OVERVIEW Recap of 2013 ACA Act NII Surtax Medicare Wage - - PowerPoint PPT Presentation

OVERVIEW

• Recap of 2013
• ACA Act
• NII Surtax
• Medicare Wage Surtax
• Tax Items For Businesses
• Ohio Tax Law Changes

FRUSH & ASSOCIATES, INC. FRUSH & ASSOCIATES, INC. FRUSH & ASSOCIATES, INC. FRUSH & ASSOCIATES, INC.

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Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, nothing contained in this communication was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting, marketing, or recommending a partnership or other entity, investment plan or arrangement to any other party. For discussion purposes only. This work is intended to provide general information about the tax and other laws applicable to retirement benefits. The author, his firm or anyone forwarding or reproducing this work shall have neither liability nor responsibility to any person or entity with respect to any loss or damage caused, or alleged to be caused, directly or indirectly by the information contained in this work. This work does not represent tax, accounting, or legal advice. The individual taxpayer is advised to and should rely on their own advisors

Last Time We Met…..

O The FISCAL CLIFF – included the potential

• nset of federal tax increases and spending

cuts (scheduled to take effect January 1, 2013) that could have a substantial impact

• n the economy.

O Was estimated up to 90% of Americans

would have a tax increase.

Where We Were

Bush-era tax rates of 10%-35% Dividends (qualified) taxed from 0%-15% Long-term capital gains taxed from 0%-15% Estate tax – higher exemption/ lower rate No marriage penalty Tax-advantaged depreciation options Phase-outs and credits

Bush Tax Cuts Extended….With A Kicker

2012 Brackets 2012 Brackets 2012 Brackets 2012 Brackets 2013 Brackets 2013 Brackets 2013 Brackets 2013 Brackets

10% 15% 25% 28% 33% 35% 10% 15% 25% 28% 33% 35% 39.6%*

Dividends

2012 2012 2012 2012 2013 2013 2013 2013

Ordinary: Up to 35% Qualified: 0-15% Ordinary: Up to 39.6%* Qualified: Up to 20%*

Capital Gains

2012 2012 2012 2012 2013 2013 2013 2013

Short-Term: Up to 35% Long-Term: 0-15% Short-Term: Up to 39.6%* Long-Term: 0-20%*

ACA Tax Provisions

* The Affordable Care Act of 2010 introduced tax provisions relating to health care, and also snuck in a couple new taxes

Schedule of New Health Care Provisions

Year Provision

2013

• Flexible spending arrangement the maximum drops to

$2,500 per plan year

• New “HI” (hospital insurance tax) on high-income taxpayers
• New 3.8% Medicare tax on investment income
• Medical care itemized deduction threshold increases to

10% of AGI starting in 2013 (except from 2015–2016) 2014

• States will be required to provide federally approved insurance plans
• Premium assistance credit
• Excise tax on uninsured individuals
• Excise tax on applicable large employers (moved to 2015)
• Insurer reporting requirements
• Eligible premiums included in cafeteria plans

2017

• Increase in medical deduction threshold for taxpayers age 65 and over

2018

• Excise tax on high-cost employer plans

9

ACA Tax Provisions

Beginning with 2012, employers are

required to report the cost of coverage on the employee’s W-2, Box 12 (informational

• nly)

Employer contribution continues to be not

taxable to the employee

Net Investment Income Tax Additional Medicare Tax

ACA Tax Provisions

Small Business Health Care Tax Credit

Helps small businesses and small tax-exempt

• rganizations afford the cost of covering their

employees

Specifically targets those with low- and

moderate-income workers

Designed to encourage small employers to

• ffer health insurance coverage

ACA Tax Provisions

Small Business Health Care Tax Credit

Small Employer

Fewer than 25 FTE Average wage less than $50,000/year Pay at least half of single (not family) employee

health insurance premiums

ACA Tax Provisions

Small Business Health Care Tax Credit

For 2010 to 2013 – maximum credit is 35%

• f premiums paid for small employers

For 2014+ changes to:

Maximum credit is 50% of premiums paid To be eligible, must pay premiums on behalf of

employees enrolled in a qualified health plan

• ffered through a SHOP

Credit available for 2 consecutive taxable years

ACA Tax Provisions

Small Business Health Care Tax Credit

Even if did not owe tax, can carry unused

credit back or forward to other years

Can claim expense for premiums in excess of

the credit

Can file an amended return if you forgot to

claim originally

File Form 8941 to calculate – include as

general business credit on return

ACA Tax Provisions

Employer Shared Responsibility Payment

Transition relief provisions moved compliance to

2015; encourage voluntary compliance in 2014

PCORI - $1 fee per number of lives covered for

plan years ending before October 1, 2013

$2 per covered life 10/1/13-9/30/14 File on Form 720 – Quarterly Excise Tax Return for

2nd Quarter following plan year end

Net Investment Income Surtax

Beginning with 2013 tax year, imposes a

3.8% surtax to all taxpayers whose income exceeds a certain “threshhold amount”

Theoretically a taxpayer in the 39.6% tax

bracket could have a marginal rate of 43.4%

NII Surtax

The surtax applies to the LESSER

LESSER LESSER LESSER of:

Net investment income

• or -

Excess of Modified Adjusted Gross Income

• ver applicable threshold amount

Threshold amounts:

Single, HOH - $200,000 MFJ - $250,000 Trusts/Estates - $11,650 (top bracket)

NII Surtax

Net Investment Income (NII) includes:

Interest Dividends Annuity Distributions Rents Royalties Income from Passive activities Capital Gains

NII Surtax

Net Investment Income (NII) does not

include:

Salaries and Wages Active business income IRA Distributions. 401(k) Distributions Self-Employment income Gain on sale of active partnership or S

Corporation interest

Tax-exempt interest Social Security and Veterans benefits

NII Surtax

Example:

John is single and has an MAGI of $220,000.

He has interest and dividends of $40,000.

John’s “surtax” base is the lesser of:

NII - $40,000 MAGI over threshold - $220,000-200,000 =

$20,000

John pays a surtax of $760 ($20,000 x 3.8%)

NII Surtax

Interest

Some interest may be excluded if earned in a

trade or business

Ordinary course of business Not trading of financial commodities Individual not a passive investor Example – dentist earns income on extra cash

in a money market – not excluded because not in the ordinary course of business

NII Surtax

What is a Passive activity?

Regulations under Section 469 automatically

assume you don’t really participate in some activities

Puts the burden of proof on you to prove

• therwise

Must prove you “materially participate” Passive income is included in both sides of the

NII calculation

NII Surtax

Proving material participation – 7 tests

1.

Participate > 500 hours per year

2.

Participation constitutes substantially all of the participation by all involved in the activity

3.

Participation more than 100 hours, and no

• ne participates more

4.

Significant participation over 100 hours in the activity, and total participation in all significant activities over 500 hours

NII Surtax

Proving material participation – 7 tests

• 5. Materially participated in activity for any 5
• f previous 10 tax years

6.

Personal service – 3 previous tax years

7.

Generic facts and circumstances After proving material participation, need to go back to exclusion test mentioned before to determine if you can exclude income.

NII Surtax

Example: Joe and Dan are 50/50

shareholders in an S Corporation and make

• widgets. Joe works 2,000 hours per year,

Dan sits on the beach doing nothing. The company earns $1,000,000 of ordinary income during the year, allocated evenly to

• each. The company also earned $100,000

in interest from its money market account. What does each include in their NII?

NII Surtax

Answer

Joe excludes his $500,000 share of income

because it meets the exclusion tests. He includes his $50,000 share of the interest income.

Dan includes his $500,000 share of income

in the NII base because he does not meet the exclusion tests. He includes his $50,000 share of the interest income also.

NII Surtax

Owners with multiple companies

IRS recognizes you may not be able to meet the

500 hour requirement

Can group together multiple activities to test

and prove material participation on a combined basis

Restrictions on types that can be grouped

together

Once you elect to group, no turning back IRS allowing changes to prior groupings if subject

to NII only

NII Surtax

Rentals

IRS automatically assumes rentals are passive

under 469 – therefore included in NII

Real estate professionals with material

participation in the rental activity can claim active participation

REP

More than half services you perform during year

must be in real estate activities

Perform more than 750 hours of real estate

services in which you materially participate

Can elect grouping Each rental must be trade or business (new)

Minimizing the NII Surtax

Need to evaluate ways to minimize both NII

and AGI in order to minimize the surtax

Spread income over multiple years Shift taxable investment income into tax-

exempt bonds

Harvest capital losses to offset future gains Maximize timing of Roth conversions

Minimizing the “Surtax”

Rents received by “Real Estate Professional”

who materially participate in the rental activities are not part of NII

Evaluate passive business interests that are

subject to the surtax

Installment sales Above-the-line deductions

Medicare “HI” Tax

Under current law, all workers pay 1.45% of

their wages to the Medicare hospital insurance program (employers match)

Self-employed taxpayers pay both Starting in 2013, high income taxpayers will

• we an additional .9% on wages or self-

employment income

Employers do not match the additional .9%

Medicare “HI” Tax

Tax applies to:

Married filing joint – wages or self-

employment income over $250,000

Single, HOH - $200,000

Medicare “HI” Tax

Self-employed taxpayers

Pay the additional .9% over threshold Since the .9% is technically the “employee’s

portion”, the additional tax in not an above- the-line deduction on Form 1040

Medicare “HI” Tax

Married taxpayers

Employers have no way of knowing the wages or

income of an employee’s spouse, so most employers will begin withholding as if their employee is single (after reaching $200,000)

If both spouses are high income earners but

under $200,000 each, may need to make estimated payments due to no withholdings

Excess withholdings are considered surplus

withholding

Minimizing Medicare “HI” Tax

Maximize deferrals to employer plans

(reduces federal taxable wages)

Request employer withhold extra withholding

Planning For Businesses

Businesses seeking to maximize tax benefits

through 2013 year-end tax planning should consider two general strategies:

1.

Use timing techniques for income and deductions

2.

Consider significant tax incentives set to expire at the end of 2013 (bonus depreciation, Section 179, WOTC) Take into consideration the new higher tax rates Take into consideration the new higher tax rates Take into consideration the new higher tax rates Take into consideration the new higher tax rates when planning for 2013 and beyond. when planning for 2013 and beyond. when planning for 2013 and beyond. when planning for 2013 and beyond.

Section 179

This has been one of the biggest business

friendly items over the past decade

For 2013, the annual dollar limit for

expensing is $500,000

Annual investment limitation is $2,000,000,

after which expensing limit reduced dollar- for-dollar over $2,000,000

For 2014 and beyond, limits revert back to

pre-Bush tax cut amounts of $25,000 and $200,000, respectively.

Section 179

Qualifying property is new and used

depreciable property purchased for use in active trade or business

For 2013, off-the-shelf computer software is

included; not included in 2014 and after

For 2013, qualifying real property is included.

QRP includes qualified leasehold improvements, qualified restaurant property and qualified retail improvement property

Maximizing Section 179

Expense property that does not qualify for

bonus depreciation (i.e. used property)

Expense assets with longer depreciation

periods

Bonus Depreciation

Qualified property is new, depreciable

property under MACRS with a recovery period of less than 20 years

Must be placed in service prior to 1/1/14 Bonus depreciation is 50% of cost of the

property, regardless of when the property is placed into service

No expensing limit Elect per asset class Scheduled to expire for 2014 and after

Maximizing Bonus Depreciation

Compare using bonus depreciation versus

Section 179 for maximum tax effect

Electing bonus depreciation in a loss year,

allows future deductions in years where income may occur

Can wait until time to file the return to make

a decision to elect

Final Repair/ Capitalization Regs

In September 2013, IRS released regs

designed to assist owners in determining when they must capitalize costs, and when they can deduct costs for acquiring, maintaining, repairing and replacing tangible property

Begin for tax years after 1/1/14 Can apply rules for 2011-2013 by filing

amended returns

Other Planning Considerations

Enter into/ sell installment contracts Defer/ receive bonuses before January Hold/ sell appreciated assets Delay/ accelerate billable services Delay/ accelerate payments for services

Ohio Tax Update

H.B. 59 signed June 30, 2013 Personal Income Tax Rates will drop 10%

(8.5% for 2013, .5% 2014, 1% 2015)

Ohio Tax Update

Small Business Income Deduction

50% of the first $250,000 of “business

income” (which is Ohio apportioned income that passes through a K-1 or Schedule C)

So can receive up to $125,000 deduction,

resulting in potentially $6,000-$7,000 in tax savings on your Ohio return

Ohio Tax Update

Sales and Use Taxes

State rate increased to 5.75% effective

9/1/13

Taxing videos, magazines, music that are

acquired electronically

Ohio Tax Update

Real estate – eliminated property rollbacks

• n new and replacement levies. Existing

levies and renewals keep the rollbacks.

Eliminates homestead exemption for those

• ver 65 earning more than $30,000. Those

that already qualify are grandfathered in.

Ohio Tax Update

Commercial Activity Tax (CAT)

Phase-out the $1MM exemption for larger

businesses on or after 1/1/14

Taxpayers in different brackets will pay at least

a minimum amount

Annual filers must now file electronically

Ohio Tax Update

Credits

Technology Investment Tax Credit - new

credits eliminated; existing credits with allowable carryforwards may continue within 15 year period

InvestOhio - $100,000,000 available from

7/1/13-6/30/15. Must hold the investment for five years. Used to be two years.

THANK YOU!

Chad W. Frush, CPA Office (614) 445-7217 Cell (614) 203-2380 chad@frushassociates.com www.frushassociates.com Follow us on Twitter @CBusCPAs