New tax laws for Individuals
All of us here at Tamiyasu, Smith, Horn & Braun are getting ready for 2014. One of our shareholders, Ken Awbrey, is in the Christmas spirit this year with his festive Christmas tie. He’s recently been attending several end of year tax seminars to get ready for tax season and wanted to remind all of our clients of some new taxes you might see in 2014:
1. New Tax rates on ordinary income and capital gains.
The new tax law increased the highest income tax rate to 39.6% for single individuals with taxable income of $400,000 or higher and married couples with taxable income exceeding $450,000. Taxpayers subject to the new 39.6% rate also will see an increase in their tax rate on dividend income and long-term capital gains from 15% to 20%. Taxpayers with taxable incomes below the top 15% ordinary income tax bracket will continue to enjoy a zero percent rate on dividends and long-term capital gains with other taxpayers paying a 15% rate. The marriage penalty for taxpayers in the 15% tax bracket has also been eliminated.
2. New 3.8% tax on net investment income.
The new 3.8% tax on net investment income went into effect in 2013 as a result of the passage of the Patient Protection and Affordable Care Act of 2010. The 3.8% tax applies to individuals with net investment income if their income (after certain deductions) exceeds $250,000 for married couples filing joint returns or $200,000 for single taxpayers. Net investment income may include capital gains, interest and dividend income received from investment assets such as stocks, bonds, certificates of deposit and mutual funds and may include rental income and royalties. Contact us at 559-252-8585 for more details.
3. Alternative Minimum Tax
The Alternative Minimum Tax (AMT) was designed to ensure that high-income taxpayers who benefit from certain exemptions, deductions and credits still pay a minimum amount of tax. Over time, the AMT affected more and more middle-income individuals as well. When the AMT is triggered, the taxpayer pays a higher tax than their regular federal income tax. The new tax law increased the AMT exemption to $51,900 for single taxpayers and heads of household and $80,800 for surviving spouses and married couples filing jointly. These amounts will be indexed for inflation after 2013. These changes should help ensure that middle-income taxpayers are not routinely subject to this tax. However, the new tax law did not increase the income levels at which those exemptions phase out. Accordingly, taxpayers may find themselves unexpectedly subject to the AMT in certain situations — for example, when they recognize large capital gains (even though the capital gains income itself is not subject to the AMT or exercise certain stock options). The good news? Taxpayers who have been subject to AMT in the past but find themselves not owing AMT in 2013 may be eligible for a minimum tax credit.
4. New rules for higher income taxpayers
The new tax law revives both the phase out of personal exemptions and the limitation on itemized deduction for high-income taxpayers. Under the phase out of personal exemptions, the total amount of personal exemptions for taxpayers and dependents is reduced if the taxpayer’s adjusted gross income is more than $300,000 for married couples and $250,000 for single taxpayers. In a similar fashion, certain itemized deductions of high-income taxpayers are reduced if their adjusted gross income exceeds certain thresholds.
5. Tax benefits for families, homeowners
The new tax law extended many credits and other benefits that otherwise were scheduled to expire after 2012. Child-related tax credits and benefits that were extended include:
• The $1,000 child tax credit
• The tax credit for qualified adoption expenses ($12,970 in 2013)
• The exclusion for qualified adoption-assistance programs offered by employers
The child and dependent care credit, which applies to care for children age 12 or younger and certain individuals (e.g., a spouse) who are physically or mentally incapable of self-care, was made permanent. For homeowners, the law extends the provision to shield taxpayers from tax on income from the cancellation of debt of up to $2 million on a principal residence. Individuals who made qualified energy-saving improvements (such as high-efficiency furnaces and air conditioners) to their home in 2013 will be glad to know related tax credits are still available. Be aware that provisions like the energy credits and the exclusion for debt forgiveness income are not in the law for next year.
6. Tax help for higher education costs
The new tax law extended several education-related incentives for taxpayers who are in college or have children in college. The American Opportunity Tax Credit was extended through 2017 and allows eligible taxpayers to claim a tax credit for post-secondary education expenses such as books or equipment. The Lifetime Learning Credit remains available as does the deduction for tuition and related higher education expenses.
Other education incentives that will be permanently available are:
• The $5,250 exclusion for employer-provided educational assistance
• The $2,500 deduction per return for student loan interest (without a 5-year limitation)
• The $2,000 maximum contribution for education savings accounts, which allow expenditures for elementary, secondary and post-secondary education
Planning for college is critical as tuition costs continue to rise. Ken knows all too well about this, he has two children that are completing their college education.
7. Donations and other expenses – what can you deduct?
Charity: Charitable contributions may provide generous tax benefits for taxpayers. However, the law requires significant documentation in order to claim those benefits, especially in the case of donated property. Deductible contributions are subject to limits based on:
• The type of property donated
• The type of charity
• Taxpayer’s adjusted gross income
The new tax law reinstated the popular provision allowing taxpayers age 70½ and older to make up to $100,000 of tax-free distributions from individual retirement accounts (IRAs) directly to qualified charities.
Sales Taxes & Mortgage Insurance Premiums: The law also extended a number of popular tax breaks, including the deduction for state and local sales taxes in lieu of a deduction for state and local income taxes. This provision is particularly important for taxpayers living in states without income taxes and for retirees who may not pay significant state income taxes. The law also extends the treatment of mortgage insurance premiums as interest expense.
Medical: As in past years, taxpayers who itemize their deductions can write off qualified medical costs not covered by insurance. However, for taxpayers under age 65, the costs must exceed 10% of adjusted gross income in 2013, up from 7.5% in previous years. Once the threshold is passed, there is no dollar limit on the deduction amount.
8. Estate and gift tax
The good news is that Congress made several estate and gift tax provisions permanent. For decedents dying in 2013, the estate tax exclusion (the amount that a decedent can leave to heirs without owing estate tax) permanently increased to $5 million and will be indexed for inflation. The exclusion is $5.25 million for 2013 deaths. Among the taxpayer-friendly provisions, Congress made permanent the portability of a deceased spouse’s unused exclusion to a surviving spouse. However, it also increased the estate tax rate to 40%. Effective estate tax planning must include a consideration of income tax as well as estate and gift tax consequences and must start before a taxpayer’s death.
9. Reporting of foreign bank and financial assets
If you own a bank account or other financial assets located in a foreign country, you may have a responsibility under the Foreign Account Tax Compliance Act (FATCA) or the Bank Secrecy Act to disclose your ownership to the IRS. In recent years, government enforcement of these requirements has increased significantly. Failure to report foreign financial assets may result in substantial penalties starting at $10,000. As part of our engagement letter, we’ll be asking you to sign whether or not you have such an account. Look for mailed communication on this question early in 2014.
Last but not least, as we hear about a major online credit card breach in the news, tax-related identify theft is on the rise. In addition to other fraudulent activities, criminals are using stolen Social Security numbers and other information to file fake returns requesting fraudulent tax refunds. While the IRS is taking aggressive steps to combat the problem, the best defense is to safeguard your personal information at all times. Never give out your Social Security Number over the phone.
We wish you the happiest of holiday seasons this year.