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Archive for January, 2013


The recent tax act impacts planning

The American Taxpayer Relief Act of 2012 ads a new dimension to tax planning.  The tax rate brackets, thresholds, phase outs, etc. are different depending on the element involved.  Some vary depending on the types of income.  Types of income include: taxable income, earned income, alternative minimum taxable income, capital gains, net investment income, self employed earned income and adjusted gross income.   Incomes for the phase outs of itemized deductions, exemptions and alternative minimum tax differ.

Planning will also be impacted by the timing of income and deductions.  Defer income and accelerate income may no longer be a general approach.  Changes in income and deduction and the nature of the income and deduction anticipated in the future will must be considered. The approach for each may vary from year to year.

Key numbers are provided on the web site under “Information of Interest” and “Newsletters” under “Resources”.

2013 Estate Planning Key Numbers (includes 2012), , is under “Estate Planning: Estate Tax, Gift Tax, elder Care, etc.”

2013 Retirement Planning Key Numbers (includes 2012), , is under “Retirement.

2013 Income Tax Key Numbers (includes 2012),, is under “Income Tax, Social Security Tax, etc.”

2012 – 2013 Key Numbers including; Business Planning, Education Planning, Protection Planning, Government Benefits, Investment Planning and the above numbers, , is under “Newsletters.

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2013 FICA Tax Increase Surprises Some Taxpayers

With all the end-of-year hype surrounding the fiscal cliff and the relief that came with New Year’s legislation permanently extending most income tax rates, one change seems to have been veiled by the settling dust: the 2 percent increase in FICA (Federal Insurance Contributions Act) tax. That increase, the result of an expiring provision that was not extended, means that the vast majority of American workers are now receiving about 2 percent less in their take-home pay, an unwelcome surprise to some people.

In the midst of the last recession a little more than two years ago, Congress passed and the president signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. This new law included a 2 percent reduction in the Social Security (OASDI) portion of the FICA tax. The provision was designed to help put a little more money into the wallets of American workers during the challenging economic environment of 2011. While the employer portion of the OASDI contribution remained at 6.2 percent, the employee contribution was reduced from 6.2 percent to 4.2 percent. The provision was extended through 2012 by the Temporary Payroll Tax Cut Continuation Act of 2011 and the Middle Class Tax Relief and Job Creation Act of 2012.

The reduction was never meant to be permanent, as it put additional financial pressure on the already stressed Social Security Trust Fund. So during the 2012 fiscal cliff negotiations, both Democrats and Republicans agreed that it should expire at the end of the year.

Impact of 2 percent
Despite media reports warning of the impending payroll tax increase, many Americans were caught off guard when they received their first paychecks in 2013. How much of an impact might the additional withholding have? A family earning $60,000 a year will see their pay cut by about $1,200, or $100 per month, during 2013. Those earning $100,000 will receive about $2,000, or about $167 per month, less. (The maximum amount of an individual’s earnings that is subject to Social Security tax in 2013 is $113,700.)

While most experts believe the decrease in take-home pay won’t be enough to cause major economic damage, it may encourage families to cut back on spending enough to slightly dampen the nation’s overall growth. For example, the 2 percent decrease could represent a family’s monthly utility bill, an investment in a college savings account, or a week’s worth of groceries.

Medicare taxes for high earners
Also consider that high earners will need to pay a bit more in Medicare taxes beginning in 2013. Taxpayers will pay an additional 0.9 percent Medicare tax on wages exceeding $200,000 for single/head of household, $250,000 for married couples filing jointly, and $125,000 for married couples filing separately. Taxpayers whose modified adjusted gross income exceeds those same threshold amounts will also pay a 3.8 percent Medicare tax on some or all of their unearned income. These provisions were part of the Patient Protection and Affordable Care Act of 2010, and like the expiration of the FICA reduction, were not affected by the 2012 fiscal cliff legislation. When combined with the 2 percent Social Security increase, the total hit could mean a difference of several thousand dollars a year to some higher-earning taxpayers.

If you have questions about your FICA withholding, your human resources department or personnel manager might be a good place to start. These representatives are typically prepared to answer such questions and can help you confirm that your withholding is correct.


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IRS announced a simplified method to claim a Home Office Deduction, starting in 2013

A new optional deduction will reduce the paperwork and recordkeeping burden on small businesses.  The deduction is based on $5 a square foot for up to 300 square feet.

Current restrictions on the home office deduction still apply.  That includes the requirement to use the home office regularly and exclusively for business and the limit to the income from the business.

This method eliminates the need to file form 8829.  A new simplified form will be provided to claim the home office deduction under the new rule.

The deduction for depreciation of the portion of the home  used in a trade or business will not be permitted if
the simplified option is used.  Allowable mortgage interest, real estate tax and casualty losses on the home can
be claimed as itemized deduction on Schedule A.  these deductions need not  be allocated between personal
and business use.

Business expenses unrelated to the home such as advertising, supplies and wages paid to employees will still be fully deductible.

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New rules for 401(k), 403(b), and 457(b) in-plan Roth conversions in the American Taxpayer Relief Act of 2012

The American Taxpayer Relief Act of 2012 (ATRA), enacted to avoid the fiscal cliff, includes a provision that may be important to certain retirement plan participants. ATRA makes it easier to make Roth conversions inside your 401(k) plan (if your plan permits).

A 401(k) in-plan Roth conversion (also called an “in-plan Roth rollover”) allows you to transfer the non-Roth portion of your 401(k) plan account (for example, your pretax contributions and company match) into a designated Roth account within the same plan. You’ll have to pay federal income tax now on the amount you convert, but qualified distributions from your Roth account in the future will be entirely income tax free. Also, the 10% early distribution penalty generally doesn’t apply to amounts you convert.

While in-plan conversions have been around since 2010, they haven’t been widely used, because they were available only if you were otherwise entitled to a distribution from your plan–for example, upon terminating employment, turning 59½, becoming disabled, or in other limited circumstances.

ATRA has eliminated the requirement that you be eligible for a distribution from the plan in order to make an in-plan conversion. Beginning in 2013, if your plan permits, you can convert any part of your traditional 401(k) plan account into a designated Roth account. The new law also applies to 403(b) and 457(b) plans that allow Roth contributions.

This provision will not be beneficial to all participates of plans the permit an in-plan Roth conversion. There are many factors to consider in deciding if it could be beneficial to you. Be sure to evaluate your current and future tax situation when making the decision.

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The American Taxpayer Relief Act of 2012

The new year began with some political drama, as last-minute negotiations attempted to avert sending the nation over the “fiscal cliff.” Technically, we actually did go over the cliff, however briefly, as a host of tax provisions and automatic spending cuts took effect at the stroke of midnight on December 31, 2012. However, January 1, 2013, saw legislation–retroactively effective–pass the U.S. Senate, and then later the House of Representatives. The American Taxpayer Relief Act of 2012 (ATRA) permanently extends a number of major tax provisions and temporarily extends many others. Here are the basics.

Tax rates
For most individuals, the legislation permanently extends the lower federal income tax rates that have existed for the last decade. That means most taxpayers will continue to pay tax according to the same six tax brackets (10%, 15%, 25%, 28%, 33%, and 35%) that applied for 2012. The top federal income tax rate, however, will increase to 39.6% beginning in 2013 for individuals with income that exceeds $400,000 ($450,000 for married couples filing joint returns).

Generally, lower tax rates that applied to long-term capital gain and qualifying dividends have been permanently extended for most individuals as well. If you’re in the 10% or 15% marginal income tax bracket, a special 0% rate generally applies. If you are in the 25%, 28%, 33%, or 35% tax brackets, a 15% maximum rate will generally apply. Beginning in 2013, however, those who pay tax at the higher 39.6% federal income tax rate (i.e., individuals with income that exceeds $400,000, or married couples filing jointly with income that exceeds $450,000) will be subject to a maximum rate of 20% for long-term capital gain and qualifying dividends.

Alternative minimum tax (AMT)
The AMT is essentially a parallel federal income tax system with its own rates and rules. The last temporary AMT “patch” expired at the end of 2011, threatening to dramatically increase the number of individuals subject to the AMT for 2012. The American Taxpayer Relief Act permanently extends AMT relief, retroactively increasing the AMT exemption amounts for 2012, and providing that the exemption amounts will be indexed for inflation in future years. The Act also permanently extends provisions that allowed nonrefundable personal income tax credits to be used to offset AMT liability.

2012 AMT Exemption Amounts
Before Act

After Act

Married filing jointly
Unmarried individuals
Married filing separately

Estate tax
The Act makes permanent the $5 million exemption amounts (indexed for inflation) for the estate tax, the gift tax, and the generation-skipping transfer tax–the same exemptions that were in effect for 2011 and 2012. The top tax rate, however, is increased to 40% (up from 35%) beginning in 2013.

The Act also permanently extends the “portability” provision in effect for 2011 and 2012 that allows the executor of a deceased individual’s estate to transfer any unused exemption amount to the individual’s surviving spouse.

Phaseout or limitation of itemized deductions and personal exemptions
In the past, itemized deductions and personal and dependency exemptions were phased out or limited for high-income individuals. Since 2010, neither itemized deductions nor personal and dependency exemptions have been subject to phaseout or limitation based on income, but those provisions expired at the end of 2012.

The new legislation provides that, beginning in 2013, personal and dependency exemptions will be phased out for those with incomes exceeding specified income thresholds. Similarly, itemized deductions will be limited. For both the personal and dependency exemptions phaseout and the itemized deduction limitation, the threshold is $250,000 for single individuals ($300,000 for married individuals filing joint federal income tax returns).

Other expiring or expired provisions made permanent
“Marriage penalty” relief in the form of an increased standard deduction amount for married couples and expanded 15% federal income tax bracket.

Expanded tax credit provisions relating to the dependent care tax credit, the adoption tax credit, and the child tax credit.

Higher limits and more generous rules of application relating to certain education provisions, including Coverdell education savings accounts, employer-provided education assistance, and the student loan interest deduction.

Temporary extensions
Provisions relating to increased earned income tax credit amounts for families with three or more children are extended through 2017.

American Opportunity credit provisions relating to maximum credit amount, refundability, and phaseout limits are extended through 2017.

The $250 above-the-line tax deduction for educator classroom expenses, the limited ability to deduct mortgage insurance premiums as qualified residence interest, the ability to deduct state and local sales tax in lieu of the itemized deduction for state and local income tax, and the deduction for qualified higher education expenses are all extended through 2013.

Charitable IRA distributions (IRA holders over age 70½ are able to exclude from income up to $100,000 in qualified distributions made to charitable organizations) are extended through 2013; special rules apply for the 2012 tax year.

Exclusion of qualified mortgage debt forgiveness from income provisions extended through 2013.

Exclusion of 100% of the capital gain from the sale of qualified small business stock extended to apply to stock acquired before January 1, 2014.

50% bonus depreciation and expanded Section 179 expense limits extended through 2013.

The above summary provides an outline of key provisions. Congress and or the IRS will provide clarifiication and additional details in the future.

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