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B.O.S.S. Workshops (Business Owner Strategy Sessions)

Yearend Tax Strategy

Speaker: Chad W. Frush, CPA - PrincipalFrush & Associates

Dec 13th

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OVERVIEW

• The Fiscal Cliff• Where Are We Now? Where Are We

Scheduled to Go? What Can Be Done?

• New Taxes From Health Care Reform

• Year-End Planning Tips

FRUSH & ASSOCIATES, INC.

Circular 230 DisclosurePursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, nothing contained in this communication was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting, marketing, or recommending a partnership or other entity, investment plan or arrangement to any other party.

For discussion purposes only. This work is intended to provide general information about the tax and other laws applicable to retirement benefits. The author, his firm or anyone forwarding or reproducing this work shall have neither liability nor responsibility to any person or entity with respect to any loss or damage caused, or alleged to be caused, directly or indirectly by the information contained in this work. This work does not represent tax, accounting, or legal advice. The individual taxpayer is advised to and should rely on their own advisors

The Fiscal CliffO The potential onset of federal tax

increases and spending cuts (scheduled to take effect January 1, 2013) that could have a substantial impact on the economy.

O Estimated up to 90% of Americans could see a tax increase.

O We’ll focus on expiring tax provisions and new AHCA provision.

Where Are We Now? Bush-era tax rates are 10%-35% Dividends (qualified) are taxed from

0%-15% Long-term capital gains are taxed

from 0%-15% Estate tax – higher exemption/ lower

rate No marriage penalty Tax-advantaged depreciation options Phase-outs and credits

Bush Tax Cuts May Expire

2012 Brackets 2013 Brackets

10%15%25%28%33%35%

15%15%28%31%*36%*

39.6%*

Dividends2012 2013 Projected

Ordinary:Up to 35%

Qualified:0%

15%

Ordinary:Up to 39.6%*

Qualified:Up to 39.6%*

Capital Gains2012 2013 Projected

Short-Term:Up to 35%

Long-Term:0%

15%

Short-Term:Up to 39.6%*

Long-Term:10%20%*

What Can We Do? Accelerate ordinary income into

2012: Bond interest Annuity income Traditional IRA income Compensation income* Roth IRA conversions Cash basis taxpayers/businesses –

accelerate billings

What Can We Do? Gain harvesting

Sell long-term capital gains in 2012 Take advantage of low rates (lower

rates but paying the tax sooner) Use the proceeds to repurchase

same or similar assets Paying the tax now could be thought

of as an investment to avoid paying larger amount of tax in the future

What Can We Do? Gain harvesting – should you?

Short-term planning – favorable because the benefit of tax deferral is small

Long-term planning – unfavorable because the benefit of tax deferral is substantial

Taxpayers in the 0% tax bracket – Yes! Taxpayers with loss carryovers – could be

better used to offset gains in years with higher long-term capital gains rates

Accelerate installment payments

What Can We Do? Loss harvesting – “Wash Sale” Rule

(IRC 1091) Capital losses are denied to the

extent that the taxpayer has acquired a “substantially identical” stock or security within a period beginning 30 days before & after the sale of a stock sold at a loss Disallowed loss is added to basis in

new stock Holding period is carried over

What Can We Do? Roth IRA Conversions - Benefits

Lowers overall taxable income in the long-term

Tax-free compounding No RMDs at age 70½

C Corporations Consider paying or declaring

dividends before the end of 2012

Estate and Gift Taxes2012 2013 Projected

Exemption:$5.12 Million

Maximum Tax Rate:35%

Portability of Exemption:

Yes

Exemption:$1 Million

Maximum Tax Rate:55%

Portability of Exemption:

No

What Can We Do? Portability Election – 2011 and 2012

Deceased Spousal Unused Exclusion Amount (DSUEA) allows married couples to fully utilize both spouses’ exclusion amounts If first spouse dies with unused

exclusion amount, the second spouse to die can add that unused exclusion to their remaining exclusion amount Increases amount of property that could

pass tax-free to beneficiaries upon 2nd’s death

What Can We Do? Portability Election – 2011 and 2012

Available for decedents dying after 12/31/10 and before 1/1/13

Must elect portability in a timely manner (nine months + six-month extension with tax paid)

Must file Form 706 even if not required to file to make election

What Can We Do? Maximize Gifting in 2012

Annual gift exclusion for 2012 - $13,000

Lifetime gift tax exemption is $5.12 million for 2012

Gifting now could: Save estate tax (rate could jump 20%) Asset protection Lock in discounts Remove appreciation from estate

What Can We Do? Maximize Gifting in 2012

Keep in mind that property transferred by gift requires a carryover of the donor’s basis to the donee, whereas property transferred at death permits a stepped-up basis to date of death value

Consider gifting low basis and/or dividend property to persons in lower tax brackets (who are not subject to kiddie tax)

What Can We Do? Maximize Gifting in 2012

Payments of tuition directly to an education provider are not considered gifts

Same with payments of medical expenses

Loans to one’s children or grandchildren – could make sense with low interest rates

Depreciation Changes Section 179

Allows purchasers to “expense” certain amounts which normally would be capitalized and depreciated

Equipment, furniture, off-the-shelf software

May be new or used Section 179 can not create or

increase a loss, but excess may be carried over to future years

Section 1792012 2013 Projected

Max Deduction:$139,000

Max Purchases:$560,000

Phaseout:$ for $

Max Deduction:$25,000

Max Purchases:$200,000

Phaseout:$ for $

Depreciation Changes Bonus Depreciation

Allows purchasers to deduct 50% of most new equipment in 2012

The remaining 50% of the cost is depreciated as normal

Bonus depreciation can create or increase a loss

Expires in 2012

What Can We Do? Accelerate equipment purchases to

take advantage of higher expensing amounts

Make sure the purchases tie in to your budget and cash flow projections

Evaluate whether regular depreciation is more beneficial

Phaseouts and Credits Phaseout of personal exemptions in

2013 Itemized deductions

No phaseout in 2012 Phaseout returns in 2013 Evaluate whether to accelerate

deductions Child Tax Credit

$1,000 per qualifying child in 2012 $500 per qualifying child in 2013

Alternative Minimum Tax (AMT)

Parallel tax with its own definitions of income and expenses, rates (26-28%), etc.

If AMT is higher than regular tax, the difference is added to your regular tax on Form 1040.

Triggers: high gross income, large number of dependents, stock options, long-term capital gains, large tax deductions (itemized), tax-exempt interest

Alternative Minimum Tax (AMT)

The AMT has slowly creeped downward and has subjected more “lower income” taxpayers to the AMT

Congress created a “patch” with higher AMT exemptions – expired in 2011

Exemption for 2012 will be lower for singles and MFJ

2011 – 4 million taxpayers paid AMT 2012 – 32 million taxpayers will pay

AMT

Alternative Minimum Tax (AMT)

AMT patch has been reinstated retroactively twice – so IRS decided to go forward as if another patch will be enacted

If no patch is enacted – potentially 60 million taxpayers will be notified that they may not file their 2012 returns until late March or after

AHCA Provisions

Schedule of New Health Care Provisions

Year Provision2013 • Flexible spending arrangement the maximum drops to

$2,500 per plan year• New “HI” (hospital insurance tax) on high-income taxpayers• New 3.8% Medicare tax on investment income• Medical care itemized deduction threshold increases to

10% of AGI starting in 2013 (except from 2015–2016)

2014 • States will be required to provide federally approved insurance plans • Premium assistance credit• Excise tax on uninsured individuals• Excise tax on applicable large employers• Insurer reporting requirements• Eligible premiums included in cafeteria plans

2017 • Increase in medical deduction threshold for taxpayers age 65 and over

2018 • Excise tax on high-cost employer plans

29

Medicare “Surtax” Beginning with 2013 tax year,

imposes a 3.8% “surtax” to all taxpayers whose income exceeds a certain “threshhold amount”

Theoretically a taxpayer in the 39.6% tax bracket could have a marginal rate of 43.4%

Medicare “Surtax” The “surtax” applies to the lesser of:

Net investment income- or -

Excess of Adjusted Gross Income over applicable threshold amount

Threshold amounts: Single - $200,000 MFJ - $250,000 Trusts/Estates - $11,650 (top bracket)

Medicare “Surtax” Net Investment Income (NII)

includes: Interest Dividends Annuity Distributions Rents Royalties Income from Passive activities Capital Gains

Medicare “Surtax” Net Investment Income (NII) does

not include: Salaries and Wages Active business income IRA Distributions. 401(k) Distributions Self-Employment income Gain on sale of active partnership or S

Corporation interest Tax-exempt interest Social Security and Veterans benefits

Medicare “Surtax” Example:

John is single and has an AGI of $220,000. He has NII of $40,000.

John’s “surtax” base is the lesser of: NII - $40,000 AGI over threshold - $220,000-200,000

= $20,000

John pays a surtax of $760 ($20,000 x 3.8%)

Minimizing the “Surtax” Need to evaluate ways to minimize

both NII and AGI in order to minimize the “surtax”

Shift taxable investment income into tax-exempt bonds

Harvest capital losses to offset future gains

Delay social security benefits Convert TIRA to RIRA in 2012 to

avoid future RMDs

Minimizing the “Surtax” Rents received by “Real Estate

Professional” who materially participate in the rental activities are not part of NII

Evaluate passive business interests that are subject to the “surtax”

Installment sales Above-the-line deductions

Medicare “HI” Tax Under current law, all workers pay

1.45% of their wages to the Medicare hospital insurance program (employers match)

Self-employed taxpayers pay both Starting in 2013, high income

taxpayers will owe an additional .9% on wages or self-employment income

Employers do not match the additional .9%

Medicare “HI” Tax Tax applies to:

Married filing joint – wages or self-employment income over $250,000

Single, HOH - $200,000

Medicare “HI” Tax Self-employed taxpayers

Pay the additional .9% over threshold Since the .9% is technically the

“employee’s portion”, the additional tax in not an above-the-line deduction on Form 1040

Medicare “HI” Tax Married taxpayers

Employers have no way of knowing the wages or income of an employee’s spouse, so most employers will begin withholding as if their employee is single (after reaching $200,000)

If both spouses are high income earners but under $200,000 each, may need to make estimated payments due to no withholdings

Excess withholdings are considered surplus withholding

Minimizing Medicare “HI” Tax

Accelerate bonuses and other compensation into 2012 (if your employer agrees)

Maximize deferrals to employer plans (reduces federal taxable wages)

THANK YOU! Chad W. Frush, CPA Office (614) 445-7217 Cell (614) 203-2380 chad@frushassociates.com

www.frushassociates.com Follow us on Twitter @CBusCPAs

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