INDIVIDUAL TAX ISSUES
What Will Affect Your Return in 2014
Updated Nov. 15, 2013
What Sweeping Tax Changes Mean to You
• American Taxpayer Relief Act (ATRA) — extensive
changes that affect planning
• High-income taxpayers need to consider
tax-deferral options due to:
- New higher rates
- Curtailed deductions
• Middle-income taxpayers can
take advantage of extended
tax benefits
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New Tax Rates on Ordinary Income and Capital Gains
• The top tax bracket personal income tax rate increased from 35% to 39.6%.
• The top tax bracket for qualified dividend income and long-term capital gains tax
rate increased from 15% to 20% (23.8% if the new net investment income
applies) with the breakout below:
- Taxpayers in lower income tax brackets ($36,250 or less): 0% rate
- Taxpayers in middle income tax brackets ($36,251-$400,000): 15% rate
- Taxpayers in highest tax bracket ($400,001 and over): 20% rate
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20% Capital Gains Rate — Example
• Facts:
Single taxpayer with $420,000 in taxable income ($100,000 from capital gains)
$89,731 Tax on ordinary income (per tax tables)
• Calculating the tax on capital gains:
$ 4,000 (20% on the income in excess of $400,000)
12,000 (15% on the remaining capital gains income)
$16,000 Tax on capital gains
• $105,731 Total Tax (before 0.9% HI and 3.8% Net Investment Income Tax)
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New Tax on Net Investment Income
• Affects individuals with income
above certain thresholds
• Applies to capital gains, interest
and dividend income from
investment assets
• May also apply to rental
and royalty income
5
Alternative Minimum Tax (AMT)
• Created to prevent the wealthy from using tax loopholes to avoid paying
income tax
• How does it work?
- Re-computes taxable income by adding back certain non-taxable income
and removing some deductions
- Re-computed income is then multiplied by a flat rate = AMT
• AMT is compared to regular tax and whichever
results in the higher tax is the amount owed
• Can be very complex to calculate
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AMT – Good and Bad News
• Good news:
- A higher AMT exemption
- AMT now indexed for inflation
• Bad news:
- The income levels at which the exemption
level phases out were not increased
• Possible pitfall:
- Triggering the AMT when taking certain
tax breaks
• AMT Exemption Amount for Tax Year 2013:
- $51,900 (Single/head of household)
- $80,800 (Married filing jointly)
7
Personal Exemptions
• Phase-out of personal exemptions reinstated
• Total amount of personal exemptions for taxpayers and dependents
is reduced if the taxpayer’s adjusted gross income is greater than:
- $300,000 for married couples
- $250,000 for single taxpayers
- $275,000 head of household
- $150,000 married filing separately
8
Itemized Deductions
• There is a limitation on itemized deductions for
high-income taxpayers
• Deductions reduced by 3% of amount by which
taxpayer’s AGI exceeds threshold
• Reduction is limited to 80% of otherwise allowable
deduction (i.e., taxpayers will receive at least 20%
of itemized deductions)
• Exception for certain itemized deductions:
- Medical expenses
- Investment interest expense
- Casualty or theft losses
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Itemized Deduction Limit — Example
• Married taxpayers (filing jointly) have the following deductions:
- Medical expenses of $6,000 (post 10% AGI floor)
- State income taxes of $30,000
- Mortgage interest of $20,000
- Charitable contributions of $7,000
• AGI is $350,000
• Threshold for 2013 is $300,000
• AGI exceeds threshold by $50,000
($350,000-$300,000)
• Result: Itemized deductions are reduced
by $1,500 (3% x $50,000)
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Some Tax Benefits Set to Expire
• The ATRA extended many deductions and credits until Dec. 31, 2013:
- Deduction for state and local sales taxes
- Some credits and benefits for families, such as the $1,000 child tax credit
- Exemption for cancellation of debt on a principal residence
- Tax credits for making qualified energy-saving improvements
to a personal residence
• Unclear if these benefits will be extended again
11
Retirement Planning
• Higher contribution limits for 401(k)s:
- Up to $17,500 ($23,000 if you are age
50 or older). Possible to qualify for an
employer match for some or all
contributions.
• All assets in non-Roth retirement accounts
can be converted to a Roth IRA or Roth 401(k).
12
Estate and Gift Taxes
• Estates up to $5 million now permanently exempt from estate tax
and indexed for inflation in future years. For 2013, the exemption
is $5.25 million.
• Estate tax rate raised to 40%
• The “portability” law enabling a surviving spouse to make use of a
deceased spouse’s unused exclusion has been made permanent.
- Example: If husband dies with estate worth $3 million, his unused
exemption amount of $2.25 million will not be lost; wife will have
new exemption amount of $7.5 million
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Charitable Contributions
• Taxpayers age 70½ and older can once again
make up to $100,000 of tax-free distributions
from an IRA directly to qualified charities.
• Contributions are:
- Not deductible, but the IRA
distributions are excluded
from gross income
- Counted toward the minimum
required distributions for the
year and may also reduce the
amount of taxable Social
Security benefits
14
Higher Education Incentives
• American Opportunity Tax Credit
- Extended through 2017
- Allows eligible taxpayers to
claim a tax credit for qualified
post-secondary education expenses
• Lifetime learning credit and
above-the-line deduction for
qualified tuition and expenses
• Above-the-line deduction for
qualified tuition and expenses
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Higher Education Incentives
• Permanent extensions of:
- $5,250 exclusion for
employer-provided educational
assistance
- $2,500 deduction for
student loan interest
(without a 5-year limitation)
- $2,000 maximum contribution
for education savings accounts
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Health Care Timeline
• Open enrollment in the newly created Health
Insurance Marketplace began Fall 2013
• Coverage can start as early as Jan. 1, 2014.
• Open enrollment closes March 31, 2014, and
will not open again until October 2014
• Other key provisions are scheduled to become
effective in the coming year
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Planning Opportunities
• Although new tax laws add complexity to the system,
they also often open up new opportunities to minimize
your tax bill.
• We can help you understand your tax situation and
determine the best steps to address your tax
challenges and any other financial concerns.
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Questions
Copyright © 2013 American Institute of CPAs
Copyright © 2011 American Institute of CPAs