The Wisdom of Heraclitus

Guest Column
William N. Kirk, Attorney Gould, Cooksey, Fennell, PA J. Vince Boyle, CPA Morgan, Jacoby, Thurn, Boyle & Associates

Heraclitus, an ancient Greek philosopher who lived about 100 years before Plato, observed, Nothing is permanent except change, and it seems he aptly described the status of our tax code over the last several years. While additional changes in our tax code may be coming soon, the following are some recent changes that may be helpful in advising clients during the balance of 2013 and into 2014. Maximum income tax rate increased to 39.6% Capital gain rates increased from 15% to 20% New Net Investment Income Surtax of 3.8% Limitations on itemized deductions and personal exemptions Estate, Gift and Generation-Skipping Transfer Tax Exemptions and Rates Spousal portability made permanent Annual gift tax exclusions increased to $14,000 Reporting of foreign gifts

Income Tax Rates For 2013 and subsequent years, the individual income tax rates reflect a continuation of the Bush era tax cuts, except for the addition of a new 39.6% rate for the highest bracket. The starting taxable income for the 39.6% bracket for 2013 is: Married filing jointly and surviving spouse Heads of household Unmarried individuals Married filing separately Estates and non grantor trusts $450,000 425,000 400,000 225,000 11,950

Because the rates for estates and trusts starts at a relatively low level of taxable income, executors and trustees should consider making distributions before year end, which will generally pass that amount of taxable income to beneficiaries, who may be taxed at a lower rate.

Capital Gains / Dividends Starting in 2013, the maximum tax rate for long term capital gains and qualified dividends has been raised to 20%. Short term capital gains may also be subject to a higher rate (39.6% instead of 35%) as a result of increased individual income tax rates effective for 2013. Holding capital assets for more than 12 months is generally advisable to avoid short term capital gain status. Year end planning should also include a review of capital gains and potential capital losses in portfolios to minimize potential income taxes. Surtax on Net Investment Income Starting in 2013, higher income taxpayers may also be subject to a 3.8% Net Investment Income (NII) Tax in addition to the regular income tax. The NII surtax equals 3.8% of:
1. Net investment income for the year, or 2. The excess, if any of: The individuals modified adjusted gross income for the year, over The threshold amount

The threshold amount is equal to:

$250,000 in the case of joint filers or a surviving spouse $125,000 in the case of a married taxpayer filing a separate tax return, and $200,000 in any other case.

The NII surtax also applies to estates and non grantor trusts. The threshold amount for estates and trusts is $11,950. Pease Limitation and Personal Exemption Phaseout For 2013, the personal exemption phaseout has been revived. Under the phaseout, the total amount of exemptions that may be claimed by a taxpayer is reduced by 2% for each $2,500, by which the taxpayers adjusted gross income exceeds the applicable threshold amount. The Pease limitation on itemized deductions for higher income taxpayers has also been reinstated for 2013 and later years. The Pease limitation reduces the total amount of otherwise allowable itemized deductions by 3% of the amount by which the taxpayers adjusted gross income exceeds the applicable threshold amount. However, the amount of the itemized deductions is not reduced more than 80%. Certain items such as medical, investment interest and casualty losses are excluded. The threshold amounts for the Pease limitation and personal exemption phaseout are:
$300,000 for married taxpayers and surviving spouses; $275,000 for heads of households; $250,000 for unmarried taxpayers: and $150,000 for married taxpayers filing separately.

Estate, Gift and Generation-Skipping Transfer Tax Exemptions and Rates While many wealthy individuals considered making large taxable gifts before the end of 2012 because of the scheduled reduction of the estate tax exclusion amount, ultimately, the temporary increase and unified exclusion amounts for 2011 and 2012 were made permanent for 2013 and future years. For gifts made and estates of decedents dying in 2013, the exclusion amount will be $5,250,000, and the GST tax exemption is the same amount. For 2014, this amount increases to $5,340,000. The applicable gift and estate tax rate was 35% for 2012, but is now 40% for 2013 and future years. Spousal Portability The ability of a spouse to take advantage of his or her deceased spouses unused exclusion amount was also continued and made permanent at the end of 2012. While this election may, if properly utilized, allow a married couple to pass $10,500,000 at the death of the surviving spouse without incurring any federal estate tax, it is important to remember that to take advantage of this technique, an election must be made on a timely filed estate tax return, even if an estate tax return would not otherwise be required upon the death of the first spouse. In addition, there are several other potential risks that should be considered in relying on spousal portability instead of the traditional use of a trust to capture all or a portion of the decedent spouses applicable exclusion amount. Accordingly, you should consult your professional advisor with regard to this matter. Gift Tax Annual Exclusion For gifts made in 2013, the gift tax annual exclusion will be $14,000, and will continue to be $14,000 in 2014. Reporting Foreign Gifts If a U.S. person receives a gift from a nonresident alien individual or foreign estate, an appropriate report on Form 3520 must be filed with the IRS if the aggregate amount of gifts from that person or foreign estate exceeds $100,000 during the tax year. For gifts received from foreign corporations and foreign partnerships, the reporting threshold amount is $15,102 for 2013 and that amount increases to $15,358 in 2014. *** We hope that you will find this information helpful as you advise your clients this season. However, please be mindful that this is only a summary of recent tax changes, and Heraclitus predicts more changes will be forthcoming.

William N. Kirk Gould Cooksey Fennell

J. Vincent Boyle Morgan, Jacoby, Thurn, Boyle & Associates