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Posted over 10 years ago

YEAR END 2013 CHANGES & OPPORTUNITIES Obama Care & ATRA

Year end 2013 brings many new planning opportunities along with the traditional year end tax planning strategies. There are also new challenges for both individuals and businesses including important changes made by the American Taxpayer Relief Act of 2012 (ATRA) and the provisions in the Affordable Care Act. On top of everything, the IRS shutdown in October could delay the start of the 2014 filing season

Tax planning does not have to be as dreadful as some people will have you believe, if you know how to plan and what to consider when planning for your taxes. This is probably one of the most important and consistent financial issues you will face. It is a good idea to stay abreast of your tax obligations and responsibilities. Whether you are an individual tax payer or business owner, a tax professional has the knowledge and experience to make the task as beneficial for you as possible.
Although the new laws are primarily designed to increase taxes for those with higher levels of income, everyone with earned income is affected. In this article, we will explore some of the changes and advise you on how to prepare your end of year taxes.

Increased Social Security Tax
At a basic level, anyone with earned income has seen a reduction in take-home pay this year as a result of the first tax law change. The employee Social Security tax rate, which was reduced from 6.2% to 4.2% in 2011 and 2012, is back to 6.2%.

Six Changes for High Income Levels
There are a total of six changes to be aware of once your income exceeds the $200,000 single or $250,000 married filing joint (MFJ) levels. Two of the changes begin at these levels, two at $250,000 (single) or $300,000 (MFJ), and two at $400,000 (single) or $450,000 (MFJ), with different definitions of income associated with each change.

1. Medicare earned income tax increase
The Medicare tax on earned income increased from 1.45% in 2012 to 2.35% in 2013 on earned income exceeding $200,000 (single) or $250,000 (MFJ) if modified adjusted gross income (MAGI) also exceeds these threshold amounts

2. New Medicare investment income tax
The Medicare investment income tax is a brand new tax that penalizes individuals with MAGI exceeding $200,000 (single) or $250,000 (MFJ) with taxable interest, dividends, and capital gains, as well as rental, royalty, and nonqualified annuity income, otherwise known as "investment income." A surcharge of 3.8% is assessed on the lesser of net investment income or MAGI in excess of the applicable threshold amounts.

3. Itemized deductions limitation
Repealed in 2010, the itemized deductions limitation was reintroduced this year with adjusted gross income (AGI) exceeding $250,000 (single) or $300,000 (MFJ). It reduces otherwise allowable itemized deductions by 3% of the amount by which AGI exceeds the threshold amounts with some exceptions.

4. Personal exemption phase out
Also repealed in 2010, the personal exemption phase out reduces the personal exemption amount of $3,900 per individual in 2013. The amount of the reduction is 2% for each $2,500 in excess of AGI threshold amounts of $250,000 (single) or $300,000 (MFJ).

5. Income tax bracket increase
Individuals with taxable income (TI) of $400,000 (single) or $450,000 (MFJ) will see an increase of 4.6% in their top tax bracket, with the 2012 top bracket of 35% increasing to 39.6% in 2013 on income exceeding these thresholds

6. Long-term capital gains and qualified dividends tax rate increase
The federal income-tax rate on long-term (assets held longer than one year) capital gains and qualified dividends increased from 15% to 20% for individuals with TI exceeding $400,000 (single) or $450,000 (MFJ).

Recent questions from my blog
Question: "I plan to buy a rental property with cash from personal assets (stock market) and I plan to have the title held in an s-corp, for liability protection. Is there liability protection value in having the s-corp borrow money from me for the purchase? Assuming the s-corp buys the property for $250k, then the s-corp would have the $250k property as an asset and no liability. If sued, the s-corp risks losing the property. If the s-corp secures a loan from me for the purchase, would it limit the exposure if sued? Would $250k in assets be offset by a $250k loan... giving s-corp $0 on the balance sheet?

My Answer: I usually advise clients with rental properties to put the assets in a Multi-member LLC. for the protection of the equity. You can have the LLC execute a loan package on the property equal to the $250k so that there is an asset and a liability hus deterring not preventing lawsuits

Question: "Doing some light research on accelerated depreciation of rental R.E. ?Does anyone use these techniques? Are they sound from an IRS standpoint. Also, can someone describe the person this technique would work the best for? I'm guessing someone in the higher tax brackets would get the best results from this. Is this true? Thanks in advance, and yes, I realize 99% of us are NOT CPAs."

My Answer: I am a CPA and a real estate investor. I typically use this strategy for my clients who are able to deduct rental activities as passive investments and the accelerated deprecation does not put them over the threshold for the passive loss limitations. For rentals, it is not just about getting the deduction but being able to deduct it because you are not subject to the passive loss rules. If you are subject to the passive loss rules because you make over $100k and you do not spend more time in real estate than in any other active profession, then there is no need to accelerate.

There are a lot of changes to your taxes to absorb. Let us work with you to figure out the best solution for your tax situation. Contact us for a FREE consultation at 1.888.502.3767


Comments (1)

  1. Thanks for the info! I WISH i was in the 200k bracket to have these question :-) I have a follow up to your last question about passive losses: If I have 2 LLCs for rental properties, and each has losses of 20k, am I stuck with 25k in passive losses, or is that per business entity? There is never any clarity on this one that I could find by going to the irs.gov website