We wish all of you a very happy Holiday Season! We look forward to seeing all of you very soon for another tax filing season. Last year, we said that “2012 has been a year like no other from a tax perspective, and 2013 is setting up to be even more exciting.”, and we were right – many more changes have taken place and are still evolving. The purpose of this letter is to highlight some of the current changes and provide you with some year-end planning points to help plan for the 2013 filings.
- Tax Rates – The tax rate tables have changed for 2013/2014. For Singles, the cut-off from the 15% bracket to the 25% bracket is $36,250 of taxable income. For Married Filers, the cut-off is $72,500 – slight increases over last year.
For income over $400,000 for singles and $450,000 for marrieds, there is now a 39.6% federal tax bracket – a significant increase from last year.
- Affordable Care Act Update/Obamacare – Please make sure that you are fulfilling your obligations under the recent healthcare law changes. As of now, all individuals are required to obtain healthcare coverage (unless: specifically exempted) for 2014. If you do not have coverage, you may be subject to penalties upon the filing of your 2014 tax return (the higher of $95 per person or 1% of your income). Note these penalties get more significant each year. Even if you are exempted, you must still obtain certification through the www.healthcare.gov website. If you have questions in regards to the ACA/Obamacare, please contact us and we will assist you and/or we also suggest visiting the Kaiser Family Foundation website at www.kff.org – which has great information related to the subsidies, etc. Small-business coverage tentatively will be available in Maryland starting 3/1/14 through the SHOP program on the Maryland website.
- Expiring Items – Note that unless Congress acts, the following items will expire after 2013: Sales Tax Deduction, Teacher School Supplies Deduction, Tuition Expense Deduction, Tax-Free IRA Distributions to Charity, 50% Bonus Depreciation and $500K Section 179 Expensing Election for businesses.
- Capital Gains and Qualified Dividends – The 15% rate on both long-term capital gains and qualified dividends remains in effect through 2013 and 2014. The same goes for the 0% rate on gains and dividends for filers in the 10% or 15% tax brackets. There is now a higher 20% rate for singles with taxable income over $400K and marrieds over $450k.
- Medicare Surtaxes – As we had mentioned last year, for 2013 and forward there is now a 3.8% Medicare Surtax on “Net Investment Income”. It applies to “unearned income” including: interest, dividends, capital gains, annuities, royalties, passive rental income, etc. It applies to singles with modified AGI’s over $200,000 and marrieds with modified AGI’s over $250,000. Tax-free interest is exempt from the tax. There is also a 0.9% Medicare surtax on earned income (including: self-employment income) for singles once earnings exceed $200K and marrieds $250K. Employers are required to withhold this tax.
- Conversions to Roth IRAs – For 2013/2014, traditional IRA’s can be converted to Roth IRAs without earnings restrictions. Contact us to hear more.
- Estate Tax – Federal Exemption is $5.25 million per person. Keep in mind the exemption for the state of MD is still $1 million per person and the rate is 16%.
- Gift Tax – The annual gift exclusion is $14,000 per person per year. All gifts should be well documented. Gift Tax returns may be required in certain circumstances – please check with us on compliance.
- Energy Credits – There is a separate 30% residential energy credit that remains in-tact for 2013 for installing solar electric and hot water systems, geothermal heat pumps, small wind turbines and fuel cell systems through 2016. No dollar caps are placed on this credit.
- Employees vs Independent Contractors – Please make sure you are properly categorizing your workers. The rules are extremely specific as to what requires you to treat an individual as an employee, and the IRS is very aggressively auditing and assessing penalties on this issue.
MAJOR CHANGES IN DEPRECIATION LAWS POSSIBLE FOR 2014
- Asset Purchases – Bonus Depreciation – For 2013, you can expense 50% of the entire cost of certain “new” assets by immediately claiming bonus depreciation. This applies to new assets with useful lives of twenty years or less including machinery, land improvements and single-purpose farm buildings. Please note that Maryland has decoupled from this law and utilizes a different asset life.
- Section 179 Expensing Deduction – For 2013, you can expense up to $500,000 of qualifying property placed in service – new or used. The amount phases out as you exceed $2,000,000 in total assets placed in service during the year. Buyers of certain SUV’s weighing between 6,000-14,000 lbs can deduct only up to $25,000 through this election. The Section 179 expensing election is scheduled to drop to $25,000 for 2014, so please take note and consider this in your asset purchase plans for now and the future.
- Health Insurance Premiums Tax Credit – If you have 10 or fewer full-time-equivalent workers and average wages under $25,000, you may qualify for a tax credit of up to 35% of the employer-paid premiums. The percentage falls for companies with more employees and higher pay. The credit is not eligible to companies with 25+ workers or average pay of $50,000 or more. Also, in order to take this credit in 2014, you must purchase insurance through the Exchange.
- Nanny Tax – If you pay a household employee/nanny/housekeeper more than $1,900 in the calendar year, you are subject to the “nanny tax” and need to contact us. Non-reporting can cause significant penalty and interest.
PLANNING IDEAS: You may be able to reduce your taxes by controlling the payment of deductible expenses and the timing of the collection of income. Several strategies to consider may include:
- Pay all state and local income taxes (e.g., 4th Qtr ES Payments) and real estate taxes prior to the end of the year (by 12/31/13). Postmark validation required.
- Maximize your elective deferrals to employer-sponsored retirement plans.
- If you are a homeowner, make energy saving improvements to the residence, such as putting in extra insulation or installing energy saving windows, or an energy efficient heater or air conditioner. You may qualify for a tax credit if the assets are installed before 2014.
- Make year-end donations to qualified charitable organizations. Use your credit card if you wish, or mail your check as late as December 31, 2013. Make sure to save all acknowledgements that you receive of your gifts.
- Medical Expenses – Consider getting and paying for elective procedures in 2013 if you are close to the 10% of AGI threshold (as. Also, make sure to track your medical mileage (24 cents per mile).
- Foreclosure – if you are settling with a bank for foreclosure on your principal residence, you may want to try to complete settlement in 2013 as future law changes may impact tax treatment in 2014.
- Section 529 – College Savings Plan Contributions must be made by 12/31.
- Please contact us to see if you have a capital-loss carry-forward from 2012 and make your broker aware of it before year-end for utilization.
- Keep good mileage logs. The standard mileage rate for business is 56.5 cents per mile. Please provide us with copies of your mileage logs for our records as the IRS is requesting these on a frequent basis.
- Review your paycheck for proper withholdings – with so many changes in tax law taking place, you may need to adjust your tax withholdings for 2014 – please contact us to discuss these changes so you don’t come up short.
IMPORTANT FIGURES FOR 2013/2014
SOCIAL SECURITY LIMIT FOR WAGE EARNERS FOR 2014: $117,000
SOCIAL SECURITY COST OF LIVING INCREASE FOR 2014 – 1.5%
HEALTH SAVINGS ACCOUNT LIMITS -2013- $3,250 SINGLE $6,450 FAMILY
RETIREMENT PLAN CONTRIBUTION LIMITS*:
YEAR 2013 YEAR 2014
IRA(REG/ROTH) $5,500 $5,500
SIMPLE IRA $12,000 $12,000
401K/403B/SEP $17,500 $17,500
*NOTE: IF YOU ARE OVER AGE 50, YOU ARE ELIGIBLE TO CONTRIBUTE ADDITIONAL CATCH-UP AMOUNTS DEPENDENT ON THE TYPE OF PLAN– PLEASE CALL FOR DETAILS.
MOST IMPORTANT TAX TIP OF ALL – MAINTAIN GOOD RECORDS!!
We have seen an increase in IRS enforcement with more audits taking place and an over 1000% (yes 1000%) increase in IRS notices being issued to taxpayers, so please make sure to keep good records of all income and expenses. We will mail out the tax organizers shortly. We encourage you to use the organizers as a tool for gathering complete and accurate information. If you have any questions, please contact our office. Watch our website www.boalandassociates.com for updated news related to the changing tax laws.
Yours very truly,
All of us at Boal and Associates
CIRCULAR 230 DISCLOSURE
TO ENSURE COMPLIANCE WITH REQUIREMENTS IMPOSED BY THE IRS, WE INFORM YOU THAT ANY U.S. FEDERAL TAX ADVICE CONTAINED IN THIS COMMUNICATION (INCLUDING ANY ATTACHMENTS) IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, FOR THE PURPOSE OF (I) AVOIDING PENALTIES UNDER THE INTERNAL REVENUE CODE OR (II) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY TRANSACTION OR MATTER ADDRESSED HEREIN. THIS ADVICE MAY NOT BE FORWARDED (OTHER THAN WITHIN THE TAXPAYER TO WHICH IT HAS BEEN SENT) WITHOUT OUR EXPRESS WRITTEN CONSENT.