YEAR-END TAX PLANNING AND THE IMPACT OF THE FISCAL … year-end planning.pdf · James J. Holtzman,...

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James J. Holtzman, CFP®, CPA

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YEAR-END TAX PLANNINGAND

THE IMPACT OF THE FISCALCLIFF

James J. Holtzman, CFP®, CPA James J. Holtzman, CFP®, CPA is an Wealth Manager and Shareholder

with Legend Financial Advisors, Inc.® (Legend)

Jim has been selected two consecutive times by MedicalEconomics as one of “The 150 Best Financial Advisors forDoctors in America.”

Jim serves as the firm’s Income Tax and Education Fundingand Planning Specialist.

Jim’s previous professional experience includes employmentwith various CPA and Financial Advisory organizationswhere he provided tax, accounting, auditing and financialconsulting services to individuals and businesses.

Jim’s areas of concentration include income tax planning, estate planning, stock optionexercise planning, insurance, retirement planning and Section 529 Plans.

Jim is a member of the Pennsylvania and American Institute of Certified Public Accountants.He is also a graduate of the Pittsburgh Leadership Development Initiative, which providesyoung leaders with the tools necessary to affect positive change in the Pittsburgh region, andPittsburgh Leadership Onboard Programs.

Jim also serves on the LaRoche College Board of Governors, is a member of Pittsburgh Cares,and is a former member of the Finance Committee for the Pittsburgh Downtown Partnership.

Jim has been quoted in The Wall Street Journal, The Wall Street Journal Online, MSN Money, CBSMarketwatch, Pittsburgh Post-Gazette, Bloomberg Wealth Manager, Financial Planning Magazine,Financial Advisor Magazine, National Underwriter, Smart Money, Investment News, Physician’sPersonal Advisory, and in Bottom Line Personal. Jim has been interviewed on CNNfn’s “YourMoney” and “Business Unusual,” as well as WPXI-TV’s “Our Region’s Business” televisionprograms.

FISCAL CLIFF: WHAT IS IT?

REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC.®

SOURCE: LEGEND FINANCIAL ADVISORS, INC.®

COPYRIGHT 2012 LEGEND FINANCIAL ADVISORS, INC.®

1. Tax Cut Expiration

a. Tax Cuts Of 2001 And 2003

b. Tax Relief Act Of 2010

c. Mortgage Forgiveness Debt Relief Act

d. Payroll Tax Cut

e. Alternative Minimum Tax Patch

f. Tax Break “Extenders” That Must Be Renewed Annually

2. $1.2 Trillion Cut In Spending To Discretionary Programs Over TheNext Decade.




2012 2013 (Pre-2001)

10% 15%

15% 28%

25% 31%

28% 36%

33% 39.6%

35%

QUALIFIED DIVIDEND




The Tax Rate For Qualified Dividends Could Go From 15.0% Tax RateTo 43.8% (New Top Federal Tax Rate Of 39.6% Plus New MedicareTax Of 3.8%) For Taxpayers In The Top Federal Income Tax Bracket.




a. The Patch Is An Increase In The AMT Exemption. Think Of This In TheSame Manner As The Personal Exemption.

b. Not Having This In Place Until So Late In The Year Makes Any Kind OfTax Planning Difficult.

c. An Income Tax Projection Needs To Be Run For 2012 And 2013Reflecting Different AMT Exemption Amounts.

ALTERNATIVE MINIMUM TAX PATCH




The Payroll Tax Holiday That Reduced Workers’ Share Of SocialSecurity Taxes From 6.2 Percent To 4.2 Percent Is Scheduled To ExpireAt The End Of 2012.

SOCIAL SECURITY TAX CUT

• Beginning In 2013, Flexible Spending AccountContribution Limits Will Be Limited To $2,500.00.




EXPIRATION OF THE FEDERAL UNEMPLOYMENT BENEFITS




a. Currently, Federal Unemployment Benefits Provides Payments After 26Weeks Of State Unemployment Benefits End.

b. Schedule To Expire At The End Of 2012.




The 0% Long-Term Capital Gain Tax Rate For The Lowest 2 TaxBrackets Goes Away In 2013.




The Child Tax Credit Will Decrease To $500 From $1,000 Starting In2013.




The Return Of The Personal Exemption And Itemized Deduction Phase-out For Certain Taxpayers In 2013.

i. Personal Exemption Phase-out: Applies For Joint FilersStarting At Adjusted Gross Income Of $267,200.00 And$178,150.00 For Single Files

ii. Itemized Deductions Would Be Limited By The Lesser Of:

1. 3.0% Of The Amount Of The Taxpayer’s Adjusted GrossIncome In Excess Of An Inflation-threshold Amount.This Amount Is Expected To Be $178,150.00 For SingleAnd Married Filing Joint;

Or

2. 80.0% Of The Itemized Deductions Otherwise AllowableFor The Tax Year

PERSONAL EXEMPTION AND ITEMIZED DEDUCTIONS




a. Expires After 2012

b. The Credit Amount Is $2,500.00 And Is Available For The First FourYears Of Post-secondary Education.

c. The Hope Education Tax Credit Comes Back In 2013.

d. Planning Idea: Consider Paying 2013 Education Expenses BeforeYear-end If That Helps You Take Advantage Of The AmericanOpportunity Tax Credit.

AMERICAN OPPORTUNITY TAX CREDIT(ENHANCED HOPE CREDIT)




a) Used To Be Called Education IRA Account.

b) The Current Maximum Contribution Is $2,000.00, But Will Decrease To$500.00 In 2013.

COVERDELL EDUCATION SAVINGS ACCOUNT




a. The Current Law Allows Employer-provided Education Assistance UpTo $5,250.00 To Be Excluded From Taxable Income For Undergraduateand Graduate Expenses.

b. In 2013, This Benefit Will Expire And That Money Will Be Included InTaxable Income For Employer Contributions To An Employee’sGraduate Education Expenses Or Does Not Qualify As A WorkingCondition Fringe Benefit.

c. Undergraduate Expenses Can Still Apply.

EMPLOYER-PROVIDED EDUCATION ASSISTANCE




a. Taxpayers With Modified Adjusted Gross Income Below $75,000.00 ForIndividuals And $150,000.00 For Joint Can Deduct Interest ExpensePaid On Education Loans Up To $2,500.00.

b. The Student Loan Interest Deduction Modified Adjusted Gross IncomeThresholds Will Drop To $55,000.00 For Individuals And $75,000.00 ForJoint After 2012.

c. In 2013, The Amount Of Time That Interest Can Be Deductible Will BeDuring The First 60 Months After Payments Begin. Currently, There IsNo Time Limit On Deducting Interest Expense.

STUDENT LOAN INTEREST DEDUCTION




a. This Deduction Is Taken Before Adjusted Gross Income With AMaximum Deduction Of $4,000.00 Available.

b. This Deduction Is Eliminated In 2013.

HIGHER EDUCATION TUITION DEDUCTION

OTHER TAX BREAKS SCHEDULED TO EXPIREOR CHANGE

1. Child And Dependent Care Credit Decrease.

2. Adoption Tax Credit Decrease.

3. Earned Income Credit For A Third Child Will Terminate.

4. Marriage Penalty Reduction (Decreasing The Size Of The 15.0%Tax Bracket Or Decreasing The Standard Deduction).




Beginning in 2013, individuals will pay an additional 0.9% in Medicare Taxeson wages (or net earnings from self-employment) above $200,000 on a single return,$250,000 on a joint return, or $125,000 if married filing separately. In the case ofemployees, this added tax falls only on the employee, even though the employercontinues to pay half the base rate of 2.9%.

The Medicare Tax on wages takes effect on January 1, 2013.

Example: Single individual has $250,000.00 of salary. The additional Medicare Taxwill be $450.00 ($50,000.00 (Excess over $200,000.00 salary x .90%).

Example: Married couple earning $500,000.00 combined salary. The additionalMedicare Tax will be $2,250 ($250,000.00 (Excess wage over $250,000.00 salary x.90%).

Self-employed individuals will be liable for an additional tax of .90% of their self-employment income to the extent it exceeds the relevant threshold amount.

MEDICARE TAX - WAGES




The Medicare Tax on unearned income takes effect in 2013.

Unearned income is the income that an individual derives from investing his/hercapital. It includes capital gains, rents, dividends and interest income. It also comesfrom some investments in active businesses if the investor is not an activeparticipant in the business.

Those whose tax filing status is “single” will be subject to the new unearned incometaxes if they have Modified Adjusted Gross Income (AGI) of more than $200,000.Married couples filing a joint return with Modified Adjusted Gross Income of morethan $250,000 will also be subject to the new tax.

You might not owe the 3.8% tax on all your investment income. The tax would applyto whichever is less -- your investment income or the amount that your modifiedadjusted gross income (AGI) exceeds the high-income threshold.

The Medicare Tax on unearned income is imposed on employees, not employers.

Example: A single individual has a Modified AGI of $220,000.00 and net investmentincome of $40,000.00. The tax would apply to the lesser of (i) net investment income($40,000.00) or (ii) modified AGI ($220,000.00) over the threshold amount for anindividual ($200,000.00), or $20,000.00. The tax is 3.8% of $20,000.00, or $760.00.

MEDICARE TAX – UNEARNED INCOME







1. Bonus Depreciation

a. In 2012, There Is A 50.0% First-year Bonus DepreciationAllowance.

b. In 2013, Bonus Depreciation Is Eliminated.

c. 100.0% Bonus Depreciation Expired At The End Of 2011.

d. Applies For Property With 20 Year Or Less Recovery Period.

2. Section 179 Depreciation

a. In 2012, The Dollar Limitation Is $139,000.00 With A $560,000.00Ceiling On Purchases.

b. In 2013, The Dollar Limitation Is $25,000.00 With A $200,000.00Ceiling On Purchase.

DEPRECIATION




a. Accelerate Bonus Before Year-end

b. Exercise Stock Options

c. Sell Assets With Significant Unrealized Capital Gains

d. Roth IRA Conversion

e. Take IRA Distributions

INCOME ACCELERATION IDEAS




a. Pay 2012 Fourth Quarter State And Local Estimated Income TaxPayments In 2013

b. Medical Expenses

c. Charitable Contributions

d. December Mortgage Payment In January, 2013.

DEDUCTION DEFERRALS




Utilize Your Capital Loss Carryovers In Future Years When Tax Rates AreHigher (They Are Worth More When Tax Rates Are Higher). Generally, WeDo Not Recommend Realizing Capital Gains Before Year-End 2012 If YouHave A Capital Loss Carryover.




1. 2012 Federal Estate And Gift Tax Rate Of 35.0% Is Scheduled ToIncrease To 55.0% In 2013.

2. The Federal Estate And Gift Tax Exemption Will Decrease From $5.12Million In 2012 To A $1,000.000.00 Million Federal Estate TaxExemption In 2013.

3. A Top Federal Estate Tax Rate Of 45.0% And A $3,500,000 FederalEstate Tax Exemption Has Been The Most Popular Proposal BeingDiscussed For 2013.

4. The Gift Tax Exemption Is Scheduled To Decrease To $1,000,000.00 In2013.

5. Strategies: Make Gifts Up To The Annual Gifting Exclusions Of$13,000.00, Per Done.

ESTATE/GIFT TAX




6. Strategy: If The Beneficiary Is In School Or Has Medical Needs, ThereIs An Unlimited Amount That Be Gifted Directly To The EducationInstitution Or Medical Facility.

7. Strategy: Consider Making Large Year-end Gifts In Excess Of TheAnnual Gift Exclusion.

8. If The Federal Estate Tax Exemption Is Lower In 2013, A TaxpayerCould Leverage The Higher Gift Tax Exemption In 2012 Providing ThatThe I.R.S. Allows It And Does Not Try To Claw It Back.

ESTATE/GIFT TAX (CONTINUED)




a. As A Reminder, This Deduction Was Not Continued For 2012.

b. There Is A Possibility That This Could Be Put Back Into Place At TheLast Minute For 2012.

STATE AND LOCAL SALES TAX DEDUCTION




a. Prior To 2012 (And Not Renewed For 2012), Taxpayers Over The AgeOf 70 ½ And Taking Their Required Minimum Distributions CouldExclude From Gross Income A Charitable Distribution From Their IRAAccount (Also Would Not Be Deductible As An Itemized Deduction)

b. In 2012, A Distribution Can Be Taken From An IRA, Given To CharityBut This Would Be A Taxable Distribution And An Itemized Deduction.

CHARITABLE DISTRIBUTIONS FROM IRA ACCOUNTS




a. Prior To 2012, Mortgage Insurance Premiums Were Deductible.

b. In 2012, This Deduction Was Eliminated.

MORTGAGE INSURANCE PREMIUMS

• No Modified Adjusted Gross Income Limits.

• Earnings May Be Withdrawn Without Tax Or Penalty If TheTaxpayer Is At Least 59 ½ And Has Held The Roth IRAAccount For At Least Five Years.

• Roth IRA Assets Are Not Subject To The RequiredMinimum Distribution Rules.

• When Converting, Taxpayers Must Pay Ordinary FederalIncome Taxes On The Converted Amount.

• The Payment Of The Federal Income Taxes Should BeDone With Non-IRA Assets.




• The Tax-free Status Of The Roth IRA Can Be Passed To ABeneficiary And The Beneficiary Will Not Have To PayIncome Tax On Any Distributions.

• A Taxpayer Can Undo The Roth Ira Conversion ByCompleting A Roth Ira Recharacterization And TheDeadline Is Your Tax-filing Deadline Plus Extensions.




• Be aware of buying a mutual fund in a taxable accountbefore the mutual fund pays their year-end capital gaindistribution.




• A health savings account is an account created for an individualwho is covered under a high deductible health insurance plan.

• Tax benefits1. Pre-tax deductions2. Tax deferred earnings3. Tax free withdrawal if used for covered medical expenses

• Contribution limits1. Family: $6,250.00 plus catch up of $1,000.002. Single: $3,100.00 plus catch up of $1,000.00

• Minimum Deductible Requirement for a High Deductible HealthInsurance Plan

1. Family: $2,400.002. Individual: $1,200.00

• Maximum Out-Of-Pocket1. Family: $12,100.002. Individual: $6,050.00




• Make Sure That You Provide Your Accountant With All MedicalInsurance Premiums And Non-reimbursed Medical Expenses.Medicare Part B, Medicare Part D And Medigap Insurance PremiumsCan Add Up Quickly And You Might Be Eligible To Deduct A PortionOf These Expenses, Along With Other Non-reimbursed MedicalExpenses.

• The Adjusted Gross Income Floor For Itemizing Medical ExpensesWill Increase From 7.5% To 10% Of Adjusted Gross Income In 2013.




• Pennsylvania allows an income tax deduction for a Section529 Plan contribution to any state's plan up to $13,000.00 perperson.




• Avoid Underpayment Penalty – 2 Tests To AvoidUnderpayment Penalty.

1. Pay The Lesser Of: 90% Of Current Year’s Tax OnA Quarterly Basis Or,

2. Pay 100% Of Last Year’s Tax On A Quarterly Basis

• Use Withholding To Avoid Underpayment Penalty.




• Brokerage firms have to report cost basis for stocks boughton or after January 1, 2011.

• Brokerage firms have to report cost basis for mutual fundsbought on or after January 1, 2012.

• IRS Form 1099-B will is used to report cost basis and willreflect short-term or long-term capital gain.

• On January 1, 2013, brokerage firms must report cost basisfor options, fixed income, and any security not covered inprevious tax years.




• If Possible, Make An Adjustment To Your Withholding To IncreaseYour Pre-tax Retirement Contribution.

• 2012 Maximum Contribution Limit For Everyone Under The Age Of50: $17,000.00

• 2012 Catch-up Contribution Limit For Everyone Over The Age Of 50:

$5,500.00




• For Self-employed Individuals, This Needs To Be Established By12/31/12.

• Contribution Deadline: 04/15/13

• Typically Provides For A Higher Contribution Than Sep IRA

• Contribute Up To 100% Of The First $17,000.00 ($22,500.00 If Age50+) Of Net Self-employment Income

• 2012 Maximum Contribution Limit For Everyone Under The AgeOf 50: $17,000.00

• 2012 Catch-up Contribution Limit For Everyone Over The Age Of50: $5,500.00




• Can Be Established Before 04/15/13 For 2012 Tax Year

• Contribution Deadline 04/15/13 For 2012 Tax Year




• 3 Types Of IRAs

1. Deductible IRA

2. Non-deductible IRA (Everyone With Earned IncomeCan Make This Kind Of IRA Contribution)

3. Roth IRA

• 2012 Deadline To Make Contribution Is: April 15, 2013

• 2012 IRA Contribution Limit: $5,000.00

• 2012 IRA Catch-up Contribution Limit: $1,000.00







1. It Is Expected That The U.S. Treasury Will Reach Its Borrowing Limit InThe First Quarter Of 2013.

OTHER ISSUES

• Reevaluate Portfolio Risk

• Property And Casualty Insurance

• Life Insurance

• Disability Insurance

• Long-term Care Insurance

• Refinance

• Identify Theft

1. Credit Monitoring Service

2. Protect Your Documents

• Estate Planning

1. Review Beneficiary Designations

OTHER YEAR-END FINANCIAL PLANNINGCONSIDERATIONS




• Designed to improve your financial situation by informing you aboutevents occurring within the financial world.

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QUESTIONS AND ANSWERS

Legend Financial Advisors, Inc.®5700 Corporate Drive, Suite 350Pittsburgh, PA 15237-5829Phone: (412) 635-9210E-mail: [email protected]

EmergingWealth Investment5700 Corporate Drive, Suite 360Pittsburgh, PA 15237-5829Phone: (412) 548-1386

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YEAR-END TAX PLANNING AND THE IMPACT OF THE FISCAL … year-end planning.pdf · James J. Holtzman,...

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