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 2

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 3

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) 4

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 6

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 taxpayers 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 9 There is a limitation on itemized deductions for high-income taxpayers Deductions reduced by 3% of amount by which taxpayers 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

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) 10

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 spouses 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 13

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 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 15

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 16

Health Care Timeline Open enrollment in the newly created Health Insurance Marketplace began Fall 2013 Coverage can start as early as Jan. 1, 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 17

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. 18

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