tag luncheon: 2012 tax update

1

2012 Year-End Tax PlanningTegan Long, Tax Senior Manager &Michelle VanDellen, Tax Senior Manager

2

The material appearing in this presentation is for informational purposes

only and is not legal or accounting advice. Communication of this

information is not intended to create, and receipt does not constitute, a

legal relationship, including, but not limited to, an accountant-client

relationship. Although these materials may have been prepared by

professionals, they should not be used as a substitute for professional

services. If legal, accounting, or other professional advice is required, the

services of a professional should be sought.

3

WELCOME AND AGENDA

• Scheduled Tax Changes

• Tax planning opportunities for remainder of 2012 and into 2013:

for you and your family for your business

• Health Care Update

4

SCHEDULED TAX

CHANGES

5

SCHEDULED CHANGED TO TOP RATES AND EXEMPTIONS

2012 2013 and Beyond

Gift tax rate 35% 55%

Estate tax rate 35% 55%

Estate tax and lifetime gift exemption

$5.12 million $1 million

Generation-skipping tax exemption

$5.12 million $1 million

Portability of estate tax exemptions between spouses?

Yes No

6

SCHEDULED CHANGED TO TOP RATES AND EXEMPTIONS (CONT.)

• *As currently scheduled based on the sunset of Bush tax cuts. **Top marginal rate with 3.8% healthcare tax on net investment income with AGI over $200K (single filers) or $250K (joint filers). Net investment income does not include certain defined income or gains attributable to qualified business holdings in flow-through entities such as S Corporations or partnerships.

2012 2013 and Beyond

Ordinary income 35% 43.4%*

Long-term capital gains 15% 23.8%*

Qualified dividends 15% 43.4%*

AMT exemption $74,450 for married filing jointly

$45,000 for married filing jointly

7

MEDICARE TAX ON UNEARNED INCOME

• 3.8% Medicare contribution tax will be assessed to individuals, trusts, and estates on lesser of net investment income or excess MAGI over $250,000 (MFJ) or $200,000 (single)

• Interest, dividends, annuities, royalties, capital gains, gains from the disposal of non-business property and passive income earned from a business

• Tax is non-deductible by the taxpayer• Tax years beginning after December 31, 2012

8

MEDICARE TAX ON UNEARNED INCOME (CONT.)

• 0.9% increase in employee portion of Medicare Hospital Insurance (HI) FICA Tax on wages and self-employment incomeAffects same taxpayers as 3.8% Medicare TaxEmployers are required to withhold this tax on

wages exceeding $200,000 in a calendar yearNo change to employer portionTax years beginning after December 31, 2012

9

INCREASE IN MEDICARE TAX EXAMPLE

• Single taxpayer with:Net investment income of $100,000,Wages of $300,000, and MAGI of $375,000.

• HI tax = $900 ($300k - $200k = $100k * .09% = $900)

• Medicare tax = $3,800 (Lesser of $375k less $200k = $175k or $100k. Thus, $100k * 3.8% =$3,800)

• Total additional Medicare taxes = $4,700

10

WHAT DOES IT MEAN?

• Higher taxes… obviously• Can be hit with both Medicare and HI tax increases• Reasonable compensation studies will become

prevalent – less wages/SE income…• More documentation requirements of “lesser

involved” owners to document active participation in enterprise

• Sweet spot – active participant with reasonable wages.

• No indexing for inflation on either taxes

11

OTHER SCHEDULED TAX CHANGES

• Effective January 1, 2013Employee portion of Social Security tax withholding

increases from 4.2% to 6.2%Limitation on itemized deductions and personal

exemptionsMedical expenses limited to 10% of AGI, raised from

7.5% Taxpayer 65 or older remains at 7.5% (2013 – 2016)

12

DEPRECIATION CHANGES

• Expansion and contraction of §179 expensing Starting in 2012, qualifying real property no longer eligible Section 179 property in excluded from midquater

calculation Subject to taxable income limitation

*to be adjusted for inflation

For Tax Years beginning in… Expense Limitation Asset Limitation

2008-2009 $250,000 $800,000

2010-2011 $500,000 $2,000,000

2012 $139,000 $560,000

2013 $25,000* $200,000*

13

DEPRECIATION CHANGES (CONT.)

• Snapshot of bonus depreciationApplies to new assets only Includes qualifies leasehold improvements (excludes

related party leases)Will not cause AMT adjustment

Placed in Service Dates Bonus Percentage

January 1, 2008 – September 8, 2010 50%

September 9, 2010 – December 31, 2011 100%

January 1, 2012 – December 31, 2012 50%

January 1, 2013 and later 0%

14

DEPRECIATION EXAMPLE - INCOME

ABC Corp has taxable income of $350,000.

Total 2012 asset purchases $150,000Less: IRC §179 expense 139,000Remaining basis 11,000Less: 50% bonus depreciation 5,500Remaining depreciable basis 5,500MACRS: first year of 5-year property 1,100Total tax depreciation for 2012 additions 145,600

15

DEPRECIATION EXAMPLE - LOSS

XYZ Corp has tax loss of $100,000.

Total 2012 asset purchases $150,000Less: IRC §179 expensing 0Remaining basis 150,000Less: 50% bonus depreciation 75,000Remaining depreciable basis 75,000MACRS: first year of 5-year property 15,000Total tax depreciation for 2012 additions 90,000

16

FLOW-THROUGH ENTITY PLANNING

• Entity basis• Buy-sell agreements• Ownership transition• C Corp to S Corp election• Qualified dividends

17

BUSINESS CREDITS

• Credit for employee health insurance expenses of small employers

• Research and development credit

• Energy Credits

18

PRESIDENTIAL PROPOSALS

19

INCOME TAX RATE PROPOSALS

Married Filing Jointly

IncomeCurrent Law

(2013)Obama Romney

Up to $17,400 15% 10% 8%

$17,400-$60,350 15% 15% 12%

$60,351-$72,300 28% 15% 12%

$72,301-$145,900 28% 25% 20%

$145,901-$222,300 31% 28% 22.4%

$222,301-$266,100 36% 33% 26.4%

$266,101-$397,000 36% 36% 26.4%

$397,000 and above 39.6% 39.6% 28%

20

INCOME TAX RATE PROPOSALS (CONT.)

Current Law (2013)

Obama Romney

Dividends 39.6% 39.6%(taxed at ordinary income rates for AGI greater than $250,000)

15%(no tax if AGI less than $200,000)

Long-term capital gains

20% 20% 15%, or none

AMT Reverts to lower exemptions absent AMT patch

Permanently extend 2011 AMT exemptions, rates, and thresholds and index for inflation

Repeal AMT

Corporations 35% 35% 25%

21

TRANSFER TAX PROPOSAL

Current Law (2013)

Obama Romney

Estate tax rate 55% 45% No estate tax

Estate tax exemption $1 million $3.5 million None

Gift tax exemption $1 million $1 million None

22

WHAT TAX DECISIONS SHOULD WAIT UNTIL AFTER THE ELECTION?

• With so much tax uncertainty, you may want to consider waiting until after the election to make timing-related decisions about certain income and deductible expenses:

Taking bonuses Recognizing consulting or other self-employment income Taking retirement plan distributions (to the extent not required) Paying 2012 state and local income and property tax bills that aren’t

due until 2013 Making charitable contributions

• But don’t put off your planning: by projecting your year-to-date income and deductible expenses now, you’ll be in a better position to act quickly whenever the tax outlook becomes more certain.

23

ENTITY SELECTION PLANNING

24

COMMON ENTITY TYPES - BENEFITS

• LLC • Single member LLC

• “Check-the-Box” Election

• S-Corp

• C-Corp

25

HEALTH CARE UPDATE

26

WHAT WE’LL COVER

• Supreme Court decision• Insurance Exchanges• Employer Mandate• The Future of Employer-Provided Insurance• Questions

27

THE SUPREME COURT DECISION

• The Individual Mandate

28

INDIVIDUAL MANDATE

• Legal residents must maintain minimum coverage

• Annual penalty if not insured, greater of: 2014 - $95 or 1% of taxpayer household income

2015 - $325 or 2% of taxpayer household income

2016 - $695 of 2.5% of taxpayer household income

Limited to 3 times annual flat penalty amount

• Penalty is assessed monthly for first three months and in full after that

• Household income includes income of all individuals on the taxpayers

return

• Penalty for uninsured dependent under age 18 is 50% of statutory

defined flat dollar amount

29

COMMERCE CLAUSE

• Commerce Clause regulates activities conducted in interstate commerce.

• Opponents of the ACA argued that the individual mandate is an attempt by Congress to regulate inactivity and to uphold this provision of the ACA would grant Congress vast new powers.

• Supreme Court agreed.

30

IT’S NOT A TAX . . . IT IS A TAX . . .???

• The individual mandate is constitutional under the government’s power to tax.

• But wait . . . . “For us to say that you’ve got to take a responsibility to get health insurance is absolutely not a tax increase.”

Barack ObamaSeptember 20, 2009

31

IT IS A TAX . . .

“The Affordable Care Act’s requirement that certain individuals pay a financial penalty for not obtaining health insurance may reasonably be characterized as a tax. Because the Constitution permits such a tax, it is not our role to forbid it or to pass upon its wisdom or fairness.”

Chief Justice John RobertsJune 28, 2012

32

THE SUPREME COURT DECISION

• The Individual Mandate • Severability clause

33

THE SUPREME COURT DECISION

• The Individual Mandate • Severability Clause• Medicaid Expansion

34

WHAT HAPPENS NEXT?

The Majority of employers who have not evaluated their options and run the numbers……Were waiting for the Supreme Court….

And then they were waiting for the election results……

….that ship has sailed!

35

INSURANCE EXCHANGES

36

WHAT ARE THE EXCHANGES?SOURCE: KAISER FAMILY FOUNDATION

• State-regulated and standardized plans• Serve primarily individuals and small businesses

(up to 100 employees)States may choose to include larger employers in the

future

37

WHAT IS THE PURPOSE OF THE EXCHANGES?

• Offer a choice of health plans• Focus competition on price• Provide standardized, transparent information• Create mechanism for enrollment • Administer subsidies• Portability of coverage

38

WHAT ARE THE EXCHANGES?

• States may run their own exchange or• Run multiple exchanges or

Each exchange covers a geographic area

• Join together to run multi-state exchanges or• Opt out completely

Federal government will step in to create an exchange

• WA State has created its exchange

39

EMPLOYER SHARED RESPONSIBILITY FEE

AKA ‘PAY OR PLAY’ PENALTY

40

EMPLOYER PAY OR PLAY

• Applies to business with ≥ 50 full time employees) Penalty applies if employerDoes not offer “minimum essential coverage”Offers unaffordable “minimum essential coverage”

Premium charged to employee > 9.5% of household income Employer pays less than 60% of premium

• Penalty applies when employee purchases a qualified health plan (QHP) through an exchange and is entitled to premium tax credit or cost-sharing subsidy

41

EMPLOYER PAY OR PLAY

• Who qualifies? 4 times FPL ($88,000 for family of four)

• Two situations: Coverage NOT offered and ONE employee obtains subsidy

in the Exchange Penalty of $2,000 for every FTE/year (less first 30 employees)

Coverage offered and employee obtains a subsidy in the Exchange

Penalty lesser of $3,000/employee receiving subsidy or $2,000 for every FTE/year (less first 30 employees)

• Penalty is not deductible

42

PAY OR PLAY – PENALTY FOR FAILURE TO PROVIDE MINIMUM ESSENTIAL COVERAGE

Example 1• In 2014, Employer A fails to offer minimum

essential coverage:100 FT employees10 receive a tax credit

• Total annual penalty$140,000 (100-30) 70 employees * $2,000

• Penalty calculated on a monthly basis

43

PAY OR PLAY – PENALTY FOR FAILURE TO PROVIDE MINIMUM ESSENTIAL COVERAGE

Example 2• In 2014, Employer A offers minimum essential

coverage:100 FT employees20 receive a tax credit

• Total annual penaltyLessor of:

$60,000 ($3,000*20) $140,000 (100-30) 70 employees * $2,000

• Penalty calculated on a monthly basis

44

PAY OR PLAY – DEFINITION OF FTE

Do you have 50 or more FTEs?• FTE = 30 or more hours per week (130 per

month)• Does not include full-time seasonal employees

who work less than 120 days during the year• Employees working less than 30 hours per

week – FTE = monthly work hours / 120

45

PAY OR PLAY – DEFINITION OF FTE (CONT)

• “Hours” include hours of paid time off (vacation, holiday, sick leave, etc.)

• The following are aggregated in determining the size of the employer: All employees of a “controlled group” All employees of any “affiliated service

group”

• Leased employees are not included

46

EMPLOYEE RAMIFICATIONS

• Significant changes to the traditional U.S. employer-employee relationship.

More part-time employmentMore contract and self-employmentLow-income, low-skilled workers will be the most

affected.

47

EFFECT ON EMPLOYER-PROVIDED INSURANCE

48

ASK YOURSELF THE QUESTION?

If you could:• stop providing employee health benefits• give employees the money

And your employees could: • buy their own health insurance• with equal or better benefits• for equal or lower premiums,

Would you do that?

49

WILL EMPLOYERS KEEP HEALTH PLANS?• Initially a coin flip• But of those saying they will

keep their plans, their top three reasons are…To retain current employeesTo attract future talentTo maintain employee satisfaction

and loyalty

What if the paradigm shifts?

International Foundation of Employee Benefits “2012 Employer Action Survey”

50

QUESTIONS?

Tegan Long, CPATax Senior Manager(360) 676-1920Tegan.Long@mossadams.com

Michelle VanDellen, CPATax Senior Manager(360) 676-1920Michelle.vandellen@mossadams.com

51

THANK YOU