Federal Tax Law and Regulation Update for Return Preparers Anticipating Issues Affecting Individual Taxpayers Such as Tax Cut Phase-Outs and Expansions of FICA and Medicare Taxes
MONDAY, NOVEMBER 19, 2012, 1:00-2:50 pm Eastern
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Federal Tax Law and Regulation Update for Return Preparers Seminar
Allison Tilton, Reid & Hellyer
Nov. 19, 2012
Jesica Speer, Grant Thornton
Today’s Program
AMT Taxes And Tax Rates
[Jesica Speer and Allison Tilton]
Court Decisions, Regulations And Guidance
[Jesica Speer]
Bonus Depreciation And Expensing
[Allison Tilton]
Possibility Of Marriage Penalty Relief
[Jesica Speer]
Slide 7 – Slide 40
Slide 58 – Slide 60
Slide 51 – Slide 57
Slide 41 – Slide 50
Prospects For AMT Patch
[Allison Tilton]
Slide 61 – Slide 67
Future Of Estate Tax
[Allison Tilton]
Slide 68 – Slide 73
Notice
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY
THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY
OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT
MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR
RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
You (and your employees, representatives, or agents) may disclose to any and all persons,
without limitation, the tax treatment or tax structure, or both, of any transaction
described in the associated materials we provide to you, including, but not limited to,
any tax opinions, memoranda, or other tax analyses contained in those materials.
The information contained herein is of a general nature and based on authorities that are
subject to change. Applicability of the information to specific situations should be
determined through consultation with your tax adviser.
AMT TAXES AND TAX RATES
Jesica Speer, Grant Thornton
Allison Tilton, Reid & Hellyer
© Grant Thornton LLP. All rights reserved. 8
Disclaimer
In accordance with applicable professional regulations, please understand that, unless
expressly stated otherwise, any written advice contained in, forwarded with, or attached to
this document is not intended or written by Grant Thornton LLP to be used, and cannot be
used, by any person for the purpose of avoiding any penalties that may be imposed under
the Internal Revenue Code.
This presentation addresses certain U.S. federal income tax issues only and does not
address state, local or other foreign tax issues. These authorities are all subject to change,
and such change could have retroactive effect. Any such changes could thus have an
effect on the validity of our conclusions. Unless specifically requested, we will not update
this presentation for subsequent changes or modifications to these authorities. Further,
this presentation is based on our interpretation of these authorities; another knowledgeable
party (such as the IRS or a court hearing the same facts) might reach different conclusions.
The advice expressed in the presentation is not an opinion as to the tax consequences of
any transaction.
© Grant Thornton LLP. All rights reserved. 9
A Road Map
AMT taxes and tax rates
• History of Bush tax cuts
• PEP limitation
• Pease limitation
• Modified education tax incentives
• Marginal rates
• Capital gains rates
• Expanded tax credits
• FICA and Medicare taxes
© Grant Thornton LLP. All rights reserved. 10
History Of Bush Tax Cuts
Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)
Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA)
Dec 31, 2010
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation
Act of 2010
Extended through Dec 31, 2012
Slide Intentionally Left Blank
11
© Grant Thornton LLP. All rights reserved. 12
History Of Bush Tax Cuts (Cont.)
"Taxmageddon"
fiscal cliff
© Grant Thornton LLP. All rights reserved. 13
A Road Map (Cont.)
AMT taxes and tax rates
• History of Bush tax cuts
• PEP limitation
• Pease limitation
• Modified education tax incentives
• Marginal rates
• Capital gains rates
• Expanded tax credits
• FICA and Medicare taxes
© Grant Thornton LLP. All rights reserved. 14
PEP Limitation
Reduced by 2% for each $2,500 (or $1,250 for MFS) over applicable threshold
© Grant Thornton LLP. All rights reserved. 15
A Road Map (Cont.)
AMT taxes and tax rates
• History of Bush tax cuts
• PEP limitation
• Pease limitation
• Modified education tax incentives
• Marginal rates
• Capital gains rates
• Expanded tax credits
• FICA and Medicare taxes
© Grant Thornton LLP. All rights reserved. 16
Pease Limitation
Sunset of the phase-out of the phase-out …
Reduced by lesser of 3% of amount by which AGI exceeds applicable
threshold, or 80% of otherwise allowable itemized deductions
© Grant Thornton LLP. All rights reserved. 17
Alternative?
Limit deductibility so that maximum benefit is a 28% reduction in
federal income tax for individuals in proposed 36% and 39.6% tax
brackets
© Grant Thornton LLP. All rights reserved. 18
_______________________________________________________________
Example
© Grant Thornton LLP. All rights reserved. 19
_______________________________________________________________
Example (Cont.)
© Grant Thornton LLP. All rights reserved. 20
Example (Cont.)
_______________________________________________________________
© Grant Thornton LLP. All rights reserved. 21
Example (Cont.)
_______________________________________________________________
© Grant Thornton LLP. All rights reserved. 22
A Road Map (Cont.)
AMT taxes and tax rates
• History of Bush tax cuts
• PEP limitation
• Pease limitation
• Modified education tax incentives
• Marginal rates
• Capital gains rates
• Expanded tax credits
• FICA and Medicare taxes
© Grant Thornton LLP. All rights reserved. 23
Modified Education Tax Incentives
Higher education tuition deduction – Up to $4,000
Student loan interest deduction – Up to $2,500
Slide Intentionally Left Blank
24
© Grant Thornton LLP. All rights reserved. 25
Modified Education Tax Incentives (Cont.)
American Opportunity Tax Credit
Up to $2,500 credit · $0 refundable · (currently up to $1,000
refundable) for qualified expenses incurred during first two years
(currently first four years) of post-secondary education
© Grant Thornton LLP. All rights reserved. 26
Modified Education Tax Incentives (Cont.)
Coverdell education savings account
- Contribution limits revert to $500 (currently $2,000)
- No elementary or secondary school expenses
Employer-provided education assistance
- No more
- Working condition fringe
© Grant Thornton LLP. All rights reserved. 27
A Road Map (Cont.)
AMT taxes and tax rates
• History of Bush tax cuts
• PEP limitation
• Pease limitation
• Modified education tax incentives
• Marginal rates
• Capital gains rates
• Expanded tax credits
• FICA and Medicare taxes
Marginal Rates
IRC §1(a)
• Current rates are reduced individual tax rates (10%, 15%, 25%, 33%,
35%).
• Rates in 2013 rise (to 15%, 28%, 31%, 36%, 39.6%).
• * In 2013, the dollar amount of the ceiling for the 15% tax bracket and
the floor for the 25% tax bracket will decrease/increase to $58,900,.
That represents a decrease to 167% of the amount for unmarried
taxpayers in the same bracket, rather than 200% of the amount for
unmarried taxpayers under current law (see table on next slide).
• Effect: This change will have the effect of putting more middle-
income joint filers in the 28% bracket and increasing the
“marriage penalty” for many taxpayers.
28
Marginal Rates (Cont.)
Tax Brackets (2012 Dollar Amounts) Marginal Rate IRC §1(a)
Unmarried Married Joint
Over But Not Over Over But Not Over 2012 2013
$0 $8,700
$0 $17,400
10% 15%
$8,700 $35,350
$17,400 $70,700*
15% 15%
$35,350 $85,650
$70,700* 142,700
25% 28%
$85,650 $178,650
142,700 217,450
28% 31%
$178,650 $388,850
217,450 388,350
33% 36%
$388,850 … 388,350 … 35% 39.6%
29
A Road Map (Cont.)
AMT taxes and tax rates
• History of Bush tax cuts
• PEP limitation
• Pease limitation
• Modified education tax incentives
• Marginal rates
• Capital gains rates
• Expanded tax credits
• FICA and Medicare taxes
30
IRC §1(h) Reduced LTCG Rates
• Current law – Long-term capital gain (LTCG) rate of 15%
• 2013 maximum LTCG rate 20%
• Other effects:
― Currently, individual taxpayers in the 10% and 15% ordinary income tax
brackets pay no tax on LTCG.
― These taxpayers (new marginal rates 15%) are scheduled to be
subject to a 20% LTCG in 2013.
― An 18% maximum rate will apply to capital assets purchased after 2000
and held for more than five years.
― The 3.8% Medicare contribution tax discussed later will increase the
effective rate of tax on LTCG for certain higher-income taxpayers, to as
high as 23.8%.
31
IRC §1(h) Reduced LTCG Rates (Cont.)
Maximum Rates 2012 2013 2013 (including Medicare contribution Tax)
LTCG 15% 20% 23.8%
Qualified 5-year Capital gain
15% 18% 21.8%
32
Reduced Qualified Dividends Rates
• The Bush tax cuts created the concept of “qualified dividend income”
• Sections 1(h)(11), 163(d)(4)(B), 854(a) and (b), and 857(c); and Sect. 303 of Pub.
L. No. 108-27
• 2013 – Taxed as ordinary income
Maximum Rates 2012 2013 2013 (including Medicare contribution Tax)
Qualified dividend income
15% 39.6% 43.4%
Ordinary dividend income
35% 39.6% 43.4%
33
Slide Intentionally Left Blank
34
A Road Map (Cont.)
AMT taxes and tax rates
• History of Bush tax cuts
• PEP limitation
• Pease limitation
• Modified education tax incentives
• Marginal rates
• Capital gains rates
• Expanded tax credits
• FICA and Medicare taxes
35
Expanded Tax Credits
• IRC §32(b) earned income tax credit (EITC) [sections 32(b)(2),
(c)(2)(A)(i), (h), and 6213(g)(2); and Sect. 901 of Pub. L. No. 107-
16]
• IRC §24 child tax credit (CTC) [sections. 24(a) and (b)(3) and
sections 203 and 901 of Pub. L. No. 107-16]
• IRC §21 dependent care tax credit [sections 21(a)(2) and 21(c) and
Sect. 901 of Pub. L. No. 107-16]
36
Payroll Tax Cut
• FICA imposes two taxes:
― Old age survivor and disability insurance (Social Security
tax)
― Hospital insurance (Medicare tax)
• The 2% reduction to the employee Social Security rate has
been extended through 2012 by the Middle Class Tax Relief and
Job Creation Act of 2012.
― First $110,100 of wages during 2012
― 4.2% Social Security and 10.4% Medicare
• In 2013, revert to 6.2% Social Security and 10.4% Medicare on
all wages
37
A Road Map (Cont.)
AMT taxes and tax rates
• History of Bush tax cuts
• PEP limitation
• Pease limitation
• Modified education tax incentives
• Marginal rates
• Capital gains rates
• Expanded tax credits
• FICA and Medicare taxes
38
New Taxes: Medicare Contribution Tax
• IRC §1411 - Enacted as part of the Patient Protection and Affordable Care Act (PPACA); is
scheduled to take effect regardless of whether Congress extends the Bush tax cuts
• A new 3.8% Medicare contribution tax ) on higher-income individuals, estates and trusts
• Before IRC §1411, Medicare tax has been assessed only on earned income (wages earned by
employees and self-employment income).
• Individuals: The new tax is equal to 3.8% of the lesser of:
― The individual’s net investment income for the year, or
― The amount by which the individual’s modified adjusted gross income (MAGI) exceeds
a threshold amount.
Filing Status Threshold
Individual $200,000
Married joint $250,000
Married separately $125,000
39
Medicare Contribution Tax
• “Net investment income”
― Investment income (for purposes of this act) includes:
― Interest
― Dividends
― Income from trades or businesses that are passive activities
or that trade in financial instruments and commodities
― Net gains from the disposition of property held in a trade or
business that is a passive activity or that trades in financial
instruments and commodities
― Investment income excludes:
― Distributions from qualified retirement plans (IRC sections
401 (a), 403 (a), 403 (b), 408, 408A or 457 (b)).
40
COURT DECISIONS, REGULATIONS AND GUIDANCE
Jesica Speer, Grant Thornton
© Grant Thornton LLP. All rights reserved. 42
A Road Map (Cont.)
AMT taxes and tax rates
Court decisions, regulations and guidance
Bonus depreciation and expensing
Possibility of marriage penalty relief
Prospects for AMT patch
Future of estate tax
© Grant Thornton LLP. All rights reserved. 43
National Federation of Independent
Business et al. v. Sebelius SCt, 2012-2 USTC ¶50,423
Patient Protection and Affordable Care Act
Health Care and Education Reconciliation Act
- All tax provisions upheld
- Largest set of tax law changes in more than 20 years
© Grant Thornton LLP. All rights reserved. 44
National Federation (Cont.)
INDIVIDUAL MANDATE
- Effective Jan. 1, 2014
- All non-exempt individuals must carry minimum essential health coverage for
themselves and their dependents, or face a shared responsibility penalty for each
month of non-compliance.
The individual mandate requires most Americans to maintain
"minimum essential" health insurance coverage. For individuals
who are not exempt and do not receive health insurance through
a third party, the means of satisfying the requirement is to
purchase insurance from a private company.
- Chief Justice Roberts
© Grant Thornton LLP. All rights reserved. 45
National Federation (Cont.)
MEDICAL DEDUCTION THRESHOLD
- Effective Jan. 1, 2013
- Deductible only to the extent they exceed 10% (currently 7.5%) of AGI
- Exception for individuals ≥ 65 before Dec. 31, 2012
© Grant Thornton LLP. All rights reserved. 46
National Federation (Cont.)
ADDITIONAL MEDICARE TAX
- Effective Jan. 1, 2013
- Additional 0.9% Medicare tax on wages and self-employment income that exceed
applicable thresholds ($200,000 single – $250,000 MFJ – $125,000 MFS)
- Employee’s obligation
- Considerations for married filing separately
© Grant Thornton LLP. All rights reserved. 47
National Federation (Cont.)
MEDICARE TAX ON NET INVESTMENT INCOME
- Effective Jan. 1, 2013
- A 3.8% Medicare contribution tax on the lesser of net investment income
or the amount of modified AGI that exceeds applicable thresholds
($200,000 single – $250,000 MFJ – $125,000 MFS)
© Grant Thornton LLP. All rights reserved. 48
National Federation (Cont.)
HEALTH FSA CONTRIBUTIONS
- Effective Jan. 1, 2013
- Contributions limited to $2,500 (currently $5,000)
- Excess contributions taxed on distribution
- Notice 2012-40
© Grant Thornton LLP. All rights reserved. 49
National Federation (Cont.)
MEDICAL DEVICE EXCISE TAX
- Effective Jan. 1, 2013
- A 2.3% excise tax on sale of certain taxable medical devices
- Retail exception, NPRM REG-113770-10
© Grant Thornton LLP. All rights reserved. 50
National Federation (Cont.)
DISCLOSURE OF PERSONAL INFORMATION
PREMIUM ASSISTANCE TAX CREDIT (§36B)
- Authority to disclose certain personal information to HHS (NPRM REG-
119632-11)
- Starting Jan. 1, 2014
- Premium assistance tax credit (Notice 2012-31, TD 9590)
BONUS DEPRECIATION AND EXPENSING
Allison Tilton, Reid & Hellyer
A Road Map (Cont.)
AMT taxes and tax rates
Court decisions, regulations and guidance
Bonus depreciation and expensing
Possibility of marriage penalty relief
Prospects for AMT patch
Future of estate tax
52
Bonus Depreciation And Expensing • Encouraged taxpayers to invest in new property and equipment
• Allowed business taxpayers to accelerate recovery of the costs of purchasing certain
assets by providing accelerated depreciation deductions or immediate expensing
• Bonus depreciation – Additional first-year depreciation
• Job Creation and Worker Assistance Act of 2002
• Accelerated first-year depreciation deduction equal to 30% of the qualifying
property’s cost, for property placed in service after Sept. 10, 2001, and
before Sept. 11, 2004
• Qualifying property generally included new assets with a tax useful life of
20 years or less, purchased pursuant to a contract entered into after Sept. 10,
2001
• In 2003, federal legislation increased the first-year depreciation deduction to
50%, expanded the definition of qualifying property and extended bonus
depreciation through Dec. 31, 2004.
53
Bonus Depreciation And Expensing (Cont.)
• Extended and expanded by the Tax Relief, Unemployment Insurance
Reauthorization, and Job Creation Act of 2010
― Allowed first-year depreciation equal to 100% of the cost of
qualifying property placed in service after Sept. 8, 2010 and
before Jan. 1, 2012
― A deduction of 50% of the asset’s cost is allowed for qualifying
property placed in service after 2011 and before Jan. 1, 2013.
[IRC sections 168(k)(1) and (2)].
• Scheduled to expire Dec. 31, 2012
― After expiration, use modified accelerated cost recovery system
(MACRS) or other alternative depreciation methods for
determining annual depreciation deductions
54
Example Of Expiring Bonus Depreciation
• Business purchased $10,000 of new office furniture in 2011
― Under bonus depreciation provisions, all of the $10,000 cost
could be deducted on the business taxpayer’s 2011 tax return. A
purchase of $10,000 of new office equipment in 2012 would
result in bonus depreciation of 50%, or $5,000, and depreciation
of the remaining $5,000 over a seven-year period beginning in
2012.
― Under the MACRS depreciation provisions, office furniture is
generally depreciable over a seven-year recovery period, with
first-year depreciation limited to 14.29%. So, the total
depreciation deduction in 2012 for the $10,000 of office furniture
purchased would be $5,715 ($5,000, plus $5,000 x 14.29%).
55
Bonus Depreciation And Expensing (Cont.)
• Elections to expense costs to acquire business assets, §179
― Allows certain small business taxpayers to deduct some or
all of the costs of acquiring certain depreciable assets
― Prior to 2011, Sect. 179 allowed for a deduction of up to
$25,000 of qualifying depreciable personal property used
in trade or business activities.
― Elective, made annually and generally available only in
the year the property is first placed in service
56
Bonus Depreciation And Expensing (Cont.)
• Sect. 179 also has been revised in recent years to further encourage
investment in depreciable assets.
• After 2012, the annual deduction limit under Sect. 179 is scheduled to
return to its pre-2003 level of $25,000.
57
POSSIBILITY OF MARRIAGE PENALTY RELIEF
Jesica Speer, Grant Thornton
© Grant Thornton LLP. All rights reserved. 59
A Road Map (Cont.)
AMT taxes and tax rates
Court decisions, regulations and guidance
Bonus depreciation and expensing
Possibility of marriage penalty relief
Prospects for AMT patch
Future of estate tax
© Grant Thornton LLP. All rights reserved. 60
Possibility Of Marriage Penalty Relief
- Effective Jan. 1, 2013
- Standard deduction for MFJ only 167% of singles (currently 200%)
- Upper limit of lower tax brackets for MFJ only 167% of singles
(currently 200%)
- Will affect > 40% of the taxpaying public, per CBO
PROSPECTS FOR AMT PATCH
Allison Tilton, Reid & Hellyer
A Road Map (Cont.)
AMT taxes and tax rates
Court decisions, regulations and guidance
Bonus depreciation and expensing
Possibility of marriage penalty relief
Prospects for AMT patch
Future of estate tax
62
Prospects For AMT Patch
• What is the AMT?
― Additional tax when tentative AMT liability exceeds
regular income tax liability
― Different rate schedule, and different tax base, than
the regular income tax
― The AMT owed is equal to the difference (if any) between
tentative AMT liability and liability under the regular
income tax.
63
Prospects For AMT Patch (Cont.)
• How does the AMT patch work?
― Temporary AMT exemption to prevent AMT liability
― Temporary legislation has allowed taxpayers to use personal,
non-refundable tax credits - (i) credits for child care and (ii) for
higher education - to reduce tentative AMT liability.
― Without “the AMT patch”:
― Exemption would stay at the nominal levels established in
1993;
― Personal, non-refundable credits would be limited or
disallowed by the AMT; and
― AMT would affect more than one-third of all taxpayers in
2012.
64
Slide Intentionally Left Blank
65
Prospects For AMT Patch (Cont.)
• 2011 patch: The Tax Relief, Unemployment Insurance
Reauthorization, and Job Creation Act of 2010 extended the
AMT patch through 2011.
― Exemption of:
― $48,450 for single and head-of-household filer,
― $74,450 for married people filing jointly and
qualifying widows or widowers, and
― $37,225 for married people filing separately.
― The AMT patch also generally included a provision allowing
taxpayers to reduce their AMT by non-refundable personal
tax credits.
― The AMT has two tax rates.
66
AMT Patch 2012
• Absent another patch – AMT exemption amounts are $45,000
for married individuals and $33,750 for unmarried individuals.
― Most non-refundable credits will not be allowed against
the AMT.
AMT Exemption Single Married Filing Jointly
2011 $48,450 $74,450
2012 $33,750 $45,000
67
FUTURE OF ESTATE TAX
Allison Tilton, Reid & Hellyer
A Road Map (Cont.)
AMT taxes and tax rates
Court decisions, regulations and guidance
Bonus depreciation and expensing
Possibility of marriage penalty relief
Prospects for AMT patch
Future of estate tax
69
Future Of Estate Tax
• Not clear what will happen with the estate tax in 2013
• Under current law - Revert back to the 2001/2002 IRC
― The estate tax exemption is scheduled to drop significantly from
$5,120,000 in 2012 to $1,000,000 in 2013 [Sect. 2010].
― The estate tax rate is scheduled to jump from 35% to 55% [IRC
sections 2001 and 2502].
― Modifications of estate and gift taxes to reflect differences in
credit resulting from different tax rates [sections 2001(b)(2),
2001(g), and 2505(a)]
― “Portability” rules permitting a surviving spouse to use the
unused estate and gift tax exemptions of the last deceased spouse
[Sect. 2010]
70
Future Of Estate Tax (Cont.)
• Estate tax deduction for state death taxes paid [IRC sections 2011,
2053, 2058, 2102, 2106 and 2604]
• Expansion and clarification of estate tax conservation easement rules
[IRC sections 2031(c)(2) and (c)(8)(A)(i)]
• Repeal of the qualified family owned business deduction [IRC Sect.
2057]
• Modifications to generation-skipping transfer tax rules regarding
deemed allocations of exemption to certain transfers in trust, severing
of trusts, valuation and relief for late elections [IRC sections 2632(c)
and 2642(a)(3), (b)(1), and (b)(2)(A)]
• Modifications to estate tax installment payment rules [IRC sections
6166(b)(1)(B)(ii), (b)(1)(C)(ii), (b)(8)(B), (b)(9)(B)(iii)(I) and (b)(10)]
71
Estate Tax: Example Of Proposal
• Estate tax provisions in the president’s FY13 budget proposal would:
― Return permanently the estate, gift and generation-skipping
transfer (GST) tax regimes to the 2009 rules (45% top tax rate and
$3.5 million exemption for estate and GST tax, and $1 million for
gift tax, starting in 2013)
― Make permanent the portability of unused exemption amounts
between spouses (starting in 2013)
― Require consistency in value for transfer and income tax purposes
(effective date of enactment)
― Modify the rules on valuation discounts (for transfers after the
date of enactment)
72
Estate Tax: Example Of Proposal (Cont.)
― Require a minimum 10-year term for grantor-retained annuity trusts
(GRATs), and a maximum term of the life expectancy of the
annuitant plus ten years – affecting the ability to use GRATs for
estate tax planning (applicable to trusts created after the date of
enactment)
― Coordinate certain income and transfer tax rules for grantor trusts -
affecting planning with intentionally defective grantor trusts (IDGTs)
― Limit the duration of GST exemption to 90 years (for additions to
pre-existing trusts and trusts created after the date of enactment)
― Extend the lien on estate tax deferrals provided under Sect. 6166 up
to 15 years and three months from the date of death, for decedents
dying after the effective date and pre-existing unexpired liens on the
effective date
73