Dear Clients and Friends,



[pic]

2013 Tax Planning Newsletter

Dear Clients and Friends,

After weeks of negotiating that, at times, looked as though it would accomplish nothing, Congress finally agreed on legislation to avoid the tax part of the “fiscal cliff.” In the early morning hours of January 1, 2013, the Senate passed the American Taxpayer Relief Act of 2012, sending the bill to the House where it was passed later that day. President Obama signed the bill into law on January 2.

The new law keeps the Bush-era tax cuts for the majority of taxpayers, but adds a 39.6% tax bracket for singles with income in excess of $400,000 and couples with income over $450,000. The law permanently “fixes” the alternative minimum tax and permanently sets the estate tax top rate at 40% with an exemption of $5,000,000. Capital gains and dividends will continue to be taxed at 2012 rates, except for a higher 20% rate on higher-income taxpayers. The law did not extend the 2% reduction in payroll taxes on wages and self-employment income beyond 2012.

A new year and new tax legislation always provide fresh opportunities for tax planning. This New Year Letter is being sent to you as a reminder of our commitment to help you minimize your taxes. We hope you find the Letter informative and helpful. Please contact us if we can assist you in your planning and in meeting your tax filing obligations.

Put the pieces together for tax savings in 2013

Beginning-of-the-year tax planning is key to identifying opportunities – and pitfalls – that lie ahead as you begin implementing personal and professional goals for 2013. Here are questions that will help you start to estimate and manage the impact of recent legislation as well as rules from previous laws that took effect on January 1.

■ What’s your anticipated income?

A new tax rate of 39.6% when your taxable income exceeds $400,000 ($450,000 when you’re married filing jointly) is just one reason to create an income projection for 2013.

Another reason: Additional rate changes take effect this year. For example, the maximum long-term capital gain rate increased to 20% when your income puts you in the highest ordinary income tax bracket. In addition, a 3.8% surtax may apply to net investment income – a term that includes interest, dividends, and capital gains – when your modified adjusted gross income (AGI) exceeds $250,000 ($200,000 if you’re single).

If you need more incentive to run the numbers early, an older rule based on AGI has been reinstated this year: the phase-out of the deduction for personal exemptions. Your deduction for yourself, your spouse, and your dependents will be reduced when you’re married, filing a joint return, and your AGI is greater than $300,000 ($250,000 if you’re single).

• Planning suggestion: Income deferral is a good strategy when you expect to be subject to higher rates and phase-outs. One way to push income into the future is by making the most of contributions to your employer’s qualified retirement plan. Pre-tax contributions reduce adjusted gross income.

■ What types of income do you expect to receive?

Sorting inflows into various categories such as wages, investments, retirement plan distributions, passive income, and active business income gives you a clearer picture of what tax rules will apply.

For instance, this year you’ll pay an additional 0.9% Medicare tax on wages and self-employment income when the combined total of those items exceeds $250,000 on a joint return ($200,000 when you’re filing as single).

This tax is separate from, and based on a different type of income than the 3.8% net investment income tax. Depending on the sources of your income, you may be subject to both taxes.

• Planning suggestion 1: Investigate pre-tax fringe benefit options. The 0.9% additional tax is assessed on wages subject to Medicare tax. Health insurance premiums paid under your employer’s cafeteria plan are exempt from Medicare tax, as are contributions made by your employer to qualified retirement plans.

• Planning suggestion 2: Switch taxable investments – especially those with a built-in loss – to municipal bonds. Tax-exempt interest is not considered net investment income when calculating the 3.8% tax.

• Planning suggestion 3: Place income-generating investments in retirement accounts. Future withdrawals can increase your adjusted gross income, but are not themselves subject to the net investment income tax.

• Planning suggestion 4: Make tax-free distributions from your traditional IRA to qualified charities when you’re over age 70½. This provision was extended through the end of 2013.

• Planning suggestion 5: Increase the amount of time you actively participate in rental real estate activities, and evaluate the effect of grouping your properties in order to combine the time spent managing them.

• Planning suggestion 6: Evaluate the legal form of your business. Flow-through income from an S corporation in which you actively participate is not generally subject to either of the new taxes. Also, depending on your personal tax rate, you may want to take another look at converting to C corporation status.

■ What tax-advantaged expenses should you budget for?

Education expenses and energy improvements are two areas of opportunity for personal tax savings.

• Planning suggestion 1: Coordinate payments for higher-education expenses between 529 plans and other sources to get the most benefit from credits and deductions, such as the newly extended American Opportunity Credit and the qualified tuition deduction.

• Planning suggestion 2: If you haven’t already taken advantage of the tax incentive for energy-efficient improvements to your home, 2013 may be the year to install furnaces, windows, doors, or skylights. Qualifying purchases are eligible for a federal credit, which can reduce your liability by up to $500.

• Planning suggestion 3: Itemized deductions need scrutiny, because your benefit may be limited in 2013. When you’re married filing a joint return, the reduction begins once your adjusted gross income exceeds $300,000. The threshold is $250,000 when you’re single. In addition, when you’re under age 65, medical expenses must now exceed 10% of your AGI to be deductible.

• Planning suggestion 4: Review your multi-year “bunching” strategy, and choose the most tax-advantageous time to schedule elective expenses. Remember to include costs you pay for dependents, as well as other family members for whom you provide support.

• Planning suggestion 5: Are you a business owner? Accelerated write-offs are available for assets you purchase and place in service this year, including vehicles, equipment, and software. For 2013, the maximum Section 179 deduction is $500,000. Bonus depreciation of up to 50% of an asset’s cost is also an option.

Even with the extension of many old rules, there are enough changes that go into effect this year that tax planning is really essential. Contact our office early in 2013 to identify tax-saving opportunities suited to your individual situation.

2012 rules extended for most taxpayers

“Fiscal cliff” avoided with last-minute law

It’s called the American Taxpayer Relief Act of 2012, and a big part of the relief is having some certainty for tax planning in 2013. With a few exceptions, many familiar federal rules remain in effect.

• For example, unless your taxable income exceeds $450,000 when your filing status is married and you file a joint return ($400,000 when you’re single), your 2013 federal income tax rates will range from 10% to 35%. The rate on taxable income above those amounts is 39.6%. In

addition, the maximum long-term capital gain tax rate is the same as prior years until your taxable income reaches the $450,000/$400,000 thresholds. You’ll still benefit from the 0% rate on capital gains and qualified dividends when you’re in the 10% or 15% tax brackets.

• In 2011 and 2012, taxpayers enjoyed a “payroll tax holiday” in the form of 2% lower social security taxes on wages and self-employment earnings. The new law did not extend the lower rate beyond 2012, and taxpayers will once again pay social security tax at a 6.2%, not 4.2%, rate.

• One big area of uncertainty – the alternative minimum tax exemption – was fixed. Without this latest fix, an estimated 30 million filers would have been required to pay the alternative minimum tax for the 2012 tax year. The 2012 exemption amount of $78,750 when you’re married filing jointly ($50,600 for singles) is now permanent, and subject to annual adjustments for inflation.

• For those aged 70½ and older, tax-free distributions to qualified charities from your traditional IRA are still an option for 2013.

• You can still exclude cancellation of debt income from a foreclosure or short sale of your home. You can continue to take advantage of the child tax credit, the credit for installing energy-efficient improvements in your home, and the American Opportunity Credit when you pay qualifying educational expenses.

• The Act also extended several deductions, including the optional deduction for state and local sales taxes, mortgage insurance premiums, student loan interest, and teacher-paid classroom expenses.

• New rules to keep in mind include the return of the limitation on itemized deductions and personal exemptions. When you’re married filing jointly, and your adjusted gross income is more than $300,000, the total amount you can claim for these two items is reduced. The threshold is $250,000 if you’re filing as single.

• The new law avoids drastic changes for several estate and gift tax provisions that had officially ended after 2012. Significantly, the estate tax exemption, which had been scheduled to drop to $1 million from $5 million (inflation-indexed to $5.12 million in 2012) remains at $5 million with inflation indexing. Portability of exemptions between spouses is preserved. The top estate tax rate, which had been scheduled to increase from 35% to 55% in 2013, is bumped up to 40%. The estate and gift tax changes are permanent.

• If you own a business, you can benefit from the increased Section 179 deduction of up to $500,000 of the cost of equipment purchased in 2012 and 2013. 50% first-year bonus depreciation is available through 2013, and the 15-year recovery life for qualified leasehold, retail, and restaurant improvements is also reinstated.

• The Work Opportunity Credit was extended too, so you can reduce your tax bill when you hire employees from targeted groups such as veterans.

The American Taxpayer Relief Act of 2012 has a number of other tax provisions that might affect you. Call us for all the details. We’re ready to help you start your 2013 tax planning.

Your 2013 tax numbers

The law requires the IRS to make annual inflationary adjustments to a variety of tax numbers. Here are some of the key tax numbers you’ll need for your 2013 tax planning.

|Provision |2013 |2012 |

|Standard mileage rate for business driving |56.5¢ a mile |55.5¢ a mile |

|Mileage rate for medical and moving expense deductions |24¢ a mile |23¢ a mile |

|Mileage rate for charitable driving |14¢ a mile |14¢ a mile |

|Business equipment expensing deduction |$500,000 |$500,000 |

|Total purchase limit for full expensing deduction |$2,000,000 |$2,000,000 |

|Maximum wages subject to social security tax |$113,700 |$110,100 |

|Social security earnings limit | | |

|• Under full retirement age |$15,120 |$14,640 |

|• Year full retirement age reached |$40,080 |$38,880 |

|• Full retirement age |No limit |No limit |

|Top estate tax rate |40% |35% |

|Amount exempt from estate tax |$5,250,000 (est.) |$5,120,000 |

|Annual gift tax exclusion (per donee) |$14,000 |$13,000 |

|Maximum retirement plan contributions | | |

|• IRA for those under age 50 |$5,500 |$5,000 |

|• IRA for those 50 and over |$6,500 |$6,000 |

|• SIMPLE plan for those under age 50 |$12,000 |$11,500 |

|• SIMPLE plan for those 50 and over |$14,500 |$14,000 |

|• 401(k) plan for those under age 50 |$17,500 |$17,000 |

|• 401(k) plan for those 50 and over |$23,000 |$22,500 |

|“Kiddie tax” threshold |$2,000 |$1,900 |

|“Nanny tax” threshold |$1,800 |$1,800 |

|Personal exemption |$3,900 |$3,800 |

|Standard deduction | | |

|• Single |$6,100 |$5,950 |

|• Joint returns and surviving spouses |$12,200 |$11,900 |

|• Married filing separately |$6,100 |$5,950 |

|• Head of household |$8,950 |$8,700 |

|• Additional for elderly or blind (married) |$1,200 |$1,150 |

|• Additional for elderly or blind (single) |$1,500 |$1,450 |

Some tax benefits are time travelers

Like a page from a science fiction novel, your tax return can reach into the past and future. How? Through the use of tax carryforwards and carrybacks. Here is what you should know about these time-traveling tax perks.

Some tax deductions have a maximum amount that you can use in any one year. In these situations, the rules generally allow you to apply the unused tax deduction to a past or future tax return. One of the most popular examples of this is the “net operating loss” or NOL. Business owners whose qualified expenses exceed their income are allowed to apply the NOL to taxable income earned in the second prior year, and if there is still loss available, to apply it to last year’s income. Any further unapplied NOL can be used to offset future taxable income.

But there are a few twists to the NOL rules. If your NOL is the result of a theft or disaster, you can carry it back three years. An NOL from farming can be carried back five years. And you may opt to apply all your NOL to future years only, which might not be a bad strategy if you expect to be taxed at higher rates in future years.

Net capital losses, such as from the sale of stocks, can be carried forward (but not back) to offset future capital gains and up to $3,000 of ordinary income. You can also carry forward charitable contributions that exceed 50% of taxable income for up to five years.

It’s important to save all records related to carryback and carryforward deductions for at least three years after the year they are applied. If you have any questions about your potential for tax carryback and carryforward deductions, contact our office. We’ll help you keep an eye on your tax situation, past, present, and future.

This Letter is issued annually to provide you with information about minimizing your taxes. Do not apply this general information to your specific situation without additional details. Be aware that the tax laws contain varying effective dates and numerous limitations and exceptions that cannot be summarized easily.

As you do your planning for 2013, stay informed about any changes Congress is planning to make to the tax code. See us prior to making business and financial decisions so that current rules and pending changes can be considered.

Sincerely,

Gallovic, Granito & Co. Ltd.

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download