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Thursday
Sep262013

Tax Law Changes in 2013 from the Affordable Care Act (ACA)

With all the discussion about the Health Care laws that are being monitored by the IRS, just what are the tax implications for the 2013 tax year and the 2014 tax filing season? Following are three key changes you should know about the Affordable Care Act (ACA) as it relates to your individual income tax return. There will be additional changes going forward, so specifically, we are looking at tax year 2013.

To start, there is only one tax law change for 2013 that could affect taxpayers in all income groups: the change to deductible medical expenses when a taxpayer is itemizing deductions. Only medical expenses that exceed 10 percent of your adjusted gross income (AGI), often referred to as the "medical expense deduction floor", will be allowed as a deduction. (Taxpayers who are age 65 or older in 2013 still have a medical deduction floor of 7.5 percent.) This change will affect all those who itemize deductions and claim a medical expense deduction. So, if you typically claim this deduction, you're going to want to watch for this change.

The other two changes for 2013 that come from the Affordable Care Act affect "high income" taxpayers. The new tax rules required an additional 0.9 percent Medicare tax be paid when there is an earned income greater than $200,000 for Single, Head of Household or Qualifying Widow taxpayers; $250,000 for Married Filing Jointly taxpayers, and $125,000 for Married Filing Separately taxpayers. This includes wages and self-employment income. The additional taxes will be withheld from your pay if your wages are $200,000 or greater regardless of your filing status. Taxpayers affected by this change may need to adjust their withholding or make estimated tax payments to ensure the additional taxes from this change doesn't trigger a balance due when filing taxes next year. Income tax withholdings can be increased by submitting an updated Form W-4 to the employer.

If you have the additional Medicare taxes withheld and you know you won't be subject to the additional taxes at the end of the year because you have a loss from a small business or your total earnings are less than $250,000 on a joint return, you must wait to file your tax return to receive a refund of any excess tax withheld. Employers generally are not able to refund the taxes. IRS is developing a new Form 8959, Additional Medicare Tax, for 2013 to calculate any additional Medicare tax that may be owed or any excess tax paid. The excess taxes paid will be treated as a refundable credit when reported on the tax return and with any remaining tax being issued as a refund after all federal tax liability reported on the return has been satisfied.

The next change, and perhaps one of the most confusing one for high income taxpayers, is the new 3.8 percent Medicare surtax on Net Investment income. Taxpayers with an income of greater than $250,000 if Married Filing Jointly, $200,000 if Head of Household, Single or a Qualifying Widow and $125,000 if Married Filing Separately will owe the new tax on Net Investment Income (NII). NII includes investment income such as interest, dividends, capital gains, passive income, and rental or royalty income. The tax is assessed on the smaller of the total NII or excess income greater than the income thresholds.

Taxpayers will determine any applicable Medicare tax on the new Form 8960, Net Investment Income Tax--Individuals, Estates and Trusts, when they file their income tax return. Taxpayers whose AGI may exceed the threshold amounts and who have investment income may need to adjust their withholding or make estimated tax payments to ensure the new Medicare tax on investment income doesn't trigger a balance due when filing taxes next year.

The good news for the vast majority of taxpayers is these particular new rules for 2013 will have very little impact. The BAD news is that if you are impacted, you will owe more tax. Further bad news for those impacted is that for some taxpayers, you may owe BOTH new taxes, and even more bad news, may owe taxes at a new HIGHER tax bracket and capital gain tax rate that were introduced in the American Tax Relief Act of 2012. The NEW highest tax bracket for very high income earners that is 39.6 percent and a new 20 percent capital gain tax rate applies to the same very high income taxpayers. So possibly a quadruple whammy tax increase if you are a very high earner with net investment income. Finally if you had medical expenses, you could find yourself with a potential tax increase due to the decrease in medical expense deduction from the increase in the medical deduction floor. So, if you're affected, or even just think you're affected, talk to your tax professional to make sure you plan accordingly.

Wednesday
Jul102013

Prepare for Natural Disasters by keeping electronic copies of your tax returns

WASHINGTON — With the start of this year’s hurricane season, the Internal Revenue Service encourages individuals and businesses to safeguard themselves against natural disasters by taking a few simple steps.

Create a Backup Set of Records Electronically

Taxpayers should keep a set of backup records in a safe place. The backup should be stored away from the original set.

Keeping a backup set of records –– including, for example, bank statements, tax returns, insurance policies, etc. –– is easier now that many financial institutions provide statements and documents electronically, and much financial information is available on the Internet. Even if the original records are provided only on paper, they can be scanned into an electronic format. With documents in electronic form, taxpayers can download them to a backup storage device, like an external hard drive, or burn them to a CD or DVD.

Document Valuables

Another step a taxpayer can take to prepare for disaster is to photograph or videotape the contents of his or her home, especially items of higher value. The IRS has a disaster loss workbook, Publication 584, which can help taxpayers compile a room-by-room list of belongings.

A photographic record can help an individual prove the market value of items for insurance and casualty loss claims. Photos should be stored with a friend or family member who lives outside the area.

Update Emergency Plans

Emergency plans should be reviewed annually. Personal and business situations change over time as do preparedness needs. When employers hire new employees or when a company or organization changes functions, plans should be updated accordingly and employees should be informed of the changes.

Check on Fiduciary Bonds

Employers who use payroll service providers should ask the provider if it has a fiduciary bond in place. The bond could protect the employer in the event of default by the payroll service provider.

IRS Ready to Help

If disaster strikes, an affected taxpayer can call 1-866-562-5227 to speak with an IRS specialist trained to handle disaster-related issues.

Back copies of previously-filed tax returns and all attachments, including Forms W-2, can be requested by filing Form 4506, Request for Copy of Tax Return. Alternatively, transcripts showing most line items on these returns can be ordered on-line, by calling 1-800-908-9946 or by using Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript or Form 4506-T, Request for Transcript of Tax Return.   

Tuesday
Apr022013

Tax Day is Almost Here!

Don't Panic If You Need More Time

Let us request an extra six months by filing for an extension, but as a reminder,  this is not an extension to pay.

Taxpayers still need to send the IRS a payment for estimated taxes owed, and it must be 90 percent accurate, to avoid penalties.  We can help you with your estimated tax amount.  Please contact the office if you need an extension filed before April 15th.

Saturday
Mar302013

Get all the tax breaks you can

Last-minute moves, often-overlooked deductions, and changes for 2012 tax returns.

After a year of federal budget crisis deadlines and headlines, the one financial deadline that most Americans actually understand is approaching—April 15, or as it’s known, Tax Day.

As you tackle your 2012 federal income tax return, you might actually uncover a few surprises. Some deductions and exemptions increased, a few that had expired were reinstated, and Congress patched the alternative minimum tax (AMT) not just for 2012, but for the foreseeable future.

Here are some key points and useful tips to keep in mind as you tackle your 2012 tax returns.

Last-minute moves to consider

There's still time to potentially lower your tax bill for 2012 by contributing to a traditional IRA, a SEP-IRA if you’re self-employed, or a Health Savings Account (HSA). Provided you qualify, you can make your tax-deductible contribution to these accounts right up until the filing deadline, April 15. Don’t forget to specify that your contribution is for the 2012 tax year.

The 2012 contribution limits are:

  • IRA — $5,000 if you’re under age 50, $6,000 if you were 50 or older by December 31, 2012.
  • SEP-IRA — The lesser of 20% of your 2012 compensation if you are self-employed, 25% for other employees, or $50,000.
  • HSA — $3,100 for individuals, $6,250 for families ($1,000 catch-up contribution if you were 55 or older by December 31, 2012).

You also can contribute to a 2012 Roth IRA up to the filing deadline, but keep in mind that you won’t get a tax deduction. The benefit of a Roth IRA comes when you can withdraw the money tax free in retirement, provided certain conditions are met.

Deduction, exemption, and bracket increases

In the category of “every little bit helps,” the personal exemption for you and each of your dependents increased $100 for 2012, to $3,800. Also, the standard deduction for taxpayers who choose not to itemize increased to $5,950 for single filers, up $150, and to $11,900 for joint filers, up $300.

The marginal tax brackets also shifted upward, which could shave a bit off your tax bill. For example, the upper limit of the 25% bracket for singles increased to $85,650, up $2,050, while the same bracket for joint filers went to $142,700, up $3,350. So if you were single with taxable income of $65,000, you would owe $95 less in 2012 than in 2011; and if you were married filing jointly with taxable income of $100,000, your tax would be $190 less.

AMT fix

The AMT is a separate method for calculating the taxes you owe that was originally designed to prevent wealthy taxpayers from piling up deductions to avoid paying federal income tax. Over the years, however, the AMT affected a growing number of average taxpayers, and Congress had enacted an annual “patch” to lessen its impact.

Again in 2012, Congress waited until almost the last minute to enact the patch, but then it went a step further by making it permanent and indexing it to inflation. For 2012, the AMT exemption will be $50,600 for unmarried individuals, $78,750 for married couples filing jointly, and $39,375 for married taxpayers filing separately. That’s good news because the patch will reduce the number of taxpayers affected by the AMT in 2012 to 4 million, from a previously projected 32 million, according to the Tax Policy Center of the Urban Institute and Brookings Institution.

New and extended deductions

As you tackle your 2102 federal income tax return, you might actually uncover a few surprises. Some deductions and exemptions increased, a few that had expired were reinstated, and Congress patched the alternative minimum tax (AMT) not just for 2012, but for the foreseeable future.

 

Taking advantage of all the deductions you’re entitled to is a good idea, but keeping track of them isn’t always easy. For example, a couple of valuable tax breaks were buried in the 157-page “fiscal cliff” legislation—the American Tax Relief Act of 2012—that Congress passed on New Year's Eve.

One is the nonbusiness energy property tax credit, which is a fancy way of saying you get to subtract up to $500 from your tax bill if you make qualified energy-saving improvements to your home—including energy-efficient windows and doors. The credit had expired at the end of 2011, but the fiscal cliff legislation reinstated it for the 2012 and 2013 tax years. The $500 limit is a lifetime limit, not an annual limit, so if you’ve already claimed $500 in past years, you cannot claim $500 in 2012. See IRS Form 5695, Residential Energy CreditsOpens in a new window..

Another is a provision that retroactively allows workers to set aside up to $240 per month in pretax income to pay for using public transportation to get to work in 2012 (increasing to $245 in 2013), provided their employer offered such a plan. The amount for 2012 would have been $125 per month without the provision. Claiming the full deduction for 2012 could be complicated, however, so you may want to consult a tax professional.

For teachers, the fiscal cliff deal extended for 2012 and 2013 the educator expense deduction of $250 for out-of-pocket money they spend on classroom supplies, materials, books, and software. If you’re self-employed, don’t overlook a provision (not in the fiscal cliff deal) that allows you to deduct the full amount of health insurance premiums—not just for you, but also for your spouse and dependents. Even better, the Affordable Care Act of 2010 allows you to deduct the cost of health insurance for nondependent children under age 27.

For those giving to charity from their IRAs, the IRA charitable rollover provision was extended retroactively for 2012, and into 2013. If you are over age 70½, you can make tax-free distributions of up to $100,000 from your IRAs directly to qualified charities. If you made a qualified charitable distribution from an IRA in January 2013, you can treat it as if made in 2012. Also, if you took a distribution from an IRA in December 2012 to contribute that amount to a charity, it can count as an eligible charitable rollover.

Roth IRA conversion reminder

Although it might feel like a long time ago, if you took advantage of a one-time opportunity in 2010 to convert a traditional IRA to a Roth IRA and postpone payment of the resulting tax bill until 2011 and 2012, the second half of that tax liability is now due.

Also, maybe you were among the taxpayers who chose to convert a traditional IRA to a Roth IRA in 2012 out of concern that Congress would increase tax rates in 2013 and beyond, thereby increasing the tax bite resulting from a conversion. The fiscal cliff deal did indeed raise rates for high-income taxpayers, increasing the ordinary income tax rate for taxable income above $400,000 for individuals and $450,000 for couples. If the upshot of all this is that it may not have been the right time to convert to a Roth IRA—maybe because the investments in the account lost value (and therefore the cost to convert would be lower now) or your 2012 tax bill is going to be bigger than you expected—you might want to consider converting it back, a process known as recharacterization. In most cases, you have until October 15 of this year to do the recharacterization and refile your tax return.

Cost-basis reporting

If you’re a mutual fund or stock investor, you may have noticed changes in the 2012 Form 1099-B sent to you by Fidelity. Specifically, brokers are now required by federal law to include the cost basis for “covered securities” on the forms and report that information to the IRS. It is important to note that your tax reporting obligations have not changed. The change has been in the information that broker-dealers and mutual fund companies are required to report to the IRS.

All in all, paying your taxes for 2012 will probably not be as difficult as it might have been without the fiscal cliff legislation.

An important reminder: Congress enacted tax increases for 2013, mostly for high-income taxpayers. The sooner you understand what they are and how they affect you, the more effectively you can shape your tax strategies for the current year. (Read Viewpoints: Taxpayers guide to 2013).

Tuesday
Mar262013

NEW TAX LAWS FOR 2013

At the beginning of 2013, President Obama signed the American Taxpayer Relief Act of 2012, averting the dreaded “fiscal cliff” and making significant changes to U.S. tax law.

While the top one percent of taxpayers will bear the biggest burden, the new law will affect most U.S. families in one way or another.

Income Tax Brackets
Rates will increase for only the highest income tax bracket, increasing from 35 percent to 39.6 percent. These changes apply only to individuals with at least $400,000 of taxable income or couples filing jointly with at least $450,000.

Payroll Taxes
In 2011 and 2012, to stimulate the economy and help the middle class, the employee portion of the Social Security tax was reduced by two percentage points. Congress allowed this cut to expire and the rate to return to 6.2 percent, so individuals will owe up to $2,425 more in payroll tax in 2013. The threshold for maximum wages taxed by the Social Security tax is $113,700 in 2013.

In addition, there will be a 0.9 percent payroll Medicare tax surcharge starting in 2013 as part of the Affordable Care Act. This applies to individuals earning more than $200,000 and couples filing jointly earning more than $250,000.

Personal Exemption
The personal exemption is the amount of money a taxpayer can deduct for him or herself and for dependents. In 2013, this exemption is expected to be $3,900.

However, the exemption now begins to phase out for individuals earning more than $250,000 and couples earning more than $300,000. It vanishes completely for individuals earning $372,500 of adjusted gross income, or income before itemized deductions, and for couples at $422,500.

Limit on Itemized deductions
The “Pease” limitation is a complex limitation on all itemized deductions, including charitable donations and mortgage interest, which will eliminate up to 80 percent of deductions for taxpayers above the threshold of $250,000 for individuals and $300,000 for couples. This phase-out effectively adds about one percentage point to the top tax rate, including the top rate on capital gains.

Investment Income
Under the new law, dividends are not taxed at the same rate as ordinary income. Instead, they are considered (along with capital gains) long-term gains. Taxpayers in the 25 percent, 28 percent, 33 percent and 35 percent income-tax brackets will continue to be taxed at 15 percent. Those in the 10 percent and 15 percent brackets will continue to pay no taxes on capital gains and dividends.

However, the new law permanently raises rates on long-terms gains for top-bracket taxpayers. People with enough income to pay tax at 39.6 percent will now owe 20 percent on their net long-term gains.

In addition, the Affordable Care Act levies a new 3.8 percent tax on net investment income above a threshold of $200,000 for singles and $250,000 for couples.

Alternative Minimum Tax
The new law indexes for inflation the Alternative Minimum Tax, preventing nearly 30 million taxpayers from being hit with bills averaging almost $3,000.

A Tax Lawyer Can Help
The law surrounding the American Taxpayer Relief Act of 2012 can be complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the changes brought about by this new law. For more detailed, specific information, please contact a tax lawyer


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