October 7, 2013|
The American Taxpayer Relief Act of 2012 (ATRA) extended and enhanced various tax breaks for individuals and small-business owners in 2013. However, ATRA also imposed higher taxes, and a new 3.8% Medicare surtax may complicate matters for some investors. With that in mind, here is a summary of several year-end tax-planning moves to consider. Capital gains and losses: Traditionally, capital losses are harvested at the end of the year to offset prior capital gains plus up to $3,000 of ordinary income. Similarly, capital gains realized in 2013 may be absorbed by prior capital losses. Under ATRA, the maximum 15% tax rate on long-term capital gain increases to 20% for single filers with taxable income above $400,000 and joint filers above $450,000. Note: Capital gains may also trigger the 3.8% surtax (see below). Medicare surtax: The 3.8% Medicare surtax applies to the lesser of "net investment income" (NII) or the excess modified adjusted gross income (MAGI) above $200,000 for single filers and $250,000 for joint filers. As a result, upper-income taxpayers may take steps at year-end to reduce NII or MAGI, or both. This may include investments in tax-free municipal bonds or turning a "passive" activity into an "active" one (see article on "Key Tax Distinction for Business Investors"). Family income-splitting: ATRA also raised the top tax rate on ordinary income from 35% to 39.6%. If the 3.8% surtax applies, the effective top federal income tax rate climbs to 43.4%. Thus, taxpayers may transfer income-producing property to other family members in lower tax brackets. Note: Due to the "kiddie tax," unearned income above $2,000 received in 2013 by a dependent child younger than 24 is generally taxed at the parents' top tax rate. Business assets: Under ATRA, the maximum Section 179 deduction for qualified business assets placed in service in 2013 is a lofty $500,000, subject to a phaseout limit of $2 million. The maximum is scheduled to plummet to $25,000 with a $200,000 phaseout threshold in 2014. In addition, ATRA generally preserves 50% bonus depreciation for qualified assets placed in service before 2014. Thus, there are powerful tax incentives to acquire equipment and supplies and place them in service before year-end. Alternative minimum tax: The alternative minimum tax (AMT), which involves a complex calculation, may apply to taxpayers with an overabundance of certain tax preference items. Although ATRA bumped up the exemption amounts in 2013, this "stealth tax" may still snare millions of taxpayers. Have a review of AMT liability made soon to determine if tax preferences items should be shifted or delayed. Charitable donations: A taxpayer may give cash or property to charity at year-end to bolster his or her itemized deductions. Even a credit card charge made in 2013, but payable in 2014, counts toward this year's deduction. But be aware that strict substantiation requirements apply to charitable gifts. Note: Under the "Pease rule" revived by ATRA, certain itemized deductions, including deductions for charitable donations, may be reduced for upper-income taxpayers. Obviously, everyone's situation is different. Arrange a year-end meeting with your Faw Casson advisor to determine the best course of action as 2013 winds down.