1. IRS 2014 Tax Law Update (as of October 16, 2014) Main Line Association for Continuing Education Penn State Great Valley Conference Center October 16, 2014 Richard G. Furlong, Jr. Senior Stakeholder Liaison Small Business Self-Employed Division

2. Expired Provisions Alternative Minimum Tax Capital Gains Revised Schedule M-3 Direct Deposit E-Signatures Web Resources Overview of Topics

3. Individual Expired Provisions Deductions for expenses of elementary and secondary school teachers Mortgage debt relief Deduction for mortgage insurance premiums Deduction for state and local general sales taxes Above-the-line deduction for higher education expenses

4. Business Expired Provisions Research and experimentation tax credit New Markets Tax Credit Employer wage credit for activated military reservists Work Opportunity Tax Credit Bonus depreciation Acceleration of AMT credits in lieu of bonus depreciation

5. Energy Expired Provisions Plug-in electric motorcycles and highway vehicles Incentives for biodiesel and renewable diesel Credit for construction of new energy efficient homes Credit for fuel cell motor vehicles

6. Expiring Provisions Improvement, Reform, and Efficiency (EXPIRE) Act – Individual extenders – Business extenders – Energy extenders EXPIRE ACT

7. Repayment of excess advance premium tax credit (Form 8962) is regular tax for the AMT Patch permanent Inflation adjustments Capital gains rates Alternative Minimum Tax

8. IRC §1202 50% on Qualified Small Business Corporation Stock 75% exclusion for qualified small business stock acquired in 2009 and held more than 5 years Small Business C Corp. ≤ $50 million in gross assets Many inflationary changes Capital Gains

9. Tax of 3.8% on certain net investment income to the extent modified AGI is above threshold: – Married Filing Jointly $250,000 – Married Filing Separately $125,000 – Single $200,000 – Head of Household $200,000 – Qualifying Widow(er) $250,000 For estates and trusts -- threshold for tax year 2014 is $12,150 Net Investment Income Tax (NIIT)

10. Three critical terms associated with the 3.8% Medicare Surtax: Net Investment Income Threshold Amount Modified Adjusted Gross Income (MAGI)

11. APPLICATION TO INDIVIDUALS The Medicare Surtax is equal to: 1.“Net investment Income” OR 2. The excess (if any) of – -“ Modified Adjusted Gross Income (MAGI) -“Threshold amount” 3.8% X the lesser of 1.Net Investment Income OR 2. The excess (if any) of : “Modified Adjusted Gross Income (MAGI) -- “Threshold Amount” Net Investment Income Tax (NIIT)

12. APPLICATION TO ESTATES AND TRUSTS The NIIT is equal to: 1.“Net investment Income” OR 2. The excess (if any) of – -“ Modified Adjusted Gross Income (MAGI) -“Threshold amount” 3.8% X the lesser of 1.Undistributed “net investment income” for such taxable year OR 2. The excess (if any) of – -“Adjusted Gross Income” (as defined in section 67) for such taxable year, over the dollar amount at which the highest tax bracket in section 1(e) begins for such a taxable year Net Investment Income Tax (NIIT)

13. “Threshold Amount:” the key factor in determining the “lesser of” formula for purposes of calculating the surtax. Threshold Amounts: Single taxpayers - $200,000 Married taxpayers - $250,000 Estates/Trusts - $12,150 (i.e. top income tax bracket in 2014)

14. Net Investment Income Tax (NIIT) “Modified adjusted gross income” (MAGI): the amount that is compared to the “threshold amount” to determine the “net investment income” that is subject to the NIIT. MAGI equals: Adjusted gross income (i.e., Form 1040, Line 37) PLUS Net foreign earned income exclusion (i.e. gross income excluded under the foreign earned income exclusion less certain deductions or exclusions that were disallowed due to the foreign earned income exclusion

15. Includes: Interest Dividends Annuity Distributions Rents Royalties Income derived from passive activity Net capital gain derived from the disposition of property Does NOT Include : Salary, wages, or bonuses Distributions from IRAs or qualified plans Any income taken into account for self- employment tax purposes Gain on the sale of an active interest in a partnership or S corporation Items which are otherwise excluded or exempt from income under the income tax law, such as interest from tax-exempt bonds, capital gain excluded under IRC 121, and veterans benefits Net Investment Income Tax (NIIT)

16. Income: Subject to NIIT: Taxable Interest Dividends Net Capital Gains Annuity Income Passive Income Royalties Rents Exempt from NIIT: Wages Exempt Interest Active Royalties IRA Distributions 401(k) Distributions Pension Income RMDs Social Security Income Net Investment Income Tax (NIIT)

17. Example 1: John Single Taxpayer $100,000 of Salary $50,000 net investment income MAGI is $150,000 3.8% NIIT would NOT apply MAGI is less than threshold

18. Tina & Terry Married, filing jointly $300,000 combined salary $0 net investment income 3.8% NIIT would NOT apply Wages Exempt from NIIT Example 2: :

19. Peter & Paula Married, filing jointly $400,000 salary income $50,000 net investment income 3.8% NIIT would apply to $50,000 Example 3:

20. Sarah & Scott Married, filing jointly $200,000 salary income $150,000 net investment income Excess of MAGI Threshold 3.8% NIIT would apply to $100,000 $350,000 - $250,000 =$100,000 Example 4:

21. Randy – Age 70 Single taxpayer $200,000 investment income $125,000 RMD from his IRA Excess of MAGI Threshold 3.8% NIIT would apply to $125,000 $325,000 - $200,000 =$125,000 Example 5:

22. David & Veronica Married, filing jointly $100,000 pension income $150,000 IRA income $25,000 tax-exempt interest $0 net investment income 3.8% NIIT would NOT apply Example 6:

23. Schedule M-3 burden reduction – For those with less than $50 million in assets – Complete Schedule M-1 instead of Schedule M-3 Parts II and III Revised Form

24. Only three direct deposit refunds per financial account (subsequent refunds convert to checks) Direct deposit only into account(s) bearing client’s (taxpayer’s) name(s) No portion of refund may go into preparer’s account Direct Deposit Restrictions

25. Allowed on Forms 8878 and 8879 No specific technology required Identity verification required E-Signatures

26. All forms and pubs: IRS.gov/formspubs Draft forms: IRS.gov/draftforms IRS.gov/aca IRS.gov/ptin IRS.gov/efile IRS.gov/eservices IRS.gov

28. IRS.gov/form1040 IRS.gov/form6251 IRS.gov/pub17 IRS.gov/w2 IRS.gov/ScheduleA IRS.gov/ScheduleD Web Pages for Forms and Pubs

30. Find instructions, forms and publications by topic IRS.gov/taxmap TaxMap.ntis.gov Make comments at TopicMap@irs.gov IRS Tax Map

33. Expired Provisions Alternative Minimum Tax Capital Gains Revised Schedule M-3 Direct Deposit E-Signatures Web Resources Summary

34. Richard G. Furlong Jr. Senior Stakeholder Liaison 215-861-1551 richard.g.furlong@irs.gov Contact Information