represent the top marginal rate of each dollar earned in top income tax bracket. Applicable for tax years beginning after December 31, 2012.Slide9Slide10
Alternative Minimum Tax
The Act permanently increases the exemption amounts for 2012 and provides indexing for inflation for taxable years beginning in 2013
.
Increase exemption amount from:
$33,750 to $50,600 (Single)
$45,000 to $78,750 (Joint)Why this matters:Provides some stability surrounding which taxpayers will be subject to this tax by eliminating the annual need for a last minute or retroactive “patch”.Slide11
Itemized Deduction Limitation
The Act repealed the limitation for taxpayers with AGI under $250,000 (Single) and $300,000 (Joint) for tax years beginning after December 31, 2012.
Deductions are reduced by 3% of the amount by which AGI exceeds the threshold.
You can’t lose more than 80% of the itemed deductions that are affected.
Deductions NOT subject to limitation include:
Medical expenses
Investment interest expense
Casualty and theft losses
Gambling
lossesSlide12
Phase-out of Personal Exemptions
The Act initiated the phase-out for taxpayers with AGI above $250,000 (Single) and $300,000 (Joint) for tax years beginning after December 31, 2012.
For each $2,500 of AGI over the threshold, personal exemptions are reduced by 2%.
$3,900 Exemption amount for 2013
Why this matters:
Individuals with high income may want to forgo claiming a dependency exemption.Slide13
Estate & Gift Tax
$5 million exemption (adjusted for inflation) made permanent. Sets the top tax rate at 40% for estates of decedents dying after December 31, 2012.
The Act also unified estate and gift taxes, providing for a single exemption and single rate schedule for the two taxes.
Why this matters:
Eliminated uncertainty surrounding the wavering exemption amount. Taxpayers that put gift and estate planning on hold can move forward.Slide14
Business Tax Provisions
R&D
Credit
The R&D Credit was a Reagan Administration initiative encouraging private sector innovation and competition with foreign competitors. The R&D Credit has since been expanded to apply to more types of businesses, and the Obama Administration has proposed both making it permanent. The R&D Credit, although labeled a “temporary tax feature,” has been extended over 15 times.
Credit based on “Qualified Research Activities and Expenses”
Why this matters? This credit applies to many businesses who aren’t aware of its application to their industry/process.Whenever some new “thing” is created, a potential exists for the R&D Credit. It applies to all industries, NOT just manufacturing.
How Handsome.Slide15
Business Tax Provisions
Bonus
Depreciation
Extends one year the 50% bonus depreciation for qualified property under sec 168(k).
Placed in service before Jan. 1, 2014 (before Jan 1, 2015 for certain long-lived and transportation assets).
Generally, qualified property includes:Property with a MACRS recovery period of 20 years or lessCertain computer software
Water utility property
Qualified leasehold improvement property
Why it matters
?
First-Year Bonus Depreciation can matter significantly in lowering TISlide16
Extends the
15-year
straight-line cost recovery through 2013
for:
certain leaseholdsrestaurant retail improvements new restaurant buildingsWhy it matters?Without this extension, leasehold improvements would revert back to a 39-year
life which would mean smaller incremental depreciation and deferred tax benefitsBusiness Tax Provisions Leasehold ImprovementsSlide17
For property placed in service during 2013, increased limitation for expensing under section 179 rather than depreciating property.
Limitation is
raised to $500,000
and would be reduced if the cost of section 179 property placed in service exceeds the $2M phase-out amount.
Allows the taxpayer to expense up to $250,000 of the cost of qualified leasehold improvement property, qualified restaurant property, and qualified improvement property.
These limitation amounts will return to an allowance of $25,000 and $200,000 respectively, after 2013.
Why it matters?
Exceeds benefit of 50% bonus depreciation!!
Business Tax Provisi
ons
Section 179 Expensing LimitationsSlide18
Extension of Tax Credits for construction of energy-efficient everything:
New homes
Improvements to existing homes
Appliances
Further incentives for biodiesel, renewable diesel, alternative fuel, alternative fuel mixtures
Extension of production tax credit for wind through 2013Why it matters?As companies are making improvements, energy efficiency needs to be a considerationBusiness Tax Provisions
Energy
ProvisionsSlide19
Encourages non-corporate investors to support small, emerging businesses
Extended the time period, through 2013, where non-corporate purchasers of small business stock are eligible for the 100% gain exclusion upon later sale of said stock
Exclusion of Gain only applies to certain scenarios:
Gain must equal $10M or 10 times the aggregate tax basis in the stock
Investor must hold stock for at least 5 years
Business Tax Provisions Exclusion from Taxable Gain on Sale of Small Business StockSlide20
2013 Tax Planning OpportunitiesSlide21
Individual Tax Planning
Reassess plan for gift giving now that $5M exemption is permanent & estate tax rate is at 40%.
Have a 401(k)?
Distribute to a Roth
Charitable distributionCapital gain planningOptimal timing of gain or loss recognition
Coordinate with ordinary income Combine tax treatment of more than one provision:Have a dependent with earned income?
Pay their college tuition?
Phased out of exemptions?
Would it be more tax advantageous to gift the tuition to dependent and have them claim tuition expense as an above the line deduction on their tax return?
Client
Discussions—Examples
Think outside the boxSlide22
3.8% Surtax on Investment Income
Category #1
– Interest, dividends, annuities, royalties and rent.
Exception if generated in trade or business
Category #2 – Business income from a passive activity or a business of trading in financial instruments/commodities.Coordination with 469 rules for material participation
Category #3 – Net gain “to the extent taken into account in computing taxable income”.Net gain defined as: “gain attributable to the disposition of property other than property held in a (non-passive) trade or business”. What about the sale of S-Corp stock or Partnership Interest? Special Rule…
What is “Net Investment Income”?
Note: Classification of trade/business
vs.
investment income is made at the partnership level. However, trade/business income to partnership will be taxed as investment income to an inactive owner.Slide23
3.8% Surtax on Investment Income
You are a 50% partner in an active business.
You sell your 50% partnership interest for a gain, which would be subject to the 3.8%
surtax. Assume
that if the partnership sold all of its assets, because you are active in the business, that would be the sale of business assets that is not subject to the 3.8% surtax. Because none of your share of the gain from a hypothetical sale would be subject to the 3.8% surtax, none of your gain on the sale of your partnership interest would be subject to the 3.8% surtax.
Example—Sale of Partnership InterestSlide24
3.8% Surtax on Investment Income
Wages, salary and other compensation income
Ex:
Guaranteed
PaymentsIncome on the exercise of compensatory optionsIncome on the vesting of restricted stockQualified retirement plan distributions
What is NOT “Net Investment Income”?Slide25
Escaping the 3.8% tax
Understanding the interplay between NII and
“other income”
NII is fairly fixed, can control other income
Other income is fairly fixed, can control NIIIncrease participation to make passive income non-passiveSeven pieces of how a partner will be considered an active part of the partnership’s business under Reg. 1.469-5T
Review how your passive activities are aggregatedOne time regrouping of activities for taxpayers with net investment income (Prop. Reg. 1.469-11(b)(3)(iv))Use of the S-corporationFlow-through income from an S-corp is not subject to SE
What are
Some Planning Opportunities
?Slide26
Escaping the 3.8% tax
Three buckets of income:
Employee wages and SE income
Subject to the 2.9% rate and will be subject to 3.8% rate if exceed earned income threshold
Investment IncomeSubject to the 3.8% rate to the extent income exceeds threshold
Other items included in gross income but not subject to Medicare taxesGoal—More income in this bucket! Aka “Sweet Spot”
Not all income is either earned or unearned…Slide27
Escaping the 3.8% tax
Taxation
of flow-through income
General Partner
All business income is subject to SE, regardless of participationLimited Partner
Active – Guaranteed payment subject to SE, remaining business income is not subject to Medicare taxesInactive – All business income is subject to NIIPartnership Interests
S-Corp Shareholder
Active – Reasonable compensation taxed as wages, remaining business income is not subject to Medicare taxes
Inactive – All business income is subject to NIISlide28
What is on the horizon—Tax Reform?Slide29
Tax Reform: What are the MACRO factors?
What is the “appropriate” level of federal taxation?
What is the distribution of the federal tax burden on American households?
Which provisions of the tax code promote economic growth?
Which provisions of the tax code impeded economic growth?
How do we stay or reduce the deficit?Slide30
Are We Really Paying a lot in Taxes?Slide31
Who’s paying NO Taxes?Slide32
Corporate & Pass-thru
Shares
of
business incomeSlide33
Gov Revenue Estimates for Repealing Selected Tax Expenditures
Provision
($ Billions, 2012-2021)
Portion related to C Corporate Taxpayers
Total for All
Business TaxpayersRepeal MACRS
and apply Alternative Depreciation System
506.8
724.1
Repeal expensing of research and experimental expenditures
152.2160.2
Repeal Section 199 domestic production activities deduction127.0
163.9
Repeal LIFO inventory accounting
method
62.7
69.7
Repeal
credit for low income housing
33.0
34.8
Repeal deferral of gain on like kind exchanges
16.018.2Repeal completed contract method13.913.9Slide34
Other Corporate Tax Expenditures
Provision
(2012-2016)
5 year amount
($
Billions)Deferral of active income of controlled foreign corporations239.7
Equipment depreciation in excess
of alternative depreciation system
Includes bonus depreciation and general acceleration under MACRS
(5.5)
Deduction for income attributable for domestic production activities53.2Exclusion of interest on public purpose tax-exempt bonds
47.4Inventory property sales source rule exception
16.9
Tax credit
for low income housing
32.4
Expensing of research and experimental expenditures
30.3
LIFO
method
22.0
Reduced rates for first $100,000 of corporate
taxable income17.1Slide35
Obama Administration FY 2014 Proposed Revenue Raising Budget Components
Individual
Tax Reform
Proposal
10 year amount ($ Millions)28% Cap on Value of certain Individual deductions and exclusions
529,261
30% Minimum Tax on Individuals
with income of over $1M
53,387
Modify Gift/Estate Tax Provisions78,559Carried
Profit Interests being Taxed as Ordinary Income***15,909Slide36
President Obama’s
Framework
for
Business Tax Reform
Reduce corporate rate from 35% to 28%
Provide 25% rate for certain domestic manufacturing incomeIncrease research credit and make permanentFully offset with base broadening optionsAddress depreciation schedulesReduce bias toward debt financingEstablish greater parity between large corporations and non corporation businesses.
Limit deferral of
U.S.
tax on foreign earnings
Minimum tax on foreign earnings
Rejects “pure” territorial systemPromote transparencySlide37
Other Tax Reform
Proposals
for
Business/Individual Tax Reform
Last major tax reform was 1986….
This month (July 2013), the U.S. Senate Finance Committee (Baucus-Hatch) is setting out a bi-partisan path to “start from scratch” with a pledge to hold all lobbyists accountable for every loopholeZero-based
tax reform:
Eliminate all deductions, exclusions and credits that reduce taxable income
Require all tax expenditure support to justify its proposal as if it were being proposed for the first time (historical data not relevant)
This concept has been mirrored by The House Ways and Means Committee (Camp) suggesting possible momentum and agreement between the House and Senate.Slide38
Questions?Slide39
©2013 True
Partners Consulting
LLC. All
rights reserved
. Printed in the U.S.A.Slide40