2012 & 2013 Tax Update Highlights

2012 & 2013 Tax Update HighlightsPresented by

Zandra O’Keefe, CPACBIZ MHM, LLC

Circular 230 Notice and DisclaimersTo ensure compliance with requirements imposed by the IRS, we inform you that-

unless specifically indicated otherwise-any tax advice in this communication is not written with the intent that it be used, and in fact it cannot be used, to avoid penalties under the Internal Revenue Code, or to promote, market, or recommend to another person any tax related matter. This educational seminar is provided with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ)

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2013 Tax Law Changes

AGENDA

• New for 2013 part of Health Care Act and Proposed Regs.– Change in Tangible Property Rules (businesses)– Medicare Surtaxes: earned income and net investment income– Medical expenses – New qualified plan tax credit

• American Taxpayer Relief Act of 2012 – First step in adverting “the fiscal cliff”

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New for 2012 and forwardChange in Tangible Property Rules

• New regulations change what should be capitalized versus deducted

• IRS allowing for automatic method changes for 2 years

• New rules significantly impact building owners by giving them the ability to deduct losses on replaced structures - this includes individual owners of rental properties

• Taxpayers with large repair & maintenance expenses also will be impacted

• A new de minimis rule may apply for some taxpayers; policy in place 1/1/13; “applicable financial statement” (audit, potentially review FS)

• IRS audit / compliance to increase

• Tip: Consider cost segregation studies and 3115 Change in Accounting Method, (accelerate timing of tax deductions), consult your tax advisor

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New for 2013 and forwardAdditional Medicare Tax .9%

• Additional .9% Medicare Surtax on earned income of higher-income individuals after 12/31/12. Subject to MAGI thresholds

• Employer withholding required and any difference paid / accounted for on personal tax return

• Increases estimated tax due for self employed• http://www.irs.gov/Businesss/Small-Businesses-&-Self-Employed/Questions-

and-Answers

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2013 3.8% Medicare Surtax - Net Investment Income Tax

• Individuals http://www.irs.gov/uac/Newsroom/Net-Investment-Income-Tax-FAQs

– 3.8% of the lesser of:• Net investment income, or• Excess of Modified AGI over the threshold amounts below

– Modified AGI = AGI + foreign earned income exclusion

Filing Status Threshold

Married Filing Jointly $250,000

Single/Head of Household $200,000

Married Filing Separately $125,000

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2013 3.8% Medicare Tax – Trusts and Estates

• 3.8% of the lesser of:– Undistributed net investment income, or– AGI over the amount at which the highest tax bracket is

applicable ($11,950 for 2013)• Does not apply to simple trusts since, by definition, all income is

distributed annually (but would apply to income distributed to beneficiaries)

• Does not apply to grantor trusts since they are disregarded for income tax purposes (but would apply to income reported by grantor)

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3.8% Medicare Tax – Net Investment Income• Net Investment Income – Defined as investment income less

otherwise allowable deductions properly allocable to such income• Includes three categories:

– Gross income from interest, dividends, annuities, royalties and rents (other than such income derived in the ordinary course of an active trade or business)

– Other gross income from any passive trade or business or business in the trading of financial instruments or commodities

– Net gains attributable to the disposition of property (other than property held in an active trade or business)

• Less:– Deductions properly allocable to such gross income or net gain

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3.8% Medicare Tax – Key Points

• Taxpayer’s must have both NII and gross income over the applicable thresholds in order to be subject to the tax

• The thresholds are NOT adjusted for inflation – This may cause a problem similar to the AMT in the future

• The inclusion of passive activities in NII represents a huge shift in traditional tax planning– more emphasis will be placed on treating profitable activities as

active instead of passive to avoid the 3.8% surtax, however• Passive losses may go unused• Net income from an active trade or business may be subject

to self employment tax

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• Only property sold that was not held in a trade or business is included in net investment income– In the case of sales of interests in a partnership or S corporation

we have to do some calculations in order to determine how much of the gain or loss is attributable to an active trade or business

– The Proposed Regulations include a complex four step process to achieve this

• The surtax also applies to income attributable to “working capital”

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• Net investment income is determined by taking into account the gross income or net gain from the three categories and reduced by allowable deductions that are “properly allocable”– Examples include, investment interest expense, investment fees,

expenses related to rents, trade or business deductions and state and local income taxes

– The allocation of state and local taxes between net investment income and other income can be determined under “any reasonable method”

– The proposed regs. provide a safe harbor method of allocating state and local taxes based on the ratio of NII to gross income

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• The 2% limitation for miscellaneous deductions and the overall deduction limit of certain itemized deductions will apply in calculating the NII

• Capital loss carryovers from years prior to 2013 can be used to offset gains

• Investment interest expense carryover from years prior to 2013 can be used in calculating NII

• Unused passive losses from years prior to 2013 can be used in calculating NII

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3.8% Medicare Tax – Key Points• The 3.8% Medicare tax does not apply to distributions from qualified

retirement plans• However, those distributions still increase MAGI which could either

– raise the taxpayer’s MAGI over the threshold amount, thus subjecting the taxpayer to the tax, or

– increase the amount subject to the tax by increasing the spread between MAGI and the threshold amount

• The 3.8% Medicare tax does not apply to investment income excludible from taxable income (e.g. municipal bond interest)

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3.8% Medicare Tax – Case Study

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Interest income from various corporate bonds and bank accounts

$10,000

Tax-exempt interest income from various municipal bonds $8,000

Qualified dividend income from various mutual funds and stock investments

$12,000

Net long-term capital gains from the disposition of various mutual funds and stock investments

$40,000

Regular IRA distribution $100,000

Net rental income from a building that Joe owns $15,000

Distributive ordinary trade or business income from an LLC in which Joe does not materially participate

$20,000

Distributive net Section 1231 gain from the same LLC $10,000

Distributive ordinary trade or business income from an S corporation in which Joe materially participates

$60,000

Distributive net Section 1231 gain from the same S corporation $50,000

Assume the following income (Total $325K):


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Net investment income is calculated as follows:Interest income from various corporate bonds and bank accounts $10,000

Qualified dividend income from mutual funds and stock investments

$12,000

Net long-term capital gains from the disposition of investments $40,000

Net rental income $15,000

Ordinary trade or business income from LLC in which Joe does not materially participate

$20,000

Net Section 1231 gain from the LLC $10,000

Net investment income $107,000


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Modified adjusted gross income is calculated as follows (doesn’t include $8K tax exempt inc):

Interest income from various corporate bonds and bank accounts $10,000

Qualified dividend income from mutual funds and stock investments

$12,000

Net long-term capital gains from the disposition of investments $40,000

Regular IRA distribution $100,000

Net rental income $15,000

Ordinary trade or business income from the LLC $20,000

Net Section 1231 gain from the same LLC $10,000

Ordinary trade or business income from the S corporation $60,000

Net Section 1231 gain from the same S corporation $50,000

Modified AGI $317,000


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The 3.8% Medicare contribution tax is calculated as follows:

Modified AGI $317,000

Less Threshold $200,000

Modified AGI in Excess of Threshold $117,000

Lesser of Net Investment Income and Modified AGI in Excess of Threshold

$107,000

Medicare Tax Rate 3.8%

Medicare Contribution Tax $4,066

Planning Strategies to Reduce 3.8% Medicare Tax• Convert to a Roth IRA so future qualified retirement plan

distributions don’t increase MAGI– Although regular IRA distributions are not subject to 3.8% tax,

they are included in modified AGI– In prior example, if IRA distribution was from Roth IRA, modified

AGI would have been reduced to $217,000, so the maximum subject to 3.8% tax would be reduced to $17,000

– If modified AGI (minus threshold amount) is greater than net investment income even without IRA distributions, no benefit to switching to Roth

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Planning Strategies to Reduce 3.8% Medicare Tax• Realign Investment Strategies

– Shift investments to growth securities that don’t produce dividends, i.e. tax-exempt bonds, insurance (with cash buildups) and annuities

– Take advantage of installment sale treatment to spread passive income over several years

– Time gains and losses to offset• Be careful of wash sale rules on loss positions• Gains not subject to wash sale rules

– Shift investments to children• Avoid 3.8% tax if MAGI less than threshold• Kiddie tax may tax income at parents’ marginal rate (under

19 or under 24 and full time student)

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Planning Strategies to Reduce 3.8% Medicare Tax

• Passive Activities– Evaluate profitable passive activities to see if changes could be

made to reach to the level of material participation.– Watch self-employment income from partnerships and LLC’s– Review passive activity rules to see if passive activities can be

grouped with non passive activities to avoid passive income– Factors to consider, similarities, common ownership,

geographical locations, interdependence of operations• Consider Passive Loss investment opportunities to offset Passive

Income (be aware of self-rent rules)

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Health Care Act - Medical expenses• 2012 AGI floor 7.5%

• 2013 AGI floor 10%

• Eligible expenses: Medical and dental services, prescriptiondrugs, co pays not reimbursed by H.S.A. or F.S.A. Out of pocket medical insurance premiums not deducted as self employed in via cafeteria plan on W-2. (Don’t double dip)

• H.S.A. limit 2013 self only $3,250; family $6,450 (advantage: keep it even if didn’t use it; grows tax deferred)

• FSA employer determines limit for 2013 can’t exceed $2,500(disadvantage: use it or lose it)

• Tips: Time medical expenses if possible and for family members with lower AGI who can benefit

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Adopt A Qualified Retirement Plan – Tax Credit

• Part of general business tax credit: equals 50% cost to set up and administer plan maximum of $500 maximum per year for each of the first 3 years

• 100 or fewer employees who received at least $5,000 in compensation for the preceding year

• At one participant must be non-highly compensated employee

• Generally employee cannot be the same for whom contributions were made in the 3 year period before the first year of the credit

• Form 8881 Credit for Small Employer Pension Plan Startup Costs

• Age weighted, cross tested, illustration that optimizes contributions for owners

• Tip: Can help reduce owners’ AGI threshold, earnings grow tax deferred, potential personal tax savings

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Signed into law in January 2, 2013 by President Obama

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H.R.8 the American Taxpayer Relief Act of 2012“ATRA”

• ATRA adds nearly $4 Trillion to federal deficits over a decade compared to the debt reduction envisioned in the extreme scenario of “the fiscal cliff”.

• Extends low income tax rates for nearly every American except the relative handful above the $400,000 threshold

• Puts off (for at least two months) the automatic budget cuts that were part of “the fiscal cliff” and would have saved about $109 Billion in federal spending on defense and non-defense programs alike

• Sets up a more heated fight in late February when Treasury must come to Congress to seek an increase in the government’s borrowing limit (raising federal debt ceiling above $14.5 Trillion)

• Consideration of effect on economic recovery and job creation

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“The AICPA is pleased that Congress has reached an agreement,” said Edward Karl, vice president–Tax for the AICPA. “The uncertainty of the tax law has unnecessarily impeded the long-term tax and cash flow planning for businesses and prevented taxpayers from making informed decisions. The agreement should also allow the IRS and commercial software vendors to revise or issue new tax forms and update software, and allow tax season to begin with minimal delay.”

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ATRA American Tax Relief Act of 2012 – Key Tax Provisions

• Individuals

• Business

• Provisions not addressed

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ATRA– Individual Tax Key Provisions

Generally all of the individual income tax provisions from 2001 EGTRRA and 2003 JGTRRA were permanently extended including:

• Lower 10/15/25/28/33/35% tax rate structure for individuals(except high income individuals – upcoming slide)

• Lower 15% tax rate on long-term capital gains and qualified dividends(except high income individuals – upcoming slide)

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Generally all of the individual income tax provisions from 2001 EGTRRA and 2003 JGTRRA were permanently extended including:

• Marriage penalty relief: expanded 15% bracket and standard deductionfor married taxpayers filing jointly to twice that of single taxpayers

• Increase in refundable child tax credit to $1,000– Regardless of number of children

– To the extent of 15% of the taxpayer’s earned income in excess of $3,000 threshold amount thru 2017

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ATRA– Individual Tax Key ProvisionsGenerally all of the individual income tax provisions from 2001

EGTRRA and 2003 JGTRRA were permanently extended including (continued):

• Increase in maximum dependent care credit and eligible expenses. IRC 21, 2012 Taxpayer Relief Act §101(a)(1) http://www.irs.gov/publications/p503/index.html– Maximum credit is $1,050 (35% of up to $3,000 of eligible expenses) if one qualifying

individual;

– $2,100 (35% of up to $6,000 of eligible expenses) if two or more qualifying individuals;

– 35% credit rate is reduced, but not below 20%, by one percentage point for each $2,000 (or fraction thereof) of adjusted gross income (AGI) above $15,000

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http://www.irs.gov/publications/p503/index.html



• Increase in non refundable adoption credit to $10,000 (inflation adjusted) and related provisions – increased to $10,000 for all adoptions; MAGI phase out from $75K-$150K – Code Sec. 36C, 2012 Taxpayer Relief Act §101(a)(1 http://www.irs.gov/Individuals/Adoption-Benefits-FAQs

• The adoption assistance exclusion Code Sec. 137, 2012 Taxpayer Relief Act §101(a)(1)

– increased to $10,000 for all adoptions, inflation adjusted to $12,170 for 2012; increased AGI phase out $182,520 - $222,250. IRS yet to come out with 2013 inflation adjusted figures

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http://www.irs.gov/Individuals/Adoption-Benefits-FAQs



• $5,250 income exclusion from employer-provided educational assistance, restoration of the exclusion for graduate level courses – Separate written employer plan subject to notification requirements, cannot provide

employees with a choice between this benefit and additional taxable income, courses need not be related to employee’s job.

– IRC 127, 2012 Taxpayer Relief Act §101(a)(1) http://www.irs.gov/publications/p970/ch11.html

• Personal Nonrefundable Credits May Offset AMT and Regular Tax for All Tax Years. IRC 26(a), as amended by Act Sec. 104(c)

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http://www.irs.gov/publications/p970/ch11.html

ATRA– Individual Tax Key ProvisionsGenerally all of the individual income tax provisions from 2001 EGTRRA and 2003 JGTRRA

were permanently extended including (continued):• Increase maximum in annual Coverdell education savings account (CESA) contributions to

$2,000 and related provisions, http://www.irs.gov/uac/Coverdell-Education-Savings-Accounts, IRC 25A, 530 as amended by Act Sec 101(a)(1)

– Individuals or corporations can make non-deductible cash contributions, max $2K per beneficiary, individual is subject to MAGI phase out (MFJ $190K-$220K) or 6% excise tax applies to excess funded.

– Beneficiary must be under age 18, unless exempted as special needs

– Contributions can be made until April 15 of the following year

– Non taxable if spent on qualified education expenses, includes elementary, secondary school and higher education.

– Earnings could be taxable upon withdraw if not used for qualified expenses and additional 10% tax may apply

– After age 30 must distribute or rollover to another beneficiary

– Other rules may apply including coordination with other education credits

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http://www.irs.gov/uac/Coverdell-Education-Savings-Accounts



• No Phase-Out of Personal Exemptions Except for Higher-Income Taxpayers– Phase out (PEP)) by 2% for each $2,500 (or portion thereof) by which the taxpayer's

AGI exceeds the applicable threshold– starting threshold of $300,000 for joint filers; $250,000 single filers

• Waiver of 60 month limit on the above the line deduction for student loan interest deduction. IRC 221, 2012 Taxpayer Relief Act §101(a)(1)

– Tax years after 12/31/12

– Deduction is lesser of amount paid or $2,500,

– Subject to AGI limitations e.g. $60K-$75K married filing joint

– http://www.irs.gov/taxtopics/tc456.html

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ATRA– Individual Tax Key ProvisionsHigher Income Taxpayers Definition New for 2013:• Highest marginal tax rate will increase to 39.6% up from 35%

• Capital gains and qualified dividends tax rate will increase to 20% for married taxable income in excess of $450,000( $400,000 for single filers)

• Note: above tax increase is in additional to the 3.8% Medicare tax on net investment income of higher income taxpayers that went into effect January 1 2013.

• Overall limitation on itemized deductions and phase-out of personal exemptions will be reinstated beginning in 2013 for couples with AGI in excess of $300,000 ($250,000 for single filers). – Indexed for inflation beginning in 2014

• Tip: Determine if you have capital loss carry forwards that can be utilized

• Tip: Consider optimizing qualified retirement plan contributions to decrease AGI

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ATRA– Individual Tax Key ProvisionsAMT Patch Permanently Extended:• Retroactive to 2012

• AMT exemption for 2012 increases for married couples from $45,000 to $78,750 and for single filers from $32,000 to $50,600

• Indexed for inflation beginning in 2013

• AMT Triggers: state and local tax deductions, real estate and personal property tax deductions, interest on home equity loan or lie of credit not used to buy build or improve residence; Misc itemized 2% deductions, LTCG and dividend income, tax-exempt interest on certain private-activity municipal bonds, ISO exercise, etc

• Tip: Customized tax planning with your tax professional before year end to determine optimal timing of payment for certain deductions

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ATRA– Estate and Gift Tax Key Provisions• Permanently extends the $5M lifetime gift and estate tax exemption as amended

by Act Sec 101• Raises the maximum gift and estate tax rate from 35% to 40%• 2013 exemption is projected to be $5.25M up from $5.12M in 2012• Exemption will be indexed for inflation and is projected to increase to $7.5M by

2020.• Other estate and gift tax provisions from 2010 act permanently extended

including the ability to carryover any unused estate tax exemption to the surviving spouse IRC 2010 (c)(2)(B) etc as amended by Act Sec 101

• Tip: Time to meet with professional advisors if you believe you have a taxable estate, minimize overall tax, avoid probate, living will, life and disability insurance, etc. $13K and annual exclusion other gifts; consider funding working child’s ROTH IRA to extent of earned income limit

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ATRA– Individual Tax Key ProvisionsOther Individual Tax Extenders set to expire end 2011 and were retroactively reinstated for 2012 and 2013:

• Above the line deduction for tuition and fees IRC 222(e) as amended by

Act Sec 207;– $4,000 for an individual whose adjusted gross income (AGI), with certain modifications,

doesn't exceed $65,000 ($130,000 for a joint return), – $2,000 for an individual whose modified AGI exceeds $65,000 ($130,000 for a joint return),

but doesn't exceed $80,000 ($160,000 for a joint return), – or zero for other taxpayers. – For taxpayer, spouse and dependents and used for higher qualified education expenses.

– Maximum amount to be reduced by other tax free assistance and other educational assistance programs e.g. CESAs

– Tips: expenses for an academic term beginning as late as Mar. 31, 2014 may qualify for the deduction, if the taxpayer pays these expenses before 2014. Consider paying some tuition for the 2014 term at the end of 2013—namely, the dollar amount equal to the maximum allowable deduction

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ATRA– Individual Tax Key ProvisionsOther Individual Tax Extenders set to expire end 2011 and were retroactively reinstated for 2012 and 2013:

• Deduction for state and local sales taxes IRC 164(b)(5)(l) as amended by Act Sec 205;

– (e.g. new car or boat) election to deduct general state and local sales tax paid e.g. on high ticket items, in lieu of total state and local income taxes e.g. state withholding and estimated tax paid

• $250 above the line deduction for teacher classroom expenses. IRC 62(a)(2)(D) as amended by Act Sec 201;

• Exclusion of cancellation of indebtedness income from the discharge of qualified personal residence indebtedness (originally expired at the end of 2012) IRC 108(a)(1)(E) as amended by Act Sec 202

– Same rules as prior, see IRS form 982

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Other Individual Tax Extenders set to expire end 2011 and were retroactively reinstated for 2012 and 2013 (continued):

• Deduction for qualified mortgage insurance premiums IRC 163(h)(3)(E)

as amended by Act Sec 204;– Paid or accrued before 1/1/14 not applicable to any period after 12/31/13.

• Exclusion for employer provided mass transit and parking benefits IRC 132(f)(2) as amended by Act Sec 203

– $240 / month 2012 and $245 / month estimated for 2013 excludable from employee income

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Other Individual Tax Extenders set to expire end 2011 and were retroactively reinstated for 2012 and 2013 (continued):

• Charitable deduction for contributions of real property for conservations purposes IRC 170(b)(1)(E)(vi) as amended by Act Sec 206(a);

– 50% charitable contribution limitation; 100% for qualified ranchers and farmers made in 2012 or 2013.

– Illustration

• In 2013, an individual with a contribution base of $100 makes a qualified conservation contribution of property with a fair market value of $80 and makes other charitable contributions subject to the 50% limitation of $60.

• Allowed a deduction of $50 in 2013 for the non-conservation contributions (50% of the $100 contribution base) and is allowed to carry over the excess $10 for up to five years.

• No current deduction is allowed for the qualified conservation contribution, but the entire $80 qualified conservation contribution may be carried forward for up to 15 years

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ATRA– Individual Tax Key ProvisionsAdditional items expired and retroactively reinstated for 2012 and 2013:• Tax-free distributions from IRAs for charitable purposes IRC 408(d)(8)(F) as

amended by Act Sec 208

– Maximum $100,000, must be trustee to trustee transfer, qualifies as RMD.

– Qualified distributions from IRAs for charitable purposes made prior to 2/1/2013 may be deemed as made in 2012.

– Cash distributions taken from IRAs after 11/30/12 and transferred to charity prior to 2/1/13 may qualify as tax-free distributions in 2012 (assuming the distributions otherwise qualify for the exclusion)

– Note: no taxable income (no increase to AGI) and no corresponding charitable deduction

• Tip: Work with professionals now to meet Feb. 1 2013 deadline for 2012; part of overall estate plan and lifetime family financial plan; to benefit charities and their missions that you care about

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Additional items benefitting lower and middle-income taxpayers extended thru 2017 (5 years):

• More generous American Opportunity Tax Credit (AOTC) for higher education expenses; – maximum $2,500 qualified education expenses (e.g. tuition, course materials,

fees) paid per eligible student

– non refundable personal credit can be claimed against AMT liability

– for first 4 years of post- secondary education degree or certificate program

– MAGI phase out between $160,000 and $180,000 for married joint filers– Code Sec. 25A(i) ; 2012 Taxpayer Relief Act §103(a)(2)

– http://www.irs.gov/uac/American-Opportunity-Tax-Credit

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http://www.irs.gov/uac/American-Opportunity-Tax-Credit


Additional items benefitting lower and middle-income taxpayers extended thru 2017 (5 years):

• Expansion of the refundable child tax credit (CTC) IRC 24 and 32(n) as amended by Act 101(a)(1) http://www.irs.gov/publications/p972/ar02.html

– $1,000 max per child, no limit on # of children.

– to the extent of 15% of the taxpayer's earned income in excess of a threshold amount e.g. $3,000

• Expansion and modifications to the Earned Income Credit (eligible taxpayers with 3 or more qualifying children); $5K increase threshold and phase outs See Act 103(c)(2); 101(a)(1)

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http://www.irs.gov/publications/p972/ar02.html


Payroll Tax Holiday Expires:

• During 2011 and 2012:

– OASDI tax (Medicare tax) reduced from 6.2% to 4.2% for W-2 employees (2%)

– Rate on self employment income was reduced from 12.4% to 10.4% (2%)

• For 2013 3.8% increase in total:

– OASDI wage limit base $113,700 times 2% equals $2,274 tax increase in 2013 for both employees and self employed taxpayers

– This tax is in addition to the 0.9% Medicare tax on earned income of higher income taxpayers that went into effect 1/1/13.

Tip: Self employed taxpayers should consider increasing their estimated tax payments accordingly (safe harbor rules)

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ATRA– Business Tax Key ProvisionsRetroactively reinstated for 2012 and 2013 but not extended

permanently:

• Cost Recovery Provisions Extended and Expanded –– IRC Sec 179 immediate deduction restored to $500K for qualified

tangible personal property. (subject to $2M phase out and net income provisions). 2013 was $25K max and $200K phase out – same for 2014 if no further extension in future law.

– Reinstated provision that allows IRC Sec 179 immediate deduction of up to $250K qualified leasehold restaurant and retail improvement property;

– Extends the 50% bonus depreciation provision placed in service before 1/1/2014 (original use). Extended election to accelerate AMT credits in lieu of bonus depreciation.

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ATRA– Business Tax Key ProvisionsRetroactively reinstated for 2012 and 2013 but not extended

permanently:

– First-Year depreciation cap for 2013 automobiles and trucks boosted by $8,000

• Passenger auto as qualified property IRC 168(k), not subject to the election to decline bonus depreciation and AMT depreciation relief

• Placed in service by 12/31/13; by 12/31/14 for aircraft and long production period property IRC 168(k)(2)

• Example: $40K cost passenger auto, $3,160 first year plus $8,000 potential total deduction $11,160

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ATRA– Business Tax Key ProvisionsExpired at the end of 2011 and were retroactively reinstated for 2012

and 2013 but not extended permanently:• Work opportunity tax credit (WOTC) (employer hiring certain targeted

groups e.g. veterans an income tax credit against their 1st and 2nd year earnings; non profit employers can also benefit). IRC 51(c)(4)(B) as amended

by Act Sec 309.• Indian Employment Credit Reinstated and Extended IRC 45A(f) as amended

by Act Sec. 304

• New markets tax credit (credit for qualified equity investments to acquire stock in a community development entity $3.5B cap no carryover) IRC 45D(f) as amended by Act Sec 305;

• 15-year straight line cost recover for qualified leasehold, restaurant and retail improvements IRC 168(e)(3)(E) and IRC 168(3)(8)(E) as amended by Act Sec

311;

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and 2013 but not extended permanently:• Expensing Election for Costs of Film and TV Production incurred in

certain qualified US areas. IRC 181(f) as modified by Act Sec 317

• Differential wage payment credit for eligible small employers when their employees are called to US active duty. IRC 45P(f) as amended by Act Sec 736

• 100% exclusion of gain from sale of qualified small business stock (IRC Sec 1244 QSB generally engaged in active trade or business and not have assets that exceed $50M; held stock at least 5 years) IRC 1202(a)(3) and IRC 1202(a)(4) as amended by Act Sec 324(b); (PSCs not eligible)

• 5-year recognition period for built-in gains of S-corporations (conversion C to S-corporation) IRC 1374(d)(7)(C) as amended by Act Sec 326(a)(2);

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and 2013 but not extended permanently:• Basis adjustment to stock of S Corporations making charitable

contributions of appreciated property, shareholder adjusts basis euqal to pro rata share of the adjusted basis of the property contributed. IRC 1367(a)(2) as amended by Act Sec 325;

• Subpart F exception for active financing income. IRC 953(e)(10) and IRC

954(h)(9) as amended by Act Sec 322;• Enhanced charitable deduction for contributions of “apparently

wholesome” food inventory by C Corporations. IRC 170(e)(3)(C)(iv) as amended by Act Sec 314

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and 2013 but not extended permanently:• Research Credit Reinstated and Liberalized IRC 41 as amended by Act Sec

301

• Empowerment Zone Tax Breaks Reinstated and Extended IRC 1391, 1394, 1397 as amended by Act Sec 327

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ATRA– Other Tax Key ProvisionsEnergy incentives expired at the end of 2011 and were

extended for 2012 and 2013:• Residential energy property non-refundable personal credit

located in the US. IRC 25C(g)(2) as amended by Act Sec 401(b);

• Credit equal to sum of: – (1) 10% of the amount paid or incurred by the taxpayer for qualified energy

efficiency improvements (i.e., energy-efficient building envelope components) installed during the tax year, and

– (2) the amount of residential energy property expenditures (i.e., expenditures for advanced main air circulating fans, for qualified natural gas, propane, or oil furnace or hot water boilers, and for “energy-efficient building property,” including heat pumps, water heaters, and central air conditioners, paid or incurred by the taxpayer during the tax year.

– Lifetime credit limit of $500 ($200 for windows and skylights)

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extended for 2012 and 2013:• Energy efficient new homes credit for eligible contractors.

$2K or $1K. IRC 45L(g) as amended by Act Sec 408;

• Energy efficient appliances manufacturers credit (dishwashers and clothes washers) IRC 45M(b) as amended by Act

Sec 409;

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extended through 2013:• Credit for 2- or 3-wheeled plug-in electric vehicles IRC 30D(g)(3)

(E), as amended by Act Sec. 403

– Credit equal to the lesser of 10% of its cost or $2,500.

• Non-hydrogen qualified alternative fuel vehicle (QAFV) refueling property credit is retroactively restored and extended to property placed in service before Jan. 1, 2014. IRC 30C(g)(2) as amended by Act Sec 402(b)

– 30% income tax credit for cost of installation not to exceed $30K/year per location

– Used in taxpayers trade or business or installed at principal residence

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extended through 2013:• Renewable electricity production credit IRC 45(d)(a) as amended

by Act Sec 407;

– e.g. Wind, closed-loop biomass, open-loop biomass, municipal solid waste (which consisted of landfill gas and trash facilities), hydropower and marine and hydrokinetic facilities construction to begin before 1/1/2014.

• Credit for biodiesel and renewable diesel used as fuel. IRC 40A(g) as amended by Act Sec 405.

– Income and excise tax credit and refund provisions

– IRS Forms 720, 8849, 4136, 8864 and 3800

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ATRA– Other Provisions• Medicare service payment cuts made to physicians deferred for

one year

• Federal-long term unemployment benefits extended for one year

• Federal milk subsidy extended for one year

• Individual taxpayers may now transfer amounts from a qualified retirement plan to qualified ROTH plan (e.g. ROTH 401(k)) without paying an early withdrawal penalty. IRC 402A(c)(4)(E) as added by Act Sec 1002

– Treated as in plan rollover, it is NOT tax-free, look for further guidance

– Conversion tax anticipated to offset half of the $24 Billion from next slide, balance anticipated to be offset by future discretionary spending cuts split equally between defense and non-defense spending

– Gets around AGI limitation for ROTH IRAs contributions

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Items that remain to be addressed…

• Automatic spending cuts scheduled to go into effect on Jan 1 2013 deferred until 3/1/2013; projected cost $24 Billion

• Automatic spending cuts “sequestration” expected to be addressed this March; likely in conjunction with a negotiation on the debt ceiling $14.5 Trillion.

• Long-term tax reform not yet addressed

• Debt reduction $16 Trillion not yet addressed

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Obama Tax Plan – Individuals

• What did not get in the new law– Cap certain deductions or exclusions at 28% for taxpayers in

the 36% and 39.6% brackets– Eliminate the carried interest “loophole” for hedge fund

managers and other similar service providers– Eliminate a special depreciation “loophole” for corporate jets

(this would increase the period for depreciation from 5 years to 7 years and would raise $2 billion over 10 years)

– Replace the AMT with the “Buffett Rule” – taxpayers with income over $1 million must pay an effective federal income tax rate of at least 30%.

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Top 5% Income Earners paid 58.7% of the Taxes

Source: Tax Foundation, based on IRS returns 2009

Category AGI Cut Off Number Share of Income Tax

Top 0.1% $1,432,890 137,982 17.1%

Top 1% $343,927 1,380,000 36.7%

Top 5% $154,653 6,899,000 58.7%

Top 10% $112,124 13,798,000 70.5%

Top 25% $66,193 34,496,000 87.3%

Top 50% $32,396 68,991,000 97.7%

Bottom 50% <$32,396 68,991,000 2.3%

Potential for Corporate Tax Reform

• February 2012-The President’s Framework for Business Tax Reform (the Framework)– Rough blueprint for the President’s plan

• To cut corporate tax rates to internationally competitive levels• Simplify the corporate tax rules• Reduce or eliminate tax loopholes in the current system

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Summary/Key TakeawaysHighlights of ATRA:• Tax rates (top bracket, capital gains, qualified dividends, Medicare tax)

increases for high income taxpayers new for 2013

• AMT Patch permanently extended, planning opportunities

• Payroll tax holiday expired

• Business can deduct more of their qualified asset purchases; consider cost segregation study for buildings and tenant improvements

• Estate tax rate increases 5%. Review your estate / gift tax plan with your advisory professionals if you believe you will be subject to estate tax

• Consider tax free distributions from IRAs for charitable purposes

• Consider ROTH IRAs and taxable rollovers; coordinate with investment advisor and tax professional; can gift to fund for working children

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Summary/Key Takeaways

• 2013 planning with investment advisor for capital gains; any capital loss carry forwards to offset gains?

• Optimize funding deductible retirement plans; can reduce AGI / tax liabilities

• Delay in tax legislation can delay filing. Affects IRS tax forms and tax preparation software development. Result: potentially more individual extensions (however note that tax liability due 4/15/13 regardless of filing an extension or late payment penalties result).

• Optimal tax planning requires customized solutions; integrated / coordinated with services of other professional advisors with your specific needs in mind as part of a “holistic approach”.

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Keeping you up to date…• CBIZ / MHM weekly update (email database; sign up sheet) – Indiv/bus tax updates

• Upcoming events:

– Eye on Washington Quarterly Business Tax Update: Tuesday January 22, 2013 1-2pm CDT (Phoenix noon – 1:00 pm)

– Healthcare Reform Seminar for employers (having 50+ employees)

• Contact Angie Avers (602) 650-6260 direct [email protected]

• Tucson - AZ Inn Jan 23 / Phoenix - Phoenix Art Museum Jan 24

• AZ CFO / CEO 2013 Economic Outlook for Phoenix – Guest speaker Barry Broome, President & CEO of GPEC at Phoenix Art Museum. Jan. 30

• Contact Susan Alispahic to be added to our educational notification lists

– [email protected]; (602) 650-6245 direct

• Our CBIZ MHM Phoenix website http://www.cbiz.com/cbizmhm-phoenix/

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mailto:[email protected]

Questions?

CBIZ MHM, LLC Contact Information

Zandra L. OKeefe CPAManaging Director 602.264.6835 [email protected]

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Thank You

2012 & 2013 Tax Update Highlights

Economy & Finance

Transcript of 2012 & 2013 Tax Update Highlights