Individual Income Tax Updates for the 2013 Filing Season

Agenda  Introduction  Agenda  Income Tax Rates  New Taxes  Phase-Outs  2014 Outlook  Terminology  Contact Information

Income Tax Rates  Federal Rates for 2013: – Ordinary Income: 10, 15, 25, 28, 33, 35, and 39.6% – 39.6% new for 2013 – 39.6% rate applies at $400,000/$450,000 – Long-Term Capital Gains: 0, 15, and 20% – 0% rate applies when in the 10 or 15% brackets noted above – 20% new for 2013 – 20% rate applies when in the 39.6% bracket noted above 1

Income Tax Rates (cont.)  Federal Rates for 2013 (cont.): – Employee portion of Medicare: 1.45% on income up to $200,000/$250, % on income above $200,000/$250,000 MFJ Amounts are combined – Example: » Husband earns $150,000, pays 1.45% » Wife earns $150,000, pays 1.45% » Combined, they have $300,000, which is $50,000 over limit, so that $50,000 is subject to additional 0.9% tax 2

Income Tax Rates (cont.)  California Rates for 2013: – 1, 2, 4, 6, 8, 9.3, 10.3, 11.3, and 12.3% 10.3% rate applies at $250,000/$500, % rate applies at $300,000/$600, % rate applies at $500,000/$1,000,000 – Additional Mental Health Tax of 1% applies at $1,000,000 – No rate difference between ordinary and capital 3

New Taxes  Medicare Tax of 3.8% on net investment income – Interest, Dividends, Annuities, Royalties, Rents – Other passive trades or businesses – Gain from non-trade or business property – Gain from sale of principal residence to extent gain exceeds §121 exclusion ($250,000/$500,000) – Tax is on lesser of net investment income (NII) or the amount by which Modified AGI (MAGI) > $200,000/$250,000 Example: MFJ, NII = $100,000, MAGI = $300,000, tax would be on lesser ($300,000-$250,000 = $50,000, which is less than $100,000) 4

Phase-Outs  Itemized Deductions: – Federal: Starts at AGI of $250,000/$300,000 Phase-out equals 3% of each dollar above AGI threshold Does not include medical, investment interest, and casualty, theft or wagering losses Can have up to 80% phased out Example: MFJ $400,000 AGI, so $400,000- $300,000=$100,000x3%=$3,000 of itemized deductions phased-out 5

Phase-Outs (cont.)  Itemized Deductions: – California: Starts at AGI of $172,615/$345,235 Phase-out equals 6% of each dollar above AGI threshold Does not include medical, investment interest, and casualty, theft or wagering losses Can have up to 80% phased out Example: MFJ $400,000 AGI, so $400,000- $345,235=$54,765x6%=$3,286 of itemized deductions phased out 6

Phase-Outs (cont.)  Personal Exemptions: – Federal ($3,900 in 2013): Starts at AGI of $250,000/$300,000 Phase-out equals 2% for each $2,500 of AGI above threshold Can have up to 100% phased out – California ($106 in 2013): Starts at AGI of $172,615/$345,235 Phase-out equals $6/$12 for each $2,500 of AGI above threshold Can have up to 100% phased out 7

Phase-Outs (cont.)  Personal Exemptions (cont.): – Example: MFJ $400,000 Federal: $400,000- $300,000=$100,000/$2,500=40x2%=80% phased out California: $400,000- $345,235=$54,765/$2,500=21x$12=$252 phased out 7

2014 Outlook  Numerous federal provisions (55 total) expired at end of 2013, including: – Deduction for state and local sales taxes – Premiums for mortgage insurance deductible as qualified residence interest – Tax-free IRA distributions to charity – Energy-efficient home improvement tax credits – Exclusion from income for discharge of debt on principal residence 8

2014 Outlook (cont.)  Pending Federal Legislation: – President Obama’s budget – The Republican’s budget – Rep. Camp’s tax simplification bill – The Senate’s tax simplification bill 9

Terminology  § ___ = Code section of the Internal Revenue Code  Two figures provided (e.g. $250,000/$300,000) represent Single and Married Filing Joint filing status  AGI = Adjusted Gross Income  MFJ = Married Filing Joint  Long-Term = one year or more 10

Contact Info Mark A. Bellows, CPA GALLINA LLP 925 Highland Pointe Drive, #450 Roseville, CA (916) LinkedIN: Mark Bellows Twitter: RE_Const_CPA