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THE TAXPAYER RELIEF ACT OF 2012 NEW TAXES IN 2013 Andy Starnes & Bert Mills Moore Colson

THE TAXPAYER RELIEF ACT OF 2012 NEW TAXES IN 2013 Andy Starnes & Bert Mills Moore Colson. What was the fiscal cliff?. Budget Control Act of 2011: Deal reached between Congress & the Administration in summer 2011 to raise the federal debt ceiling to $16.4 Trillion.

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THE TAXPAYER RELIEF ACT OF 2012 NEW TAXES IN 2013 Andy Starnes & Bert Mills Moore Colson

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  1. THE TAXPAYER RELIEF ACT OF 2012 NEW TAXES IN 2013 Andy Starnes & Bert Mills Moore Colson

  2. What was the fiscal cliff? • Budget Control Act of 2011: Deal reached between Congress & the Administration in summer 2011 to raise the federal debt ceiling to $16.4 Trillion. • As part of the deal, a deficit reduction super-committee was created and given until November 2011 to either (1) reach a deficit reduction agreement, or else (2) $1.2 Trillion of broad based spending cuts (“sequestration”) would automatically be triggered over a multi-year period beginning in 2013.

  3. What was the fiscal cliff? • The super-committee failed to reach an agreement, setting-up the so-called “fiscal cliff” scenario: • Sequestration was set to begin 1/1/2013 (spending cuts) • $16 trillion debt ceiling reached around 12/31/2012; increase needed to allow federal government to borrow to fund spending • Bush tax cuts to “sunset” on 12/31/12 (tax increase) • 2% payroll tax holiday set to expire on 12/31/12 (tax increase). • Alternative Minimum Tax (AMT) to hit millions more taxpayers in 2012 (tax increase) • Several new taxes enacted in connection with the Affordable Care Act to take effect on 1/1/2013 (tax increase)

  4. “Fiscal Cliff” Tax Changes….what might have been • An income tax increase for all individual taxpayers as income tax rates revert back to 2001/2003 levels (top marginal rate moves to 39.6%) • Long term capital gain rate reverts to 20% from 15% • Expiration of 15% rate for qualified dividends (tax rate on dividends moves to 39.6%, a 264% increase in taxes on dividend income) • Itemized Deduction/Personal Exemption phase-outs would have resumed • AMT individual exemption amounts significantly decreased

  5. “Fiscal Cliff” Tax Changes….what might have been (cont.) • Standard deduction for joint returns would have decreased $1,950 • No deduction for student loan interest after 1st 60 mos. of repayment • Earned income tax credit, child tax credit &American Opportunity (Hope) tax credit all revert to old, lower limits & less generous rules • Expiration of temporary 2% reduction in employee portion of payroll tax • Estate & gift tax provisions would revert to 2001 rules (exclusion decrease from 5.12M to $1M & tax rate increase from 35% to 55%)

  6. “Fiscal Cliff” Avoided? • On January 2, 2013, the American Taxpayer Relief Act of 2012 (ATRA) was enacted. • Provided short-term tax policy answers by making permanent certain tax provisions….but stay tuned • Pushed decisions regarding spending cuts (sequestration) and debt-ceiling increases until March 1, 2013

  7. ATRA……what didn’t happen? • No income tax rate increase for individual taxpayers with taxable income less than $400K single/$450K joint • No taxation of qualified dividendsat ordinary income tax rates • No decrease in AMT exemption • No reduction in standard deduction for joint returns

  8. ATRA……what didn’t happen (cont.)? • No elimination of deductibility of student loan interest after 1st 60 mos. of repayment • No reduction in tax credits for earned income tax credit, child tax credit &American Opportunity (Hope) tax credit • No decrease in estate & gift tax exemption amounts

  9. ATRA – Summary of Major Tax Provisions Enacted • Individual tax rates made permanent and indexed for inflation. • Long term capital gain/qualified dividend tax rates made permanent: • AMT patch & nonrefundable credit offset - permanent effective 1/1/2012 • Personal exemption and itemized deduction phase-outs resume • Estate tax exemptions & rates made permanent: • Increased accelerated depreciation extended (through 2013) • Research credit & Work Opportunity Tax Credit (WOTC) extended (through 2013)

  10. ATRA - Permanent tax rate changes enacted for individuals effective 1/1/2013 • Taxable income above high-earner $400K single/$450K joint thresholds subject to 39.6% rate (on ordinary income) and 20% preferential rate (on LTCG & qualified dividends). • Permanent extension of 2012 ordinary income tax rates and 0%/15% preferential tax rates on LTCG & qualified dividend income for: • Single taxpayers less than $400,000 per year • Heads of households less than $425,000 per year • Married couples filing joint returns less than $450,000 per year • Married couples filing separately less than $225,000 per year • Permanent extension of marriage penalty relief: alignment of joint rates with corresponding top-of-bracket amounts for single taxpayer.

  11. ATRA - Other permanent tax changes for individuals effective 1/1/2013 • Standard deduction marriage penalty relief is made permanent. • Permanent reduction of rates & withholding for “kiddie tax” • Election to include qualified dividends in investment income for purposes of investment interest deduction now permanently allowed. • “In-plan Roth rollovers” now permitted for designated Roth accounts after 12/31/12. • Tax rate on individuals’ non-qualifying capital gain withdrawals from Merchant Marine CCFs now 20%

  12. ATRA - Other permanent tax changes for individuals effective 1/1/2013 (cont.) • Inclusion of qual. dividend in prohibition on IRD double benefit – permanent • Qual. dividend treatment for ordinary income on disposition of Sec. 306 stock now permanent. • Child tax credit of $1,000 per child permanently extended; increase in refundable portion extended through 2017. • EIC simplification made permanent; increased phase-out threshold increase for joint filers & increased EIC for families with 3 or more qualifying children both extended through 2017. • EGTRRA expansion of dependent care credit made permanent. • Expanded adoption credit rules (but not refundable) made permanent.

  13. ATRA - Permanent AMT relief enacted for individuals effective 1/1/2012 • Previous AMT patch expired on 12/31/2011. • AMT exemption amount retroactively increased for 2012 (to be adjusted for inflation in subsequent years) as follows: • $50,600 for unmarried individuals • $79,750 for married taxpayers filing jointly & surviving spouses • $39,375 for married taxpayers filing separately • Certain nonrefundable personal credits allowed to offset both regular tax & AMT.

  14. ATRA - Permanent changes to thresholds for phase-outs of itemized deductions & personal exemptions effective 1/1/13 • In previous years, phase-out of itemized deductions & personal exemptions (to the extent that Adjusted Gross Income exceeded certain threshold amounts) was temporarily suspended. • Effective 1/1/2013, phase-outs have been reinstated, but… • Threshold amounts permanently increased (and subject to adjustment for inflation in subsequent years). • New thresholds (for both itemized deductions & personal exemptions) are: • $300,000 for married taxpayers filing jointly & surviving spouses • $275,000 for heads of households • $250,000 for unmarried taxpayers • $150,000 for married taxpayers filing separately

  15. ATRA – Phase-outs of itemized deductions effective 1/1/2013 • Itemized deduction phase-out is 3% of the excess of taxpayer’s AGI over threshold amount, up to a maximum of 80% of itemized deductions. • For taxpayers in top tax bracket, phase-out of itemized deductions equates to 1.2% tax increase.

  16. ATRA – Phase-outs of itemized deductions effective 1/1/2013 (cont.) • Example: For a married couple filing a joint return with AGI of $500,000 in 2013 (AGI exceeds $300,000 by $200,000) and itemized deductions of $100,000 prior to phase-out: $200,000 excess of AGI over threshold * 3% = $6,000 $100,000 of itemized deductions before phase-out Less $6,000 phase-out Equals: $94,000 net deductible itemized deductions after phase-out

  17. ATRA - Personal Exemption Phase-out (PEP) effective 1/1/2013 • PEP is 2% of the personal exemption that would be allowed (without PEP) for each $2,500 or portion thereof by which taxpayer’s AGI exceeds applicable threshold amount. • For taxpayers whose AGI exceeds threshold amount by $125,000 or more, their personal exemptions are effectively 100% phased out.

  18. ATRA - Personal Exemption Phase-out (PEP) effective 1/1/2013 (cont.) • Example for a married couple with 2 dependent kids, filing a joint return with AGI of $400,000 in 2013 (AGI exceeds $300,000 by $100,000) and 4 personal exemptions of $3,800 each ($15,200 total) prior to phase-out: $100,000 excess of AGI over threshold Divided by $2,500 = 40…. 40 * 2% = 80% PEP $15,200 total * 80% = $12,480 PEP $2,720 net deductible personal exemptions after PEP

  19. ATRA - Individual Tax Extenders • Exclusion of cancellation of indebtedness on principal residence has been extended for one year (through 2013) Provisions expiring 12/31/11 retroactively extended for 2012 & 2013: • 100% gain exclusion for qualified small business stock. • Parity for employer-provided mass transit & parking benefits. • State & local sales tax deduction. • Interest deduction for mortgage insurance premiums. • Special rule allowing contributions of capital gain real property for conservation purposes to be taken against 50% of contribution. • Special rule allowing tax-free distributions from IRAs to public charities, by individuals age 70½ or older.

  20. ATRA -Tax changes specifically relating to education effective 1/1/2013 Permanent tax changes enacted: • 2001 EGTRRA changes to student loan deduction rules made permanent. • Increased $2,000 contribution limit & other EGTRRA enhancements to Coverdell ESAs made permanent. • Exclusion for employer-provided educational assistance & restoration of the exclusion for graduate-level courses made permanent. • Income exclusion for awards under the National Health Service Corps & Armed Forces Health Professions programs made permanent.

  21. ATRA -Tax changes specifically relating to education effective 1/1/2013 (cont.) Temporary extensions enacted: • AOTC for higher education expenses extended 5 years through 2017. • Qualified tuition deduction retroactively extended through 2012 & 2013. • Teachers’ classroom expense deduction for qualified out-of-pocket expenses up to $250 retroactively extended for 2012 & 2013.

  22. New Tax Levies Imposed by the 2010 Affordable Care Act • Applicable threshold amounts: • $200,000 for unmarried taxpayers • $250,000 for married taxpayers filing joint returns • $125,000 for married taxpayers filing separate returns • New healthcare tax of 3.8% on investment income (if MAGI exceeds the applicable threshold amount) • New hospital insurance tax of 0.9% on earned income in excess of applicable threshold amount • New floor for deductibility of medical expenses is 10% of AGI (rather than 7.5% of AGI)

  23. ATRA - Permanent tax changes enacted for estates & trusts effective 1/1/2013 • Permanent extension of 2012 ordinary income tax rates for estates and trusts with taxable income of $11,950 or less (indexed for inflation in future years) • Estate tax, gift tax & GST exemption amount permanently increased to $5.25 Million effective 1/1/2013 (indexed for inflation after 2011) • 35% tax rate permanently extended for taxable estates/gifts up to $500,000 • Progressive rate structure for taxable amounts over $500,000: • 37% for amounts over $500,000 but not over $750,000 • 39% for amounts over $750,000 but not over $1,000,000 • 40% for amounts over $1,000,000 • Portability rules permanently extended.

  24. ATRA - Business Tax Extenders • Increased $500,000 Section 179 deduction limit & $2,000,000 phase-out threshold retroactively extended for 2012 & 2013. • 50% bonus depreciation deduction for qualified property extended for 1 year through 2013. • Increase in 1st year depreciation cap for cars that are “qualified property” extended for 1 year through 2013. • Sec. 179 election revocation w/o IRS consent & eligibility of software for Sec. 179 extended 1 year through 2013.

  25. ATRA - Business Tax Extenders (cont). • 15-year MACRS depreciation for certain building improvements & restaurants retroactively extended for 2012 & 2013. • Accumulated earnings & personal holding company tax rates now 20% • Research tax credit for taxpayers engaged in qualified activities retroactively extended for 2012 & 2013. • WOTC for taxpayers that hire individuals from targeted groups retroactively extended for 2012 & 2013.

  26. ATRA - More Business Tax Extenders Provisions that expired 12/31/11 retroactively extended for 2012 & 2013: • 7 year recovery period for motorsports entertainment complexes • Special expensing rules for qualified film and television productions • Accelerated depreciation for business property on Indian reservations • Reduced 5-year recognition period for S Corporation built-in gains • Rule that S corporation’s charitable contribution of property reduces shareholder’s basis only by contributed property’s basis • Election to expense mine safety equipment • Allowance of Section 199 deduction for Puerto Rico activities • Above-basis deduction for charitable contributions of food inventory • Subpart F exclusions for active financing income • Look through rule for payments between related CFCs • Treatment of dividends of Regulated Investment Companies (RICs) • Qualified Zone Academy Bond (QZAB) program • New York Liberty Zone tax-exempt bond financing • Round I empowerment zone designation period

  27. ATRA - More Business Tax Extenders • Employer-provided child care credit (expired 12/31/12) extended permanently • New Markets Tax Credit (expired 12/31/11) retroactively extended through 2013 • Temporary 9% minimum low-income housing credit rate for non-federally subsidized buildings (housing credit $ amount allocations made before 2014) • Extension of military housing allowance exclusion for tax-exempt bond financing & for low-income housing credit purposes through 2013 • Differential wage payment credit for activated military reservists (expired 12/31/11) retroactively extended through 2013 • Indian employment credit for wages paid to qualified Native Americans (expired 12/31/11) retroactively extended through 2013 • Mine rescue team training credit (expired 12/31/11) retroactively extended through 2013. • Railroad track maintenance credit (expired 12/31/11) retroactively extended through 2013.

  28. ATRA - Energy Incentives • $500 lifetime maximum credit for individuals who make energy efficient improvements to their homes has been extended through 2013. • Sec. 45 production tax credit for facilities that produce energy from wind facilities extended through 2013. • Other energy tax incentives extended through 2013: • Credits for alternative fuel vehicle property • Credits for cellulosic bio-fuel production • Credits for biodiesel and renewable diesel • Production credits for Indian coal facilities • Credit for energy efficient new homes • Credit for energy-efficient appliances • Allowance for cellulosic bio-fuel plant property • Special rules for sales of electric transmission property • Tax credits and outlay payments for ethanol

  29. Example for an American family • Jim Smith owns a manufacturing company (c-corporation). His salary is $450,000 per year and he receives dividends based on profits. Dividends for 2013 were $120,000. • Jim’s wife Jane is a teacher earning $80K per year • Jim & Jane also invest in stocks & bonds and receive 50K of qualified dividends, 30K of long-term capital gains, & 20K of interest income (100K of investment income) • Annual AGI is $750,000 • Itemized deductions are $100,000 • They have 2 dependent children

  30. The net effect of reintroducing itemized deduction & personal exemption phaseouts • The Smiths will lose $13,500 in deductions – 3% of their excess AGI over the $300K threshold – equates to a 1.2% tax increase (39.6%*3%=1.2%) • Since the Smiths’ AGI is 450K over the $300K threshold for personal exemption phase-outs, they lose 100% of their personal exemption deduction.

  31. Lost Deductions Due to Phase-outs = Hidden Tax Increase

  32. Example: Smith Family income & payroll tax increase in 2013

  33. Example: New taxes that will be levied on the Smith family in 2013 (in addition to tax increases attributable to the fiscal cliff)

  34. Comparison: Smith Family Federal Tax Burden (2012 vs. 2013) Note: for purposes of comparison, the effective tax rate is determined by dividing the combined federal tax burden by the family’s 750K AGI reduced by 100K of pre-phase-out itemized deductions (ignore the personal exemption deduction). Put another way, $650K is their net take home each year before federal taxes.

  35. Planning Opportunities • Choice of entity (C corp., S corp., Partnership, etc.) • Capital expenditure timing • Timing of dividends and bonuses • Succession planning • Estate and gift comprehensive planning

  36. Still to come……. • Debt Ceiling Debate • Sequestration • Tax Reform? • Entitlement Program Reform?

  37. Remember to Pick up Your Copy of… Thanks for Your Attendance !

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