Take a look at this new infographic we created showing the tax environment in Illinois.
Take a look at this new infographic we created showing the tax environment in Illinois.
Is your child taking a job this summer? If so, you both may have questions about taxes. The following information may be helpful.
For 2014, your child can earn as much as $6,200 and not pay a dime in federal income taxes. If your child’s earnings won’t exceed this amount, consider having the child claim “student – exempt” when completing the federal withholding allowance certificate (Form W-4). If this is the child’s only income and the total doesn’t exceed the $6,200 limit, he or she then won’t have to file a 2014 tax return.
Don’t overlook the fact that there will still be withholding from your child’s paycheck for social security and Medicare taxes. But those payments are not income taxes, and they cannot be refunded to the child.
Keep in mind that self-employment income, tips, and interest, dividends, and stock sales can affect your child’s tax return filing requirement.
Realize also that as long as you provide more than half of your child’s support, you can continue to claim the child as an exemption on your tax return. Your child will lose his or her exemption, but that exemption deduction is typically more valuable to you than to your child.
If you need more details about the tax implications of your child’s summer job, give us a call. We’re happy to help.
The tax side of the “Fiscal Cliff” has been averted. The American Taxpayer Relief Act allows the Bush-era tax rates to sunset after 2012 for individuals with incomes over $400,000 and families with incomes over $450,000; permanently “patches” the alternative minimum tax (AMT); revives many now-expired tax extenders, including the research tax credit and the American Opportunity Tax Credit; and provides for a maximum estate tax of 40 percent with a $5 million exclusion. The bill also delays the mandatory across-the-board spending cuts known as sequestration.
The Act is nowhere close to the grand bargain as envisioned by the President and many lawmakers after the November elections. Effectively, it is a stop-gap measure to prevent the onus of the expiration of the Bush-era tax cuts from falling on middle income taxpayers. Congress must still address sequestration. Congress is likely to revisit tax policy and spending cuts when it tackles the expected increase on the nation’s debt limit in February. Slowing the growth of entitlements, such as through a “chained-CPI” is certain to be a controversial topic in upcoming debates.
The devil is in the details and we are still going through the new law carefully, but here are the major tax provisions:
INDIVIDUALS & FAMILIES
• Individuals with incomes above the $450,000/$400,000 thresholds ($450,000 for joint filers; $425,000 for heads of household) will pay more in taxes because their tax rate rises to 39.6 percent income tax rate and a 20 percent maximum capital gains tax;
• All taxpayers will find less in their paycheck in 2013 because the Act did not extend the 2012 payroll tax holiday that had reduced social security taxes from 6.2 percent to 4.2 percent on earned income up to the wage base ceiling ($113,700 for 2013);
Marriage Penalty Relief
• The Act extends all existing marriage penalty relief;
Permanent AMT Relief
• The new law “patches” the Alternative Minimum Tax (AMT) for 2012 and subsequent years by increasing the exemption amounts and allowing nonrefundable personal credits to the full amount of the individual’s regular tax and AMT. Additionally, the Act provides for an annual inflation adjustment to the exemption amounts for years beginning after 2012. The legislation permanently increases the exemption amounts to $50,600 for single filers, $78,750 for joint filers and $39,375 for married taxpayers filing separately;
Capital Gains/Dividends Sunsets
• Dividends and long-term capital gains are taxed at 20% for individuals making over $400,000 ($450,000 for joint returns);
Personal Exemption Phase-Out
• The personal exemption phase-out is reinstated with a starting threshold of $300,000 for joint filers and a surviving spouse, $275,000 for heads of household, $250,000 for single filers, and $150,000 for married taxpayers filing separately. Under the phase-out, the total amount of exemptions that can be claimed by a taxpayer subject to the limitation is reduced by 2% for each $2,500 (or portion thereof) by which the taxpayer’s adjusted gross income (AGI) exceeds the applicable threshold;
Itemized Deduction Phase-Out
• The itemized deduction phase-out is reinstated with a threshold of $300,000 for joint filers and a surviving spouse, $275,000 for heads of household, $250,000 for single filers, and $150,000 for married taxpayers filing separately. Under this phase-out, the total amount of itemized deductions is reduced by 3% of the amount by which the taxpayer’s AGI exceeds the threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions;
Mortgage Insurance Premiums
• This provision treats mortgage insurance premiums as deductible interest that is qualified residence interest. The Act extends this provision through December 31, 2013.
State and Local Sales Tax Deduction
• The Act extends through 2013 the election to claim an itemized deduction for state and local general sales taxes in lieu of state and local income taxes;
Earned Income Credit
• The Act makes permanent or extends through 2017 enhancements to the earned income credit (EIC) in Bush-era and subsequent legislation.
Child Care Credit
• The Act extends permanently the $1,000 child tax credit. Certain enhancements to the credit under Bush-era legislation and subsequent legislation are also made permanent;
•The Act extends permanently Bush-era enhancements to the adoption credit and the income exclusion for employer-paid or reimbursed adoption expenses up to $10,000 (indexed for inflation) both for non-special needs adoptions and special needs adoptions;
Child And Dependent Care Credit
• The Act extends permanently Bush-era enhancements to the child and dependent care credit. The current 35 percent credit rate is made permanent along with the $3,000 cap on expenses for one qualifying individual and the $6,000 cap on expenses for two or more qualifying individual;.
Employer-Provided Child Care Credit
• The Act extends permanently the Bush-era credit for employer-provided child care facilities and services;
American Opportunity Tax Credit
• The Act extends through 2017 the American Opportunity Tax Credit (AOTC). The AOTC is an enhanced, but temporary, version of the permanent HOPE education tax credit;
Deduction For Qualified Tuition And Related Expenses
• The Act extends until December 31, 2013 the above-the-line deduction for qualified tuition and related expenses. The bill also extends the deduction retroactively for the 2012 tax year;
Student Loan Interest Deduction
• The Act extends permanently suspension of the 60-month rule for the $2,500 above-the-line student loan interest deduction. The Act also expands the modified adjusted gross income range for phaseout of the deduction permanently and repeals the restriction that makes voluntary payments of interest nondeductible permanently;
Coverdell Education Savings Accounts
• The Act extends permanently Bush-era enhancements to Coverdell education savings accounts (Coverdell ESAs). These enhancements include a $2,000 maximum contribution amount and treatment of elementary and secondary school expenses as well as postsecondary expenses as qualified expenditures;
Employer-Provided Education Assistance
• The Act extends permanently the exclusion from income and employment taxes of employer-provided education assistance up to $5,250;
Teachers’ Classroom Expense Deduction
• The Act extends through 2013 the teacher’s classroom expense deduction. The deduction, which expired after 2011, allows primary and secondary education professionals to deduct (above-the-line) qualified expenses up to $250 paid out-of-pocket during the year;
Exclusion Of Cancellation Of Indebtedness On Principal Residence
• Cancellation of indebtedness income is includible in income, unless a particular exclusion applies. This provision excludes from income cancellation of mortgage debt on a principal residence of up $2 million. The Act extends the provision for one year, through 2013;
IRA Distributions to Charity
• The new law extends for two years, through December 31, 2013, the provision allowing tax-free distributions from individual retirement accounts to public charities, by individuals age 70 & 1/2 or older, up to a maximum of $100,000 per taxpayer per year;
Energy Credits For Individuals
• The credit is available to individuals who make energy efficiency improvements to their existing residence. The lifetime credit limit is $500 ($200 for windows and skylights) under the 2010 tax bill. The Act extends the credit at the $500 level through December 31, 2013;
ESTATES AND GIFTING
• The Act permanently extends the inflation adjusted $5 million exemption for estate, gift, and generation-skipping transfer tax purposes. The top estate, gift and GST rate is increased from 35% to 40%;
• The new law makes permanent “portability” between spouses. Under the portability rules, the estate of a decedent who is survived by a spouse can elect to apply any unused exclusion amount to the surviving spouse’s own transfers during life and at death. The portability provision was made permanent by this legislation;
State Death Tax Credit/Deduction
• The Act extends the deduction for state estate taxes;
• The payroll tax holiday for the Social Security tax was allowed to expire. Consequently, the employee-share of social security taxes reverts back to 6.2% (from 4.2%);
• The Act extends 50 percent bonus depreciation through 2013. Some transportation and longer period production property is eligible for 50 percent bonus depreciation through 2014. It now generally applies to property placed in service before January 1, 2014 (January 1, 2015, for certain property with longer production periods);
Section 179 Small Business Expensing
• The Act extends through 2013 enhanced Section 179 small business expensing. The Section 179 dollar limit for tax years 2012 and 2013 is $500,000 with a $2 million investment limit. Before the Act, expensing limit was set at $139,000. The rule allowing off-the shelf computer software is also extended;
Research Tax Credit
• The Act extends through 2013 the research tax credit, which expired after 2011. The incentive rewards taxpayers that engage in qualified research activities with a tax credit;
Work Opportunity Tax Credit
• The Act extends through 2013 the Work Opportunity Tax Credit (WOTC), which rewards employers that hire individuals from targeted groups with a tax credit;
Qualified Leasehold/Retail Improvements, Restaurant Property
• The Act extends through 2013 the 15-year recovery period for qualified leasehold improvements, qualified retail improvements and qualified restaurant property;
Energy tax incentives extended by the Act through 2013, include:
▪ Credit for energy-efficient new homes;
▪ Credit for energy-efficient appliances;
More Business Tax Extenders
A number of other business tax extenders expired after 2011 and they are extended through 2013 under the new law.
They include, among others:
▪ 100 percent exclusion for gain on sale of qualified small business stock;
▪ Reduced recognition period for S corporation built-in gains tax;
▪ Enhanced deduction for charitable contributions of food inventory;
▪ S corporations making charitable donations of property;
Not extended. Certain business provisions were not extended by the Act. These include:
▪ Enhanced deduction for corporate charitable contributions of book inventory;
▪ Enhanced deduction for corporate charitable contributions of computers.
Rest assured as we meet with you to discuss your 2012 taxes, we will outline more specifically how the new tax law will impact you directly. If you have questions, please give us a call at (630) 665-4440.
President Obama has been re-elected and the potential for continued gridlock between the House of Representatives and the Senate is as prevalent as before the election. This results in considerable uncertainty for taxpayers with respect to their income and estate tax planning.
On the income tax side, the significant increases in rates already programmed into the law for January 1st may actually occur. This could be a significant burden upon single individuals who earn more than $200,000 per year and married couples who earn more than $250,000 per year.
The scheduled income tax increases include a highest bracket of 39.6% instead of the present 35%, an increase in the capital gains tax rate from 15% to 20%, taxing dividends as ordinary income and a new 3.8% tax on interest, dividends, net rent, and other passive income to the extent that the taxpayer has total earnings exceeding the $200,000 and $250,000 thresholds.
Actions To Consider Before Year-end
Income tax planning steps that might be worth considering include the following:
• Analyzing when to take deductions and losses. Although the general rule of thumb is to accelerate tax deductions and losses, because of the possible tax rate rise, the opposite approach might sometimes be advisable. Thus, many taxpayers will benefit from deferring income tax deductions and losses until 2013 when higher marginal tax rates will make these deductions and losses more valuable. But it’s not automatic. If restrictions on specific deductions are enacted, then it may only prove worthwhile deferring deductions that themselves are not restricted or eliminated. The reinstatement of the 3% AGI phase out of itemized deductions may make many deductions of little or no value next year regardless of changes in marginal tax rates.
• If rates will be higher next year, then accelerating capital gains into 2012 will prove advantageous. This could avoid the income tax at higher rates in 2013 as well as the Medicare surtax. Avoiding the increase in long-term capital gains and the health care surtax by harvesting gains this year will sound appealing, but it will not always prove advantageous. You must evaluate the trade-off between paying lower taxes and the loss of tax deferral by trigging the gain.
• Bonus depreciation and Section 179 deductions are important to consider as you plan asset acquisitions near year end. If you buy a new car should you buy it now or in January 2013 when income tax rates are higher and you may qualify for a Section 179 deduction?
• If you can get paid this year the income may be taxed at a lower rate than next year.
In the estate tax arena the chips are even higher, as the present $5,120,000 gifting and estate tax exemptions would drop to $1,000,000 on January 1! This is why many clients have been working with us to make gifts exceeding $1,000,000 make use of all or part of the $5,120,000 temporary gifting allowance, an opportunity which may never exist again. In addition to this, the estate tax rate, which is now only 35%, would go up to 55%!
Many clients have a concern that if they gift too much away they could run out of assets. Popular solutions to this have been (1) have a spouse as a beneficiary of the trust and assume that as long as the spouse is alive the donor can derive indirect benefit by being supported by the spouse while the spouse is being supported by the trust, and (2) forming the trust in an asset protection jurisdiction, since the IRS has ruled in at least one case that the contributor can be a discretionary beneficiary and actually receive the benefit of trust assets if and when needed.
Another option is to consider putting an irrevocable trust into place that can hold assets that would not be subject to federal estate tax, but would be considered as owned by the grantor for income tax purposes. This is because two very important estate and gift tax provisions that presently exist for these trusts would be eliminated if President
Obama’s February 2012 budget suggestions are adopted, which are as follows:
1. Presently the grantor can pay the tax on dividends, interest and other income earned by such a trust, which accelerates the growth of the assets that would pass free of estate tax.
Under President Obama’s proposal, this type of trust would be subject to estate tax on the death of the grantor. Trusts existing before the end of this year probably would be grandfathered. The effect of paying the income tax on trust earnings and selling assets or discounted family interests to the trust in exchange for a low interest note has an incredible mathematical value.
2. Presently this type of trust can be used to avoid estate tax not only at the grantor’s level, but also at the level of generations of descendants going for as long as 360 years if the trust is formed in Florida.
President Obama’s proposal would limit this “generation skipping dynasty” trust effect to 90 years.
In addition, many clients are selling family business ownership interests to these types of trusts before year-end because we can presently value non-voting or minority interests in family entities using discounts. President Obama’s 2012 budget proposal would eliminate discounts.
The Republican House of Representatives may be able to resist having some of these new restrictive estate tax provisions enacted, but what will the trade-off be for raising the estate tax exemption above $1,000,000 per taxpayer? President Obama’s February 2012 budget called for a $3,500,000 per taxpayer estate tax exemption but did not address the gifting exemption. Since many wealthy individuals have probably used their $5,120,000 gifting exemption in 2011 and 2012, we may not see significant resistance to allowing the gift tax exemption to go down to $1,000,000.
So what are people to do between now and December 31, 2012?
If In Doubt Gift It Out! – Many clients with a net worth in the $2,000,000 to $4,000,000 range have stopped annual gifting in the hopes that the $5,120,000 exemption will continue. Since that now seems highly unlikely, it may be a good idea to complete normal 2012 year end gifts to make maximum use of the $13,000 per person annual exclusion.
Also, remember that the Obama budget proposals would largely curtail grantor retained annuity trust planning by requiring a minimum 10 year term and a positive remainder interest.
Hopefully, there will be a political compromise with respect to both income and estate taxes between now and year-end. But most experts believe that this will likely not be sorted out until 2013, with the compromise to be retroactive to January 1, 2013.
Please contact us if you have any questions or if we can be of assistance between now and year end.