Preparing your 2013 Tax Returns - Key Changes That May Impact You!

 

Welcome to the New Year, now that the celebrating is over, let start thinking about - Taxes!!  Sorry to put a "damper" on your new year celebrations.  

Tax filing season will officially begin January 31, 2014 - the date the IRS has announced that they will be ready to start accepting paper and electronically filed tax returns.

 

The following is a summary of the key provision of changes in the 2013 tax law which may have an impact on your 2013 taxes.  Although in many cases you may not be able to do anything now to reduce your 2013 taxes, you should use this as an opportunity to plan for 2014 and future years.\

Here is the summary............................................... 

A Tax Increase on the Highest Incomes in 2013.  Taxpayers (including those who receive income through partnerships and S corporations) who earn more than $400,000 ($450,000 for married taxpayers filing jointly) have a marginal tax rate of 39.6%. All other existing rates remain the same.

Higher Capital Gains Rates for Top Earners. The same individuals who are subject to the new 39.6% top rate on income now face a 20% rate on capital gains and dividends, up from 15%. Taxpayers in the 10% and 15% income brackets have a zero capital gains rate and those in the middle will continue to pay 15%.

·        Higher Personal Exemptions Phase-out Levels. The phase-out levels for personal exemptions and itemized deduction have been raised to $300,000 for married couples and surviving spouses and $250,000 for individuals. 

·       Permanent AMT Inflation Indexing (Finally!!). The alternative minimum tax originally was intended to prevent high-income individuals from avoiding taxes. In the absence of a patch for last year, more than 60 million middle-income taxpayers might have been subject to the AMT on their 2012 income. After years of last-minute AMT “patches,” the new law permanently indexes the AMT to inflation starting in tax year 2012. For income you earned in 2012, the exemptions are $50,600 for individuals and $78,750 for married taxpayers filing jointly. 

·        Clarity on Estate and Gift Taxes. After years of uncertainty in this area, the new law holds the estate and gift-tax exclusion at $5 million, indexed for inflation -  $5.2 million in 2013.   The top tax rate jumped to 40% from 35% as of Jan. 1, 2013, but without this change, it would have soared to 55% with a $1 million exclusion amount. The act made permanent the estate tax portability election, which allows a surviving spouse to use a deceased spouse’s unused exemption amount. 

·         Marriage Penalty Relief Retained. Certain taxpayers filing jointly will no longer have to worry about paying more than if they filed as single taxpayers; joint filers also will enjoy a larger standard deduction. 

·        Education Tax Benefits Extended. Most deductions for education expenses will remain in place under the new law. For example, the law extends the deduction for qualified education expenses through 2013.

·        Conversions to Roth Retirement Plans. The new law allows participants in an employer-sponsored 401(k) to transfer any amount to a Roth 401(k) — the funds will be taxed upon conversion.  

·        Tax Relief for Mortgage Loan Modifications. Taxpayers struggling to pay their mortgages, or whose home values have fallen below their purchase price, were given another year of tax relief on any qualifying “indebtedness income” they may receive as a result of a loan modification or short sale on their principal residence.

Net Investment Income Tax.  Taxpayers who have net investment income in 2013 will face a 3.8% surtax on categories of certain unearned income, potentially increasing the total tax rate to 43.4%. This tax is part of the health care reform act. 

 Supreme Court Ruling on DOMA.  The Supreme overturned DOMA during the summer of 2013.  As a result,  Same Sex Married couples (SSM) can now file joint tax returns for federal.  In Utah, we are waiting for word from the Utah State Tax Commission as to whether SSM couples can file a joint tax return for Utah based on the recent ruling by Judge Shelby - unconstitutionality of Amendment 3.  Currently on Appeal to the U.S. Supreme Court.

 

Tax planning should be done in conjunction with preparation of your 2013 tax returns.  For example, if you are currently using an S Corporation for your business and you are in the 39.3% bracket, it may be a good tax planning move to convert your S Corporation to a C Corporation since the top rate in a  C Corporation is 35%.  Of course there are other reasons why you may want to keep using your S Corporation. 

 

 The bottom line here - prepare for 2013, but plan for 2014!!!

 

 

HOW WILL NEW HEALTHCARE IMPACT YOU!!!

How will health care reform affect you and your taxes?

 

It is in all the news the last several weeks - It’s massive, and it’s complicated. At more than 2,400 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, and uninsured individuals must 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 will be 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

Small companies that pay at least 50% of the health insurance premiums for their employees may be eligible for a tax credit for as much as 35% of the cost of the premiums. To qualify, the business must employ fewer than 25 full-time people with average wages of less than $50,000. For 2014, the maximum credit increases to 50% of the premiums the company pays, though to qualify for the credit, the insurance must be purchased through SHOP.

· 50 or more employees

For companies with 50 or more full-time employees, the requirement to provide “affordable, minimum essential coverage” to employees has been delayed for one year and is not required until 2015. Originally, employers had been required to file information returns that reported details about the health insurance they provided, with penalties to apply if the insurance did not meet standards. Companies complained that they needed more time to meet the reporting obligations, and in response the IRS made the reporting requirement optional for 2014. Without the reporting, the IRS could not determine penalties, so the penalties also were postponed for a year.

 

Bottom line: the IRS is encouraging companies to comply in 2014 even though there are no penalties for failure to do so.

· The business play or pay penalty

Starting in 2015, companies with 50 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

Currently, attention is focused on the health insurance exchanges or “Marketplace” that opened for business on October 1. Confusion about the Affordable Care Act has left many people thinking everyone has 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 and are happy with your plan, you can keep your coverage. 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 will either develop an insurance exchange (Marketplace) or use one provided by the federal government. The Marketplace will allow those seeking coverage to comparison shop for health plans from private insurance companies.

 

There will be 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 will depend on several factors including your age, whether you smoke, and where you live.

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

· The individual play or pay penalty

If you’re one of the 45 million or so Americans without health insurance, you will need to get coverage for 2014 or pay a penalty of $95 or 1% of your income, whichever is greater. Low-income individuals may qualify for subsidies and/or tax credits to help pay the cost of insurance.

 The penalty increases to $325 or 2% of income for 2015 and to $695 or 2.5% of income for 2016. 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.

 NOTE: If you will be shopping for health insurance on the Marketplace, be aware that there’s no need to rush to enroll; the enrollment period runs from October 1, 2013, through March 31, 2014. Take the time you need to review your options and select what’s best for you and your family.  Also there has been some major glitches with the Federal Health Care Exchange Website so this date will likely be extended. 

 

IMPACT ON 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 increases to 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 increases 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, capital gains) for single taxpayers with income over $200,000 and married couples with income over $250,000.

 

The Affordable Care Act may be one of the most complicated and confusing laws ever passed, but one thing is very clear: the law will affect the taxes of most Americans. In order to manage your tax bill, you will have to factor the new health care rules into your overall personal and business tax planning. For guidance, contact our office.

 

To begin checking out your state’s exchange (Marketplace), start at www.healthcare.gov – the federal government’s website on the Affordable Care Act. (if it is working!!)

 

Check back here for updates.

 

Gurr CPA LLC

1156 S State, Suite 202

Orem, UT  84097

801-225-9411

info@gurrcpa.com