How will health care reform affect you and your taxes?

It’s massive, and it’s complicated. At more than 2,000 pages, the Affordable Care Act (ACA for short) has left businesses and individuals confused about what the law contains and how it affects them.

 The aim of the law is to provide affordable, quality health care for all Americans. To reach that goal, the law requires large companies to provide health insurance for their employees starting in 2015. Medium-sized companies have until 2016 to provide health insurance to employees. Uninsured individuals must generally get their own health insurance starting in 2014. Those who fail to do so face penalties.

 Insurance companies must also deal with new requirements. For example, they cannot refuse coverage due to pre-existing conditions, preventive services must be covered with no out-of-pocket costs, young adults can stay on parents’ policies until age 26, and lifetime dollar limits on health benefits are not permitted.

 The law mandates health insurance coverage, but not every business or individual will be affected by this requirement. Here’s an overview of who will be affected.

 

 FOR BUSINESSES – It’s all in the numbers

Fewer than 50 employees

Companies with fewer than 50 employees are encouraged to provide insurance for their employees, but there are no penalties for failing to do so. A special marketplace is available for businesses with 50 or fewer employees, allowing them to buy health insurance through the Small Business Health Options Program (SHOP).

Fewer than 25 employees

For 2010 through 2013, small companies that paid at least 50% of the health insurance premiums for their employees could be eligible for a tax credit for as much as 35% of the cost of the premiums. To qualify, the business had to employ fewer than 25 full-time people with average wages of less than $50,000.

 

For years that begin after 2013, the maximum credit is 50% of the premiums the company pays, though to qualify for the credit, the insurance must be purchased through SHOP. (Special rules apply where SHOP is not available.) The credit may only be claimed in two consecutive tax years that begin after 2013.

50 to 99 employees

Businesses with 50 to 99 employees have until January 1, 2016, to meet the requirement of providing minimum, affordable health insurance to workers or face penalties. To qualify for this transitional relief, employers must certify that they have not laid off workers in order to come under the 100 employee threshold.

 

100 or more employees

For companies with 100 or more full-time employees, the requirement to provide “affordable, minimum essential coverage” to employees is effective January 1, 2015.

The business play or pay penalty

Effective in 2015, companies with 100 or more employees that don’t offer minimum essential health insurance face an annual penalty of $2,000 times the number of full-time employees over a 30-employee threshold. If the insurance that is offered is considered unaffordable (it exceeds 9.5% of family income), the company may be assessed a $3,000 per-employee penalty. These penalties apply only if one or more of the company’s employees buy insurance from an exchange and qualify for a federal credit to offset the cost of the premiums.

                   

 FOR INDIVIDUALS – It’s all about coverage

A great deal of attention has been focused on the health insurance exchanges or “Marketplace” that opened for business on October 1, 2013. Confusion about the Affordable Care Act left many people thinking everyone had to deal with the exchanges. The fact is that if you are covered by Medicare, Medicaid, or an employer-provided plan, you don’t need to do anything.

Also, if you buy your health insurance on your own, you can keep your coverage if your plan is still offered by the insurance company. You can keep insurance that doesn’t meet the law’s minimum coverage requirements through October 2017 if your state permits it. However, the only way to get any premium-lowering tax credits based on your income is to buy a plan through the Marketplace.

The exchanges (Marketplace)

Each state either developed an insurance exchange (Marketplace) or uses one provided by the federal government. The Marketplace allows those seeking coverage to comparison shop for health plans from private insurance companies.

 There are four types of insurance plans to choose from: Bronze, Silver, Gold, and Platinum. The more expensive the plan, the greater the portion of medical costs that will be covered. The price of each plan depends on several factors including your age, whether you smoke, and where you live.

 Individuals may qualify for federal tax credits that will reduce the premiums they actually pay. Each state’s Marketplace has a calculator to assist individuals in determining the amount, if any, of their federal tax credit.

The individual play or pay penalty

Individuals generally need to have had coverage for 2014 or pay a penalty of $95 or 1% of their income, whichever is greater. Under certain circumstances, individuals may qualify for an exemption from the requirement to have health insurance. Low-income individuals may qualify for subsidies and/or tax credits to help pay the cost of insurance.

 The penalty for 2015 is $325 or 2% of income; for 2016 it is scheduled to be $695 or 2.5% of income. For 2017 and later years, the penalty is inflation-adjusted. Those who choose not to be insured and to pay the penalty instead will still be liable for 100% of their medical bills.

MORE ABOUT THE LAW AND YOUR TAXES

 In addition to the penalties required by the Affordable Care Act, the law made other tax changes that could affect you. Among them are the following:

Annual contributions to flexible spending accounts are limited to $2,500 (indexed for inflation).

The 7.5% adjusted gross income threshold for deducting unreimbursed medical expenses is now 10% for those under age 65. Those 65 and older can use the 7.5% threshold through 2016.

The additional tax on nonqualified distributions from health savings accounts (HSAs) is 20%, an increase from the previous 10% penalty.

The payroll Medicare tax increased from 1.45% of wages and self-employment income to 2.35% on amounts above $200,000 earned by individuals and above $250,000 earned by married couples filing joint returns. This rate increase applies only to the employee portion, not to the employer portion.

A 3.8% Medicare surtax is imposed on unearned income (examples: interest, dividends, most capital gains) for single taxpayers with income over $200,000 and married couples with income over $250,000.

 

Employer Reimbursement of Employees’ Health Insurance Premiums

Employers who reimburse employees for their individual health insurance policies may find themselves in violation of the “market reform” restrictions in the ACA. The penalty for noncompliance with these restrictions is $100 per day, per employee. It’s important to note that these reimbursement rules apply to all employers, regardless of size, and for health care plans effective beginning on or after January 1, 2014.

 

Generally speaking, the ACA market reform requirements do not permit employers to subsidize or reimburse employees for individual health insurance policies on either a pre-tax or after-tax basis. It appears that employers may be allowed to increase an employee’s taxable wages to provide funds that the employee may use to purchase an individual insurance policy. However, the employer may not require that the additional wages be used to pay for insurance; the employee must be allowed to decide whether to use the funds for that purpose or not.

 

Be aware that the IRS may issue further guidance on this issue. Because the penalties for noncompliance with the rules governing employer reimbursement arrangements are so severe, all employers should carefully review their situation to be sure they are meeting the new ACA requirements.

 

 

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Do year-end planning to cut your 2014 taxes

The end of another year is fast approaching, and it’s once again time to take steps to reduce taxes on your personal and business returns. Planning advice for 2014 includes strategies for accelerating deductions and deferring income as well as managing assets.

● Bunch your deductions. For example, bunching deductions on your personal income tax return can make sense for 2014. Bunching means you concentrate itemized deductions into the year offering the most tax benefit and claim the standard deduction in alternate years. Even if the current limitation on itemized deductions applies to you, bunching can be effective when combined with other tax planning such as reducing adjusted gross income.

One category of itemized deductions that lends itself to bunching is charitable contributions. In general, as long as you have written acknowledgment from a qualified charity, you can deduct donations in the year you write the check or put the charge on your credit card.

Instead of cash, donating appreciated assets before December 31 may be more tax advantageous. When you contribute property you have owned for more than a year, you can usually deduct the full fair market value.

For instance, say the value of the shares you own in a mutual fund has gone up since you bought into the fund. If you sell those shares and donate the proceeds to charity, you’ll have capital gain. But when you donate the shares to the charity, you can claim a deduction for the value on the date of your donation, garnering a benefit without the related income tax bill.

Other itemized deductions you can control in order to maximize tax savings include real estate taxes and state income taxes.

● Check exposure to the AMT. Just remember to check your exposure to the alternative minimum tax and the 3.8% net investment income tax when deciding in which year to pay these tax bills. Why? Certain itemized deductions – such as taxes – are disallowed under the AMT rules, but can help reduce exposure to the net investment income tax.

What if you’re not planning to itemize? Taking a look at your deductions is still a useful exercise. One reason: The standard deduction is also disallowed under AMT rules, and you may benefit by itemizing even when your total itemized deductions are under the threshold.

The standard deduction for 2014 is $12,400 when you’re married filing jointly and $6,200 when you’re single.

● Monitor adjusted gross income. Another tax planning strategy is to reduce adjusted gross income (AGI). One way to do this on your personal tax return is to maximize above-the-line deductions. These are expenses you can claim even if you don’t itemize. Above-the-line tax savers include such items as retirement plan contributions, student loan interest deduction, and the health savings account deduction.

● Set up a retirement plan. When you have a business, contributions to a self-employed retirement plan also reduce AGI above-the-line. Depending on the plan you choose, you can set up the paperwork before year-end and make contributions by the due date of your 2014 tax return.

For instance, say you’re the sole owner of your business. Establishing a 401(k) gives you the opportunity to set aside as much as $17,500 in salary deferral (plus an extra $5,500 if you’re over age 50). In addition, you can put up to 20% of your business profit into your plan.

● Manage asset policies. Another tax-saving suggestion for your business is to review your asset management policies. Depreciation is probably the first thing you think of when you consider tax benefits for business assets. And you probably already know bonus depreciation expired at the end of 2013 and the Section 179 expensing deduction was reduced to $25,000 for 2014. (Be aware that Congress may reinstate the larger deductions.)

While accelerated depreciation tax rules affect your current year deduction, remember that changes to these rules have no impact on the total amount you can deduct over the life of an asset. In addition, you still have tax planning opportunities.

One such opportunity is to take advantage of the new repair and capitalization regulations. These rules, which generally take effect this year, provide safe-harbor thresholds for writing off the cost of certain business supplies, repairs, and maintenance. What you need to do before year-end: Create and implement a written policy to comply with the rules.

Another potential tax saver involving business assets: Examine the tax benefits of leasing business equipment instead of buying. Depending on the type of lease, you may be able to deduct payments in full as you make them. What’s the downside? Generally you’ll forfeit depreciation deductions. Run an analysis to determine which option will work best for you.

● Consider shifting income. A planning strategy to help reduce taxes on both your business and personal returns is shifting income among family members.

For your business, the strategy could mean hiring family members and paying a reasonable – and deductible – salary for work actually performed. You may be able to provide tax-deductible fringe benefits as well as save on payroll tax expense.

An income-shifting technique is to make gifts of income-producing property to family members in lower tax brackets. (Be aware of the “kiddie tax.”) Though you can’t take a tax deduction for gifts, future income is taxed to the recipient, and may mitigate your exposure to the 3.8% net investment income tax.

Gifts of up to $14,000 per person ($28,000 when you’re married) made before year-end incur no income, gift, estate, or generation-skipping taxes.

The Affordable Care Act: How will it affect your 2014 taxes?

Staggered start dates. Exceptions. Waivers. Are you still trying to determine how the health care laws will affect your 2014 personal and business federal income tax returns?

Here’s an overview of some current rules.

● Individual penalty. The 2014 Form 1040 has a new line for reporting the “individual responsibility payment.” You’ll owe this penalty if you or your dependents did not have health insurance during the year and don’t qualify for an exemption.

The amount you’ll report on your 2014 tax return is the greater of $95 per adult and $47.50 per child, up to a maximum family penalty of $285, or 1% of your “household income formula.”

● Individual premium credit. Depending on your income, you may be eligible for a reduction in the cost of your health insurance premium during the year.

When you signed up for insurance on the health insurance exchange, you had the option to use the reduction to offset your premiums as you paid them. Alternatively, you can apply for the credit when you file your 2014 federal income tax return.

The amount of the credit depends on your income and family size.

● Net investment income surtax. You may be familiar with this 3.8% surtax from last year’s return. It applies to net investment income – income such as dividends, interest, and capital gains, less related expenses – when your adjusted gross income (AGI) exceeds certain levels.

Those levels have not increased for 2014. When you are married filing jointly, the surtax applies if your AGI exceeds $250,000. When you’re single or filing as head of household, the AGI threshold is $200,000.

● Medicare surtax on wages. As in 2013, this 0.9% surtax applies to wages, compensation, and self-employment income when your AGI exceeds $250,000 and you’re married filing jointly. When you’re single or filing as head of household, the AGI threshold is $200,000.

● Business health insurance premium credit. Did you pay at least 50% of the health insurance premium costs for your employees during 2014? If you employed fewer than 25 full-time equivalent employees and paid them wages of less than $50,800, you may be able to claim a credit of up to 50% of the premiums you paid.

The credit is available even if you claimed it in prior years. Tax-exempt organizations can also benefit.

● Business fee. When you self-insure your business health care expenses, you may have to pay a fee to help fund a healthcare research institute. The fee may also apply to your health reimbursement arrangement or health flexible spending arrangement.

● Employer penalties. Depending on the number of workers you employ, you may be penalized for not providing health insurance and/or not providing affordable health insurance.

Neither penalty applies for tax year 2014. However, you’ll want to review your workforce to determine whether the penalty will affect you in the future.

Beginning January 1, 2015, the penalty will apply when 100 or more full-time employees work in your business. The penalty applies in 2016 when your business employs 50 or more full-time workers. When you employ fewer than 50 workers, you’re not subject to the penalty.

● Employer reporting. The health care laws included a requirement for reporting on Forms W-2 the cost of the health insurance coverage you provide to your employees. However, reporting is optional for 2014 when you file fewer than 250 Forms W-2.

Posted in tax |

Don’t waste your tax refund

Are you expecting a tax refund this year? No doubt you’ve already heard the standard admonishment about why you should not be giving the government an interest-free loan. Maybe you’ve decided to “do better” during 2014 by revising your withholding or estimated tax payments to reduce the amount of next year’s refund – or maybe you haven’t.

Either way, set aside your guilt. Financial planning means creating effective strategies that work for you – which can include forcing yourself to save by overpaying your income tax during the year.

The more important consideration is what you do with the money you get back. Here are ideas for making the most of your refund.

Save. The unexpected happens. The question is, how do you pay the resulting bills? Parking part of your refund in a readily accessible location, such as a bank checking, savings, or money market account, will help you weather short-term, temporary setbacks without incurring penalties or transaction fees.

Spend. Spending your refund wisely can get your finances in shape and pay off over the long run. For instance, home improvements like energy-efficient windows or a new water heater may result in lower electric and insurance bills, or utility company rebates. Refinancing your mortgage reduces your monthly cash outlay, freeing money for investing or saving. Ditto for paying down high-interest credit cards – so long as you resist the urge to reload them.

Self-invest. Using your refund to refresh your current career-related skills or to learn new ones can provide a double benefit: more employment opportunities and tax savings. Unsure of your job security? Put your refund to work by financing a home-based business and creating a second stream of income.

Give us a call for any assistance you need related to your tax withholding, estimated tax payments, or tax refund.

Posted in tax |

What’s Going on at the IRS and the taxpayer is paying the price!!!

Well this Article about the IRS explains why I was on hold yesterday for 1 hour the first time and two and a half hours the second time, and neither time was I able to get anything accomplished because I didn’t have Power of Attorney on the Client but I DID prepare their tax returns, go figure the inefficiency of our Government and IRS. There is a place on the tax return that the taxpayer can authorize me, their CPA, as a third party designee, BUT it is only good for the initial filing. There is something seriously wrong with out system when I person who prepared the return can’t call the IRS and try to resolve any questions or issues. On both clients I call on behalf of the mistake was the IRS’s not the clients, who’s working those files and what are they doing is what I would like to know?

http://www.nbcnews.com/business/why-customer-service-irs-bad-could-get-worse-2D11931818irs office

Posted in tax |

IRS Release 2014 Tax Numbers

Each year the IRS adjusts certain tax numbers for inflation and tax law changes. Here are some of the adjusted numbers you’ll need for your 2014 tax planning.

* STANDARD MILEAGE RATE for business driving drops to 56¢ a mile. Rate for medical and moving mileage drops to 23.5¢ a mile. Rate for charitable driving remains at 14¢ a mile.

* SECTION 179 maximum deduction decreases to $25,000, with a phase-out threshold of $200,000. (Legislation may reinstate the 2013 deduction amount of $500,000, with a $2,000,000 purchase limit.)

* SOCIAL SECURITY taxable wage limit increases to $117,000. Retirees under full retirement age can earn up to $15,480 without losing benefits.

* KIDDIE TAX threshold remains at $2,000 and applies up to age 19 (up to age 24 for full-time students).

* NANNY TAX threshold increases to $1,900.

* HSA CONTRIBUTION limit increases to $3,300 for individuals and to $6,550 for families. An additional $1,000 may be contributed by those 55 or older.

* 401(k) maximum salary deferral remains at $17,500 ($23,000 for 50 and older).

* SIMPLE maximum salary deferral remains at $12,000 ($14,500 for 50 and older).

* IRA contribution limit remains at $5,500 ($6,500 for 50 and older).

* ESTATE TAX top rate remains at 40%, and the exemption amount increases to $5,340,000.

* The ANNUAL GIFT TAX EXCLUSION remains at $14,000.

* ADOPTION TAX CREDIT for adoption of an eligible child in 2014 is $13,190.

Posted in tax |

2014 Tax Numbers

I thought you might find these 2014 tax numbers just
published by the IRS and SSA useful in your tax planning
sessions with clients over the coming weeks.

* SOCIAL SECURITY taxable wage limit increases from 2013
limit of $113,700 to $117,000 for 2014. Retirees under
full retirement age can earn up to $15,480 without
losing benefits.
* AMT EXEMPTIONS for 2014 are $52,800 for singles,
$82,100 for couples, and $41,050 for married couples
filing separately.
* 401(k) MAXIMUM salary deferral remains at $17,500 for
2014. The catch-up limit for 50 and older also remains
unchanged at $5,500.
* SIMPLE maximum deferral remains at $12,000 for 2014.
The catch-up limit for 50 and older also remains
unchanged at $2,500.
* IRA CONTRIBUTION limit remains at $5,500 for 2014
($6,500 for 50 and older).
* HSA CONTRIBUTION limit increases for 2014 to $3,300
for individuals and to $6,550 for families.
* KIDDIE TAX threshold for 2014 remains at $2,000.
* NANNY TAX threshold increases from the 2013 level of
$1,800 to $1,900 for 2014.
* ANNUAL GIFT TAX EXCLUSION remains at $14,000.
* ESTATE TAX EXEMPTION increases from the 2013 amount
of $5,250,000 to $5,340,000 for 2014.

Posted in tax |

Busy IRS delays 2014 tax filing season

The 16-day government shut-down in October created sizable work backlogs at the IRS. The IRS reports that it received 400,000 pieces of correspondence during the closure, and that was in addition to the one million items already being processed prior to the shut-down.

The heavy demand on its services has resulted in the IRS deciding to delay the start of the 2014 filing season. Originally, the start date had been set for January 21, 2014. With the one- to two-week delay just announced by the IRS, the earliest the IRS will accept and process 2013 individual tax returns is January 28, 2014 (or possibly February 4, 2014).

The delay was made necessary, according to the IRS, to allow time to program, test, and validate IRS systems for the 2014 filing season, a job that normally is done during the fall of each year.

There is no delay in the filing deadline for 2013 individual tax returns, however. That deadline is set by law and remains April 15, 2014.

Posted in tax |

Year End Tax Planning

Year-end tax planning could be especially productive this year because timely action could nail down a host of tax breaks that won’t be around next year unless Congress acts to extend them, which, at the present time, looks doubtful. These include, for individuals: the option to deduct state and local sales and use taxes instead of state and local income taxes; the above-the-line deduction for qualified higher education expenses; and tax-free distributions by those age 70-— or older from IRAs for charitable purposes. For businesses, tax breaks that are available through the end of this year but won’t be around next year unless Congress acts include: 50% bonus first-year depreciation for most new machinery, equipment and software; an extraordinarily high $500,000 expensing limitation; the research tax credit; and the 15-year writeoff for qualified leasehold improvements, qualified restaurant buildings and improvements and qualified retail improvements.
High-income-earners have other factors to keep in mind when mapping out year-end plans. For the first time, they have to take into account the 3.8% tax surtax on unearned income and the additional 0.9% Medicare (hospital insurance, or HI) tax that applies to individuals receiving wages with respect to employment in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately).

The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over an unindexed threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). As year-end nears, a taxpayer’s approach to minimizing or eliminating the 3.8% surtax will depend on his estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than unearned income, and others should consider ways to minimize both NII and other types of MAGI.

The additional Medicare tax may require year-end actions. Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimate tax. There could be situations where an employee may need to have more withheld toward year end to cover the tax. For example, consider an individual who earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year. He would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don’t exceed $200,000. Also, in determining whether they may need to make adjustments to avoid a penalty for underpayment of estimated tax, individuals also should be mindful that the additional Medicare tax may be over withheld. This could occur, for example, where only one of two married spouses works and reaches the threshold for the employer to withhold, but the couple’s income won’t be high enough to actually cause the tax to be owed We have compiled a checklist of additional actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make:

Year-End Tax Planning Moves for Individuals

• Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year.
• If you become eligible to make health savings account (HSA) contributions in December of this year, you can make a full year’s worth of deductible HSA contributions for 2013.
• Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.
• Postpone income until 2014 and accelerate deductions into 2013 to lower your 2013 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2013 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, the above-the-line deduction for higher-education expenses, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2013. For example, this may be the case where a person’s marginal tax rate is much lower this year than it will be next year or where lower income in 2014 will result in a higher tax credit for an individual who plans to purchase health insurance on a health exchange and is eligible for a premium assistance credit.
• If you believe a Roth IRA is better than a traditional IRA, and want to remain in the market for the long term, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your adjusted gross income for 2013.
• If you converted assets in a traditional IRA to a Roth IRA earlier in the year, the assets in the Roth IRA account may have declined in value, and if you leave things as-is, you will wind up paying a higher tax than is necessary. You can back out of the transaction by recharacterizing the rollover or conversion, that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA.
• It may be advantageous to try to arrange with your employer to defer a bonus that may be coming your way until 2014.
• Consider using a credit card to prepay expenses that can generate deductions for this year.
• If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2013 if doing so won’t create an alternative minimum tax (AMT) problem.
• Take an eligible rollover distribution from a qualified retirement plan before the end of 2013 if you are facing a penalty for underpayment of estimated tax and the increased withholding option is unavailable or won’t sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2013. You can then timely roll over the gross amount of the distribution, as increased by the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2013, but the withheld tax will be applied pro rata over the full 2013 tax year to reduce previous underpayments of estimated tax.
• Estimate the effect of any year-end planning moves on the alternative minimum tax (AMT) for 2013, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes (or state sales tax if you elect this deduction option), miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses, are calculated in a more restrictive way for AMT purposes than for regular tax purposes in the case of a taxpayer who is over age 65 or whose spouse is over age 65 as of the close of the tax year. As a result, in some cases, deductions should not be accelerated.
• Accelerate big ticket purchases into 2013 in order to assure a deduction for sales taxes on the purchases if you will elect to claim a state and local general sales tax deduction instead of a state and local income tax deduction. Unless Congress acts, this election won’t be available after 2013.
• You may be able to save taxes this year and next by applying a bunching strategy to miscellaneous itemized deductions, medical expenses and other itemized deductions.
• 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 in your home before 2014.
• Unless Congress extends it, the up-to-$4,000 above-the-line deduction for qualified higher education expenses will not be available after 2013. Thus, consider prepaying eligible expenses if doing so will increase your deduction for qualified higher education expenses. Generally, the deduction is allowed for qualified education expenses paid in 2013 in connection with enrollment at an institution of higher education during 2013 or for an academic period beginning in 2013 or in the first 3 months of 2014.
• You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.
• You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
• Purchase qualified small business stock (QSBS) before the end of this year. There is no tax on gain from the sale of such stock if it is (1) purchased after September 27, 2010 and before January 1, 2014, and (2) held for more than five years. In addition, such sales won’t cause AMT preference problems. To qualify for these breaks, the stock must be issued by a regular (C) corporation with total gross assets of $50 million or less, and a number of other technical requirements must be met. Our office can fill you in on the details.
• If you are age 70-1/2 or older, own IRAs and are thinking of making a charitable gift, consider arranging for the gift to be made directly by the IRA trustee. Such a transfer, if made before year-end, can achieve important tax savings.
• Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retired plan) if you have reached age 70-1/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70-1/2 in 2013, you can delay the first required distribution to 2013, but if you do, you will have to take a double distribution in 2014 the amount required for 2013 plus the amount required for 2014. Think twice before delaying 2013 distributions to 2014 bunching income into 2014 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2014 if you will be in a substantially lower bracket that year, for example, because you plan to retire late this year.
• Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give $14,000 in 2013 to each of an unlimited number of individuals but you can’t carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

Year-End Tax-Planning Moves for Businesses & Business Owners

• Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2013, the expensing limit is $500,000 and the investment ceiling limit is $2,000,000. And a limited amount of expensing may be claimed for qualified real property. However, unless Congress changes the rules, for tax years beginning in 2014, the dollar limit will drop to $25,000, the beginning-of-phaseout amount will drop to $200,000, and expensing won’t be available for qualified real property. The generous dollar ceilings that apply this year mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What’s more, the expensing deduction is not prorated for the time that the asset is in service during the year. This opens up significant year-end planning opportunities.
• Businesses also should consider making expenditures that qualify for 50% bonus first year depreciation if bought and placed in service this year. This bonus writeoff generally won’t be available next year unless Congress acts to extend it. Thus, enterprises planning to purchase new depreciable property this year or the next should try to accelerate their buying plans, if doing so makes sound business sense.
• Nail down a work opportunity tax credit (WOTC) by hiring qualifying workers (such as certain veterans) before the end of 2013. Under current law, the WOTC won’t be available for workers hired after this year.
• Make qualified research expenses before the end of 2013 to claim a research credit, which won’t be available for post-2013 expenditures unless Congress extends the credit.
• If you are self-employed and haven’t done so yet, set up a self-employed retirement plan.
• Depending on your particular situation, you may also want to consider deferring a debt-cancellation event until 2014, and disposing of a passive activity to allow you to deduct suspended losses.
• If you own an interest in a partnership or S corporation you may need to increase your basis in the entity so you can deduct a loss from it for this year.

These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you.

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Will the IRS call your venture a business or a hobby?

Have you started a new business? Planning to start one? If so, the tax difference between a business and a hobby could turn out to be very important to you.

If the IRS considers your new venture a business, you can deduct losses against other income. But if it’s classified as a hobby, losses are generally deductible only to the extent of hobby income (with the additional limitation imposed on them as miscellaneous itemized deductions subject to the 2% of adjusted gross income floor).

The tax law presumes that an activity is a business, not a hobby, if it is profitable in three out of the last five consecutive years (two out of seven consecutive years for activities involving horses).

Some factors used by the IRS to determine whether you have a hobby or a business include the following:

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The 2013 annual gift tax exclusion: Use it or lose it

Time is running out for making 2013 tax-free gifts. You have only a few more months to use your annual gift tax exclusion for this year, or it’s gone forever.

Each year you can make gifts up to a certain dollar limit to an unlimited number of people, free of any gift tax. For 2013, the dollar limit per recipient is $14,000. These gifts do not reduce your lifetime exemption from gift and estate taxes.

Why would you want to make annual tax-free gifts? There are a number of possible reasons. Tax-free gifts are often used in estate planning as a way of steadily reducing the value of a taxable estate during the owner’s lifetime. Another strategy is to transfer income-producing assets to children or other family members who are in a lower tax bracket. If done carefully to avoid the “kiddie tax,” the result can be a lower overall tax bill for the family unit.

If you fail to use this year’s exclusion, it is not carried over to future years. To qualify as a 2013 gift, the transaction must be completed by December 31, 2013. If you are writing a check as a 2013 gift, do so in time for the recipient to deposit it before year-end.

Check with us if you would like more information about making tax-free gifts in your situation.

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