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Trump Taxes and 2016 tax planning for higher income earners
By Stacie Clifford Kitts
The proposed tax plans offered up by President Elect Trump and the House Republican Tax Reform Plan are presenting some unique year-end tax planning challenges.
The most common question that taxpayers are asking is, will tax rates be lower in 2017?
To help answer this question, we should first review how our tax rates work now.
We currently pay federal income taxes at graduated rates ranging from 10% to 39.6%. However, if you are a higher income earner making more than $125,000 (single) or $250,000 (married), you may pay an additional 3.8% tax on your net investment income, making your top federal rate 43.4%.
An analysis of Trump’s current plan, indicates that if your income is over approximately $425,400 (single) and $487,650 (married), you may (depending on your itemized deductions) see a significant reduction in income taxes under his plan.
However, middle class taxpayers may face an increase in tax depending on the size of their family and filing status. This is largely due to the Republican and Trump plans which seek to limit itemized and dependent deductions, expand income tax brackets, and repeal the personal exemption and head of household status.
To help better understand the possible impact on your taxes, here are some of the key proposals affecting higher income earners (AGI over $150K). Because the Trump and Republican plans are not the same, we will most likely see some sort of mix of the two plans:
Individual income tax
- Both Trump, and the House Republican Plan, will drop the number of income tax brackets to just three, at 12%, 25%, and 33%.
- The plan will also eliminate the alternative minimum tax (yay),
- it also eliminates all itemized deductions (boo) except mortgage interest and charitable giving.
- They have further proposed to limit the amount of total itemized deduction to $100,000 (Single) and $200,000 (Married). This proposal will reduce the tax incentive for charitable giving once your itemized deductions reach the allowed limit.
- Significantly for us here in California, state income taxes paid would no longer be deductible on Federal returns.
Investment income
The top rate for long term capital gains is currently 20% plus the 3.8% investment tax imposed by the Affordable Care Act (for high income earners), for a total top rate of 23.8%. Interest and non-qualified dividend income is taxed at ordinary rates.
Trump’s Plan
Trump proposes to repeal the affordable Care Act including the 3.8% tax which will cap long term capital gains at 20%.
House Republican’s Plan
On the other hand, the House’s plan would apply tax to 50% of interest income, dividends and capital gains at ordinary income tax rates. The remaining 50% would not be subject to tax. This translates to a top rate of 16.5% for investment income.
Estate and gift tax
Under current law, estates are subject to a 40% tax on the estates value over $5.45 million. In addition, beneficiaries of the estate receive a step-up in the basis of the assets value equal to the fair market value at the date of death.
Trump and the House Republican Plan propose a repeal of the estate and gift tax entirely. Trump proposes to repeal the step up in basis provision and replace it with a carryover provision for computing taxable gains on sales for estates in excess of $5 million (single) or $10 million (married). The Republican Plan provides for carryover of basis on all assets.
Business tax
The top corporate tax rate is currently 35%. Income from pass-through businesses such as partnerships and S-corporations are taxed at individual rates.
Trump’s Plan
- Trump’s plan would reduce top corporate income taxes from 35% to 15% and repeal corporate AMT tax.
- Individuals can elect a tax rate of 15% for business income from pass-through entities (including sole proprietorships).
- Distributions from large pass-through businesses received by owners who elected the 15% flat rate would be taxed as dividends. (included in overall personal taxable income)
- The Trump plan eliminates all tax credits (tax incentives) except the research credit.
- The plan would allow businesses to elect to expense capital equipment, structures and inventories directly rather than over time. However, if direct expense is elected, interest expense deductions would not be allowed.
House Republican’s Plan
- The Republican Plan would reduce the corporate tax to a flat 20%.
- Eliminate the corporate alternative minimum tax.
- Income from pass-through entities would top out at 25%.
- Costs of capital investments are immediately deductible
- Eliminates the deductibility of net interest expenses on future loans.
- Restricts the deduction for net operating losses to 90 percent of net taxable income and allows net operating losses to be carried forward indefinitely, and increased by a factor reflecting inflation and the real return to capital. Does not allow net operating losses to be carried back.
- Eliminates the domestic production activities deduction (section 199) and all other business credits, except for the research and development credit.
- Creates a fully territorial tax system, exempting from U.S. tax 100 percent of dividends from foreign subsidiaries.
- Enacts a deemed repatriation of currently deferred foreign profits, at a tax rate of 8.75 percent for cash and cash-equivalent profits and 3.5 percent on other profits.[Tax Foundation]
Conclusion
An analysis of your personal itemized deductions along with the type of income to be reported on your return, including pass through or investment income, is necessary to determine the actual impact of these proposed tax plans on your 2017 income tax. Higher income earners might consider deferring income into 2017 if possible.
IRS Special Edition Tax Tip 2013-10: Summer Job Tax Information for Students
When summer vacation begins, classroom learning ends for most students. Even so, summer doesn’t have to mean a complete break from learning. Students starting summer jobs have the opportunity to learn some important life lessons. Summer jobs offer students the opportunity to learn about the working world – and taxes.
Here are six things about summer jobs that the IRS wants students to know.
- As a new employee, you’ll need to fill out a Form W-4, Employee’s Withholding Allowance Certificate. Employers use this form to figure how much federal income tax to withhold from workers’ paychecks. It is important to complete your W-4 form correctly so your employer withholds the right amount of taxes. You can use the IRS Withholding Calculator tool at IRS.gov to help you fill out the form.
- If you’ll receive tips as part of your income, remember that all tips you receive are taxable. Keep a daily log to record your tips. If you receive $20 or more in cash tips in any one month, you must report your tips for that month to your employer.
- Maybe you’ll earn money doing odd jobs this summer. If so, keep in mind that earnings you receive from self-employment are subject to income tax. Self-employment can include pay you get from jobs like baby-sitting and lawn mowing.
- You may not earn enough money from your summer job to owe income tax, but you will probably have to pay Social Security and Medicare taxes. Your employer usually must withhold these taxes from your paycheck. Or, if you’re self-employed, you may have to pay self-employment taxes. Your payment of these taxes contributes to your coverage under the Social Security system.
- If you’re in ROTC, your active duty pay, such as pay received during summer camp, is taxable. However, the food and lodging allowances you receive in advanced training are not.
- If you’re a newspaper carrier or distributor, special rules apply to your income. Whatever your age, you are treated as self-employed for federal tax purposes if:
- You are in the business of delivering newspapers.
- Substantially all your pay for these services directly relates to sales rather than to the number of hours worked.
- You work under a written contract that states the employer will not treat you as an employee for federal tax purposes.
If you do not meet these conditions and you are under age 18, then you are usually exempt from Social Security and Medicare tax.
Visit IRS.gov, the official IRS website, for more information about income tax withholding and employment taxes.
Additional IRS Resources:
- Your First Job
- Tax Information for Students
- IRS Withholding Calculator tool
- Form W-4, Employee Withholding Allowance Certificate
- Self-Employed Individuals Tax Center
- Student’s Page – High School
- Student’s Page – Higher Education
- Frequently Asked Questions – W 4 Allowances, Excess FICA, Students, Withholding
IRS Tax Tip 2013-59: Ten Facts on Filing an Amended Tax Return
What should you do if you already filed your federal tax return and then discover a mistake? Don’t worry; you have a chance to fix errors by filing an amended tax return. This year you can use the new IRS tool, ‘Where’s My Amended Return?’ to easily track the status of your amended tax return. Here are 10 facts you should know about filing an amended tax return.
- Use Form 1040X, Amended U.S. Individual Income Tax Return, to file an amended tax return. An amended return cannot be e-filed. You must file it on paper.
- You should consider filing an amended tax return if there is a change in your filing status, income, deductions or credits.
- You normally do not need to file an amended return to correct math errors. The IRS will automatically make those changes for you. Also, do not file an amended return because you forgot to attach tax forms, such as W-2s or schedules. The IRS normally will send a request asking for those.
- Generally, you must file Form 1040X within three years from the date you filed your original tax return or within two years of the date you paid the tax, whichever is later. Be sure to enter the year of the return you are amending at the top of Form 1040X.
- If you are amending more than one tax return, prepare a 1040X for each return and mail them to the IRS in separate envelopes. You will find the appropriate IRS address to mail your return to in the Form 1040X instructions.
- If your changes involve the need for another schedule or form, you must attach that schedule or form to the amended return.
- If you are filing an amended tax return to claim an additional refund, wait until you have received your original tax refund before filing Form 1040X. Amended returns take up to 12 weeks to process. You may cash your original refund check while waiting for the additional refund.
- If you owe additional taxes with Form 1040X, file it and pay the tax as soon as possible to minimize interest and penalties.
- You can track the status of your amended tax return three weeks after you file with the IRS’s new tool called, ‘Where’s My Amended Return?’ The automated tool is available on IRS.gov and by phone at 866-464-2050. The online and phone tools are available in English and Spanish. You can track the status of your amended return for the current year and up to three prior years.
- To use either ‘Where’s My Amended Return’ tool, just enter your taxpayer identification number (usually your Social Security number), date of birth and zip code. If you have filed amended returns for more than one year, you can select each year individually to check the status of each. If you use the tool by phone, you will not need to call a different IRS phone number unless the tool tells you to do so.
IRS Tax Tip 2013-12: Taxable and Nontaxable Income
Most types of income are taxable, but some are not. Income can include money, property or services that you receive. Here are some examples of income that are usually not taxable:
- Child support payments;
- Gifts, bequests and inheritances;
- Welfare benefits;
- Damage awards for physical injury or sickness;
- Cash rebates from a dealer or manufacturer for an item you buy; and
- Reimbursements for qualified adoption expenses.
Some income is not taxable except under certain conditions. Examples include:
- Life insurance proceeds paid to you because of an insured person’s death are usually not taxable. However, if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.
- Income you get from a qualified scholarship is normally not taxable. Amounts you use for certain costs, such as tuition and required course books, are not taxable. However, amounts used for room and board are taxable.
All income, such as wages and tips, is taxable unless the law specifically excludes it. This includes non-cash income from bartering – the exchange of property or services. Both parties must include the fair market value of goods or services received as income on their tax return.
If you received a refund, credit or offset of state or local income taxes in 2012, you may be required to report this amount. If you did not receive a 2012 Form 1099-G, check with the government agency that made the payments to you. That agency may have made the form available only in an electronic format. You will need to get instructions from the agency to retrieve this document. Report any taxable refund you received even if you did not receive Form 1099-G.
IR-2013-18: IRS To Accept Tax Returns with Education Credits, Depreciation Next Week
WASHINGTON — The Internal Revenue Service announced today that taxpayers will be able to start filing two major tax forms next week covering education credits and depreciation.
Starting Sunday, Feb. 10, the IRS will start processing tax returns that contain Form 4562, Depreciation and Amortization. And on Thursday, Feb. 14, the IRS plans to start processing Form 8863, Education Credits.
This step clears the way for almost all taxpayers to start filing their tax returns for 2012. These forms affected the largest groups of taxpayers who weren’t able to file following the Jan. 30 opening of the 2013 tax season.
The IRS will be able to accept the education credits and depreciation forms following the completion of reprogramming and testing of its systems. Work continues on preparing IRS systems to accept the remaining tax forms affected by the American Taxpayer Relief Act (ATRA) enacted by Congress on Jan. 2.
The IRS also announced today it will start accepting the remaining forms affected by the January legislation the first week of March. A specific date will be announced later. Most of those in this group file more complex tax returns and typically file closer to the deadline or obtain an extension. A full list of the forms that will be accepted the first week of March is available on IRS.gov.
Next week’s opening covers two groups of taxpayers using:
- Form 8863, Education Credits. Form 8863 is used to claim two higher education credits — the American Opportunity Tax Credit and the Lifetime Learning Credit.
- Form 4562, Depreciation and Amortization. Most of the people using the depreciation form tend to file later in the tax season or obtain a six-month extension. Non-1040 business filers using Form 4562 can also file starting Sunday.
For taxpayers using e-file, most software companies are now accepting tax returns with these two forms and will submit them after the IRS begins accepting them next week.
More information is available on IRS.gov.
IRS Tax Tip 2013-11: Eight Tax Benefits for Parents
Your children may help you qualify for valuable tax benefits, such as certain credits and deductions. If you are a parent, here are eight benefits you shouldn’t miss when filing taxes this year.
1. Dependents. In most cases, you can claim a child as a dependent even if your child was born anytime in 2012. For more information, see IRS Publication 501, Exemptions, Standard Deduction and Filing Information.
2. Child Tax Credit. You may be able to claim the Child Tax Credit for each of your children that were under age 17 at the end of 2012. If you do not benefit from the full amount of the credit, you may be eligible for the Additional Child Tax Credit. For more information, see the instructions for Schedule 8812, Child Tax Credit, and Publication 972, Child Tax Credit.
3. Child and Dependent Care Credit. You may be able to claim this credit if you paid someone to care for your child or children under age 13, so that you could work or look for work. See IRS Publication 503, Child and Dependent Care Expenses.
4. Earned Income Tax Credit. If you worked but earned less than $50,270 last year, you may qualify for EITC. If you have qualifying children, you may get up to $5,891 dollars extra back when you file a return and claim it. Use the EITC Assistant to find out if you qualify. See Publication 596, Earned Income Tax Credit.
5. Adoption Credit. You may be able to take a tax credit for certain expenses you incurred to adopt a child. For details about this credit, see the instructions for IRS Form 8839, Qualified Adoption Expenses.
6. Higher education credits. If you paid higher education costs for yourself or another student who is an immediate family member, you may qualify for either the American Opportunity Credit or the Lifetime Learning Credit. Both credits may reduce the amount of tax you owe. If the American Opportunity Credit is more than the tax you owe, you could be eligible for a refund of up to $1,000. See IRS Publication 970, Tax Benefits for Education.
7. Student loan interest. You may be able to deduct interest you paid on a qualified student loan, even if you do not itemize your deductions. For more information, see IRS Publication 970, Tax Benefits for Education.
8. Self-employed health insurance deduction – If you were self-employed and paid for health insurance, you may be able to deduct premiums you paid to cover your child. It applies to children under age 27 at the end of the year, even if not your dependent. See IRS.gov/aca for information on the Affordable Care Act.
IRS Tax Tip 2013-10 Missing Your W-2? Here’s What to Do
It’s a good idea to have all your tax documents together before preparing your 2012 tax return. You will need your W-2, Wage and Tax Statement, which employers should send by the end of January. Give it two weeks to arrive by mail.
If you have not received your W-2, follow these three steps:
1. Contact your employer first. Ask your employer – or former employer – to send your W-2 if it has not already been sent. Make sure your employer has your correct address.
2. Contact the IRS. After February 14, you may call the IRS at 800-829-1040 if you have not yet received your W-2. Be prepared to provide your name, address, Social Security number and phone number. You should also have the following information when you call:
• Your employer’s name, address and phone number;
• Your employment dates; and
• An estimate of your wages and federal income tax withheld in 2012, based upon your final pay stub or leave-and-earnings statement, if available.
3. File your return on time. You should still file your tax return on or before April 15, 2013, even if you have not yet received your W-2. File Form 4852, Substitute for Form W-2, Wage and Tax Statement, in place of the W-2. Use the form to estimate your income and withholding taxes as accurately as possible. The IRS may delay processing your return while it verifies your information.
If you need more time to file you can get a six-month extension of time. File Form 4868, Application for Automatic Extension of Time to File US Individual Income Tax Return. If you are requesting an extension, you must file this form on or before April 15, 2013.
If you receive the missing W-2 after filing your tax return and the information on the W-2 is different from what you reported using Form 4852, then you must correct your tax return. File Form 1040X, Amended U.S. Individual Income Tax Return to amend your tax return.
Do Your Taxes and E-File for Free with Free File
WASHINGTON — All taxpayers have a fast, safe and free option when it comes to preparing their own federal taxes. It’s called Free File, and it’s available only at IRS.gov.
Free File offers brand-name tax software to people who earned $57,000 or less last year, which is 70 percent of all taxpayers. For those who earned more, there are free online fillable forms. Both options allow people to file returns electronically and use direct deposit, which is the fastest way to get refunds.
The nation’s leading tax software companies have partnered with the IRS to make their products available for free through IRS.gov. Each company sets its own eligibility criteria, generally based on income, state residency, age, military service or eligibility for the Earned Income Tax Credit (EITC). There is also a software option that is available in Spanish for people who earned $30,000 or less.
Free File does the hard work for you. The software asks questions; you provide the answers. It picks the right forms, does the math and helps you find all the tax benefits for which you are eligible.
All participating Free File partners have been vetted and use the latest in security technology. Some Free File software providers also offer state tax returns for free or for a fee.
Free File Fillable Forms is the electronic version of IRS paper forms. It’s best for people experienced and comfortable preparing their own returns on paper. It does not support state tax returns.
Some Free File software products also are available in select free tax preparation sites operated by Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE). Taxpayers can use VITA or TCE computers to access Free File, prepare their own state and federal returns with a trained and certified volunteer on stand-by to help and e-file – all for free.
To find a participating site near you, go to IRS.gov and search for “VITA” to find a self- preparation site location near you.
More than 36 million people have used Free File since it started in 2003. You can explore all your options at http://www.irs.gov/freefile.
Businesses, organizations, states or local governments may want to promote Free File to their employees, customers or clients with products from the IRS. Just go to http://www.freefile.irs.gov/partners to see what you can do to help. There are printable posters, a tax-day countdown widget for websites and prepared social media posts for your use.
Many Business Tax Filers Can File for 2012 Starting Feb. 4 But many others are Looking at late Feb. Early March before they can file
Many businesses will be able to file their 2012 federal income tax returns starting Monday, Feb. 4. Filers of forms affected by January tax law changes will need to wait until late February or early March.
These delay dates impact the release of your electronically prepared returns. They do not prevent Katherman Kitts from preparing your tax return.
Katherman Kitts wants to remind our clients that there is no push back on the March 15 (business filers) and the April 15 (individual filers) due dates for your tax returns. Therefore, we still need enough time to receive the information and to prepare your returns before the filing deadlines. Please, continue to send the information to prepare your returns as soon as possible.
The Monday opening covers non-1040 series business returns for calendar year 2012, including Form 1120 filed by corporations, Form 1120S filed by S corporations, Form 1065 filed by partnerships, Form 990 filed by exempt organizations and most users of Form 720 , Quarterly Excise Tax Return. This includes both electronic filers and paper filers.
While many businesses will be able to file starting Feb. 4, there are a number of business forms still being updated for 2012. The IRS will announce soon when individual and business taxpayers can begin filing returns that include any of the delayed forms. Processing of these forms were delayed while the IRS completes programming and testing of its processing systems to reflect changes made by the American Taxpayer Relief Act (ATRA) enacted by Congress on Jan. 2.
A full list of the affected forms is available on IRS.gov.
In addition to the forms listed on IRS.gov, filing of two other business forms is affected by the delay, but only for electronic filers. Businesses using Form 720 and filling out lines 13 and 14 cannot file yet electronically, but they can file on paper. Other Forms 720 are being accepted electronically. In addition, Form 8849 Schedule 3, Claim for Refund of Excise Taxes, is not currently being accepted electronically, but it can be filed on paper.
Additional information will be posted soon on IRS.gov.
Who Should File a 2012 Tax Return?
If you received income during 2012, you may need to file a tax return in 2013. The amount of your income, your filing status, your age and the type of income you received will determine whether you’re required to file. Even if you are not required to file a tax return, you may still want to file. You may get a refund if you’ve had too much federal income tax withheld from your pay or qualify for certain tax credits.
You can find income tax filing requirements on IRS.gov. The instructions for Forms 1040, 1040A or 1040EZ also list filing requirements. The Interactive Tax Assistant tool, also available on the IRS website, is another helpful resource. The ITA tool answers many of your tax law questions including whether you need to file a return.
Even if you’ve determined that you don’t need to file a tax return this year, you may still want to file. Here are five reasons why:
1. Federal Income Tax Withheld. If your employer withheld federal income tax from your pay, if you made estimated tax payments, or if you had a prior year overpayment applied to this year’s tax, you could be due a refund. File a return to claim any excess tax you paid during the year.
2. Earned Income Tax Credit. If you worked but earned less than $50,270 last year, you may qualify for EITC. EITC is a refundable tax credit; which means if you qualify you could receive EITC as a tax refund. Families with qualifying children may qualify to get up to $5,891 dollars. You can’t get the credit unless you file a return and claim it. Use the EITC Assistant to find out if you qualify.
3. Additional Child Tax Credit. If you have at least one qualifying child and you don’t get the full amount of the Child Tax Credit, you may qualify for this additional refundable credit. You must file and use new Schedule 8812, Child Tax Credit, to claim the credit.
4. American Opportunity Credit. If you or someone you support is a student, you might be eligible for this credit. Students in their first four years of postsecondary education may qualify for as much as $2,500 through this partially refundable credit. Even those who owe no tax can get up to $1,000 of the credit as cash back for each eligible student. You must file Form 8863, Education Credits, and submit it with your tax return to claim the credit.
5. Health Coverage Tax Credit. If you’re receiving Trade Adjustment Assistance, Trade Adjustment Assistance, Alternative Trade Adjustment Assistance or pension benefit payments from the Pension Benefit Guaranty Corporation, you may be eligible for a 2012 Health Coverage Tax Credit. Spouses and dependents may also be eligible. If you’re eligible, you can receive a 72.5 percent tax credit on payments you made for qualified health insurance premiums.
Want more information about filing requirements and tax credits? Visit IRS.gov.
Additional IRS Resources:
• Interactive Tax Assistant
• EITC Assistant
• Publication 596, Earned Income Credit
• Schedule 8812, Child Tax Credit
• Publication 972, Child Tax Credit
• Form 8863, Education Credits
• Publication 970, Tax Benefits for Education
• Health Coverage Tax Credit
IRS YouTube Videos:
• Do I Have To File a Tax Return? – English | Spanish | ASL
• Education Tax Credits and Deductions – English | Spanish | ASL
IRS Podcasts:
• Education Tax Credits and Deductions – English | Spanish
IRS To Accept Returns Claiming Education Credits by Mid-February
WASHINGTON – As preparations continue for the Jan. 30 opening of the 2013 filing season for most taxpayers, the Internal Revenue Service announced today that processing of tax returns claiming education credits will begin by the middle of February.
Taxpayers using Form 8863, Education Credits, can begin filing their tax returns after the IRS updates its processing systems. Form 8863 is used to claim two higher education credits — the American Opportunity Tax Credit and the Lifetime Learning Credit.
The IRS emphasized that the delayed start will have no impact on taxpayers claiming other education-related tax benefits, such as the tuition and fees deduction and the student loan interest deduction. People otherwise able to file and claiming these benefits can start filing Jan. 30.
As it does every year, the IRS reviews and tests its systems in advance of the opening of the tax season to protect taxpayers from processing errors and refund delays. The IRS discovered during testing that programming modifications are needed to accurately process Forms 8863. Filers who are otherwise able to file but use the Form 8863 will be able to file by mid-February. No action needs to be taken by the taxpayer or their tax professional. Typically through the mid-February period, about 3 million tax returns include Form 8863, less than a quarter of those filed during the year.
The IRS remains on track to open the tax season on Jan. 30 for most taxpayers. The Jan. 30 opening includes people claiming the student loan interest deduction on the Form 1040 series or the higher education tuition or fees on Form 8917, Tuition and Fees Deduction. Forms that will be able to be filed later are listed on IRS.gov.
AMERICAN TAXPAYER RELIEF ACT-SUMMARY FOR KATHERMAN KITTS CLIENTS READING PLEASURE
Yesterday, the President signed the American Taxpayer Relief Act, which was passed on New Year’s Day. Here is brief summary of selected portions of it, for your review. We can help answer any questions that you may have.
Individual Tax Rates
The Act preserves and permanently extends the Bush-era income tax cuts except for single individuals with taxable income above $400,000; married couples filing joint returns with taxable income above $450,000; and heads of household with taxable income above $425,000. Income above these thresholds will be taxed at a 39.6 percent rate, effective January 1, 2013. The $400,000/$450,000/$425,000 thresholds will be adjusted for inflation after 2013.
The new law, however, does not extend the payroll tax holiday. Effective January 1, 2013, the employee-share of Social Security tax withholding increased from 4.2% to 6.2% (its rate before the payroll tax holiday).
Capital Gains and Dividend Tax Rate
Effective January 1, 2013, the maximum tax rate on qualified capital gains and dividends rises from 15 to 20 percent for taxpayers whose taxable incomes exceed the thresholds set for the 39.6 percent rate (the $400,000/$450,000/$425,000 thresholds discussed above). The maximum tax rate for all other taxpayers remains at 15 percent; and moreover, a zero-percent rate will continue to apply to qualified capital gains and dividends to the extent income falls below the top of the 15- percent tax bracket. Note – The 2010 Affordable Care Act imposes a 3.8% Medicare tax on interest, dividends, capital gains, and other passive income, starting in 2013, and it applies at taxable income over $200,000 for single filers and over $250,000 for joint filers.
Estate and Gift Tax
Federal transfer taxes (estate, gift and generation-skipping transfer (GST) taxes) seem to have been in a constant state of flux in recent years. The Act provides some certainty. Effective January 1, 2013, the maximum estate, gift and GST tax rate is generally 40 percent, which reflects an increase from 35 percent for 2012. The lifetime exclusion amount for estate and gift taxes is unchanged for 2013 and subsequent years at $5 million (adjusted for inflation). The GST exemption amount for 2013 and beyond is also $5 million (adjusted for inflation). The new law also makes permanent portability and some enhancements made in previous tax laws.
Other Act Elements Affecting Individuals
• AMT (Alternative Minimum Tax) – Higher exemptions are made permanent, and indexed for inflation
• IRA distributions to charitable organizations, (for those over age 70) – restored through 2013
• Exclusion for cancellation of debt on principal residence – extended through 2013
• Reduction of itemized deductions for incomes over certain levels, (which was not in place since 2010) – will apply starting in 2013
Business Tax Provisions
Code Sec. 179 business equipment expensing. In recent years, Congress has repeatedly increased dollar and investment limits under Code Sec. 179 to encourage spending by businesses. For tax years beginning in 2010 and 2011, the Code Sec. 179 dollar and investment limits were $500,000 and $2 million, respectively. [This means that you can expense up to $500,000 of equipment or software purchased, so long as you don’t spend more than $2 million in total. Expenditures over the $2 million level reduces the allowable expense amount dollar-for-dollar.] The Act restores the dollar and investment limits for 2012 and 2013 to their 2011 amounts ($500,000 and $2 million) and adjusts those amounts for inflation. However, this increase is temporary. The Code Sec. 179 dollar and investment limits are scheduled, unless changed by Congress, to decrease to $25,000 and $200,000, respectively, after 2013. The new law also provides that off-the-shelf computer software qualifies as eligible property for Code Sec. 179 expensing. The software must be placed in service in a tax year beginning before 2014. Additionally, the Act allows taxpayers to treat up to $250,000 of qualified leasehold and retail improvement property as well as qualified restaurant property, as eligible for Code Sec. 179 expensing.
Bonus depreciation. Bonus depreciation of business equipment is one of the most important tax benefits available to businesses, large or small. In recent years, bonus depreciation has reached 100 percent, which gave taxpayers the opportunity to write off 100 percent of qualifying asset purchases immediately. For 2012, bonus depreciation remained available but was reduced to 50 percent. The Act extends 50 percent bonus depreciation through 2013. The Act also provides that a taxpayer otherwise eligible for additional first-year depreciation may elect to claim additional research or minimum tax credits in lieu of claiming depreciation for qualified property.
While not quite as attractive as 100 percent bonus depreciation, 50 percent bonus depreciation is valuable. For example, a $100,000 piece of equipment with a five-year MACRS life would qualify for a $55,000 write-off: $50,000 in bonus depreciation plus 20 percent of the remaining $50,000 in basis as “regular” depreciation, with the half-year convention applied in the first and last year.
Bonus depreciation also relates to the passenger vehicle depreciation dollar limits under Code Sec. 280F. This provision imposes dollar limitations on the depreciation deduction for the year in which a taxpayer places a passenger automobile/truck in service within a business and for each succeeding year. Because of the new law, the first-year depreciation cap for passenger automobile/truck placed in service in 2013 is increased by $8,000.
Bonus depreciation, unlike Code Sec. 179 expensing, is not capped at a dollar threshold. However, only new property qualifies for bonus depreciation. Code Sec. 179 expensing, in contrast, can be claimed for both new and used property and qualifying property may be expensed at 100 percent.
Research Tax Credit. The research tax credit was restored for 2012 and extended through 2013.
If you have any questions, please contact us.
Problem Resolving An Issue With The IRS? The Taxpayer Advocate Service: Helping You Resolve Tax Problems
The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that helps taxpayers who are experiencing unresolved federal tax problems. Here are 10 things every taxpayer should know about TAS:
1. The Taxpayer Advocate Service is your voice at the IRS.
2. TAS assistance is free and tailored to meet your needs.
3. You may be eligible for TAS help if you’ve tried to resolve your tax problem through normal IRS channels and have gotten nowhere, or if you are facing (or your business is facing) an immediate action from the IRS that will adversely affect you.
4. The worst thing you can do is nothing at all!
5. TAS helps individual and business taxpayers whose tax problems are causing financial difficulty, which could include the cost of hiring professional representation, such as a tax attorney.
6. If you qualify for TAS help, you’ll be assigned one advocate who will do everything possible to get your problem resolved.
7. There is at least one local Taxpayer Advocate office in every state, the District of Columbia, and Puerto Rico. You can obtain the number of your local Taxpayer Advocate from your local phone book, in Pub. 1546, Taxpayer Advocate Service – Your Voice at the IRS and on the IRS website at IRS.gov/advocate. You can also call TAS toll-free at 1-877-777-4778.
8. As a taxpayer, you have rights that the IRS must abide by when working with you. Our tax toolkit website at http://www.TaxpayerAdvocate.irs.gov can help you understand these rights.
9. TAS also handles tax problems that may have a broad impact on more than just one taxpayer. You can report these “systemic” issues to TAS through the Systemic Advocacy Management System at IRS.gov/advocate.
10. You can get updates on hot tax topics by visiting the TAS YouTube channel at http://www.youtube.com/TASNTA and the TAS Facebook page at http://www.facebook.com/YourVoiceAtIRS, or by following TAS tweets at http://www.twitter.com/YourVoiceatIRS.
IRS Presents – How Does The Gain On The Sale Of Your Main Home Work
If you have a gain from the sale of your main home, you may be able to exclude all or part of that gain from your income.
Here are 10 tips to keep in mind when selling your home.
1. In general, you are eligible to exclude the gain from income if you have owned and used your home as your main home for two years out of the five years prior to the date of its sale.
2. If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases).
3. You are not eligible for the full exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.
4. If you can exclude all of the gain, you do not need to report the sale of your home on your tax return.
5. If you have a gain that cannot be excluded, it is taxable. You must report it on Form 1040, Schedule D, Capital Gains and Losses.
6. You cannot deduct a loss from the sale of your main home.
7. Worksheets are included in Publication 523, Selling Your Home, to help you figure the adjusted basis of the home you sold, the gain (or loss) on the sale, and the gain that you can exclude. Most tax software can also help with
this calculation.
8. If you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.
9. Special rules may apply when you sell a home for which you received the first-time homebuyer credit. See Publication 523, Selling Your Home, for details.
10. When you move, be sure to update your address with the IRS and the U.S. Postal Service to ensure you receive mail from the IRS. Use Form 8822, Change of Address, to notify the IRS of your address change.
For more information about selling your home, see IRS Publication 523,Selling Your Home.
Links:
Publication 523, Selling Your Home (PDF)
Form 8822, Change of Address (PDF)
Tax Topic 701 – Sale of Your Home
Real Estate Tax Tips – Sale of Residence
IRS SUMMERTIME TAX TIPS- Don’t Forget Those Pesky Misc Deductions
Don’t Overlook the Benefits of Miscellaneous Deductions
If you are able to itemize your deductions on your tax return instead of claiming the standard deduction, you may be able to claim certain miscellaneous deductions. A tax deduction reduces the amount of your taxable income and generally reduces the amount of taxes you may have to pay.
Here are some things you should know about miscellaneous tax deductions:
Deductions Subject to the 2 Percent Limit. You can deduct the amount of certain miscellaneous expenses that exceed 2 percent of your adjusted gross income. Deductions subject to the 2 percent limit include:
Unreimbursed employee expenses such as searching for a new job in the same profession, certain work clothes and uniforms, work tools, union dues, and work-related travel and transportation.
Tax preparation fees.
Other expenses that you pay to:
– Produce or collect taxable income,
– Manage, conserve, or maintain property held to produce taxable income, or
– Determine, contest, pay, or claim a refund of any tax.
Examples of other expenses include certain investment fees and expenses, some legal fees, hobby expenses that are not more than your hobby income and rental fees for a safe deposit box if it is not used to store jewelry and other personal effects.
Deductions Not Subject to the 2 Percent Limit. The list of deductions not subject to the 2 percent limit of adjusted gross income includes:
Casualty and theft losses from income-producing property such as damage or theft of stocks, bonds, gold, silver, vacant lots, and works of art.
Gambling losses up to the amount of gambling winnings.
Impairment-related work expenses of persons with disabilities.
Losses from Ponzi-type investment schemes.
Qualified miscellaneous deductions are reported on Schedule A, Itemized Deductions. Keep records of your miscellaneous deductions to make it easier for you to prepare your tax return when the filing season arrives.
There are also many expenses that you cannot deduct such as personal living or family expenses. You can find more information and examples in IRS Publication 529, Miscellaneous Deductions, which is available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Links:
Publication 529, Miscellaneous Deductions (PDF)
Tax Topic 508 – Miscellaneous Expenses
Schedule A Itemized Deductions (PDF)
Instructions for Schedule A (PDF)
Stacie's Tax Tips and Other Stuff 