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2013 Tax Planning Newsletter

DearClientsandFriends,

Afterweeksofnegotiatingthat,attimes,lookedasthoughitwouldaccomplishnothing,Congress
finallyagreedonlegislationtoavoidthetaxpartofthefiscalcliff.Intheearlymorninghoursof
January1,2013,theSenatepassedtheAmericanTaxpayerReliefActof2012,sendingthebilltothe
Housewhereitwaspassedlaterthatday.PresidentObamasignedthebillintolawonJanuary2.
ThenewlawkeepstheBusherataxcutsforthemajorityoftaxpayers,butaddsa39.6%tax
bracketforsingleswithincomeinexcessof$400,000andcoupleswithincomeover$450,000.The
lawpermanentlyfixesthealternativeminimumtaxandpermanentlysetstheestatetaxtoprateat
40%withanexemptionof$5,000,000.Capitalgainsanddividendswillcontinuetobetaxedat2012
rates,exceptforahigher20%rateonhigherincometaxpayers.Thelawdidnotextendthe2%
reductioninpayrolltaxesonwagesandselfemploymentincomebeyond2012.
Anewyearandnewtaxlegislationalwaysprovidefreshopportunitiesfortaxplanning.ThisNew
YearLetterisbeingsenttoyouasareminderofourcommitmenttohelpyouminimizeyourtaxes.
WehopeyoufindtheLetterinformativeandhelpful.Pleasecontactusifwecanassistyouinyour
planningandinmeetingyourtaxfilingobligations.

Putthepiecestogetherfortaxsavingsin2013
Beginningoftheyeartaxplanningiskeytoidentifyingopportunitiesandpitfallsthatlieahead
asyoubeginimplementingpersonalandprofessionalgoalsfor2013.Herearequestionsthatwill
helpyoustarttoestimateandmanagetheimpactofrecentlegislationaswellasrulesfromprevious
lawsthattookeffectonJanuary1.

Whatsyouranticipatedincome?
Anewtaxrateof39.6%whenyourtaxableincomeexceeds$400,000($450,000whenyoure
marriedfilingjointly)isjustonereasontocreateanincomeprojectionfor2013.
Anotherreason:Additionalratechangestakeeffectthisyear.Forexample,themaximumlong
termcapitalgainrateincreasedto20%whenyourincomeputsyouinthehighestordinaryincome
taxbracket.Inaddition,a3.8%surtaxmayapplytonetinvestmentincomeatermthatincludes
interest,dividends,andcapitalgainswhenyourmodifiedadjustedgrossincome(AGI)exceeds
$250,000($200,000ifyouresingle).
Ifyouneedmoreincentivetorunthenumbersearly,anolderrulebasedonAGIhasbeen
reinstatedthisyear:thephaseoutofthedeductionforpersonalexemptions.Yourdeductionfor
yourself,yourspouse,andyourdependentswillbereducedwhenyouremarried,filingajoint
return,andyourAGIisgreaterthan$300,000($250,000ifyouresingle).
Planningsuggestion:Incomedeferralisagoodstrategywhenyouexpecttobesubjecttohigher
ratesandphaseouts.Onewaytopushincomeintothefutureisbymakingthemostof
contributionstoyouremployersqualifiedretirementplan.Pretaxcontributionsreduceadjusted
grossincome.

Whattypesofincomedoyouexpecttoreceive?
Sortinginflowsintovariouscategoriessuchaswages,investments,retirementplandistributions,
passiveincome,andactivebusinessincomegivesyouaclearerpictureofwhattaxruleswillapply.
Forinstance,thisyearyoullpayanadditional0.9%Medicaretaxonwagesandselfemployment
incomewhenthecombinedtotalofthoseitemsexceeds$250,000onajointreturn($200,000when
yourefilingassingle).
Thistaxisseparatefrom,andbasedonadifferenttypeofincomethanthe3.8%netinvestment
incometax.Dependingonthesourcesofyourincome,youmaybesubjecttobothtaxes.

Planningsuggestion1:Investigatepretaxfringebenefitoptions.The0.9%additionaltaxis
assessedonwagessubjecttoMedicaretax.Healthinsurancepremiumspaidunderyour
employerscafeteriaplanareexemptfromMedicaretax,asarecontributionsmadebyyour
employertoqualifiedretirementplans.

Planningsuggestion2:Switchtaxableinvestmentsespeciallythosewithabuiltinlossto
municipalbonds.Taxexemptinterestisnotconsiderednetinvestmentincomewhencalculating
the3.8%tax.

Planningsuggestion3:Placeincomegeneratinginvestmentsinretirementaccounts.Future
withdrawalscanincreaseyouradjustedgrossincome,butarenotthemselvessubjecttothenet
investmentincometax.

Planningsuggestion4:MaketaxfreedistributionsfromyourtraditionalIRAtoqualifiedcharities
whenyoureoverage70.Thisprovisionwasextendedthroughtheendof2013.

Planningsuggestion5:Increasetheamountoftimeyouactivelyparticipateinrentalrealestate
activities,andevaluatetheeffectofgroupingyourpropertiesinordertocombinethetimespent
managingthem.

Planningsuggestion6:Evaluatethelegalformofyourbusiness.Flowthroughincomefroman
Scorporationinwhichyouactivelyparticipateisnotgenerallysubjecttoeitherofthenewtaxes.
Also,dependingonyourpersonaltaxrate,youmaywanttotakeanotherlookatconvertingto
Ccorporationstatus.

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Whattaxadvantagedexpensesshouldyoubudgetfor?
Educationexpensesandenergyimprovementsaretwoareasofopportunityforpersonaltax
savings.

Planningsuggestion1:Coordinatepaymentsforhighereducationexpensesbetween529plans
andothersourcestogetthemostbenefitfromcreditsanddeductions,suchasthenewlyextended
AmericanOpportunityCreditandthequalifiedtuitiondeduction.

Planningsuggestion2:Ifyouhaventalreadytakenadvantageofthetaxincentiveforenergy
efficientimprovementstoyourhome,2013maybetheyeartoinstallfurnaces,windows,doors,or
skylights.Qualifyingpurchasesareeligibleforafederalcredit,whichcanreduceyourliabilityby
upto$500.

Planningsuggestion3:Itemizeddeductionsneedscrutiny,becauseyourbenefitmaybelimitedin
2013.Whenyouremarriedfilingajointreturn,thereductionbeginsonceyouradjustedgross
incomeexceeds$300,000.Thethresholdis$250,000whenyouresingle.Inaddition,whenyoure
underage65,medicalexpensesmustnowexceed10%ofyourAGItobedeductible.

Planningsuggestion4:Reviewyourmultiyearbunchingstrategy,andchoosethemosttax
advantageoustimetoscheduleelectiveexpenses.Remembertoincludecostsyoupayfor
dependents,aswellasotherfamilymembersforwhomyouprovidesupport.

Planningsuggestion5:Areyouabusinessowner?Acceleratedwriteoffsareavailableforassets
youpurchaseandplaceinservicethisyear,includingvehicles,equipment,andsoftware.For2013,
themaximumSection179deductionis$500,000.Bonusdepreciationofupto50%ofanassets
costisalsoanoption.

Evenwiththeextensionofmanyoldrules,thereareenoughchangesthatgointoeffectthisyear
thattaxplanningisreallyessential.Contactourofficeearlyin2013toidentifytaxsaving
opportunitiessuitedtoyourindividualsituation.

2012rulesextendedformosttaxpayers
Fiscalcliffavoidedwithlastminutelaw
ItscalledtheAmericanTaxpayerReliefActof2012,andabigpartofthereliefishavingsome
certaintyfortaxplanningin2013.Withafewexceptions,manyfamiliarfederalrulesremainin
effect.
Forexample,unlessyourtaxableincomeexceeds$450,000whenyourfilingstatusismarried
andyoufileajointreturn($400,000whenyouresingle),your2013federalincometaxrateswill
rangefrom10%to35%.Therateontaxableincomeabovethoseamountsis39.6%.In

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addition,themaximumlongtermcapitalgaintaxrateisthesameasprioryearsuntilyour
taxableincomereachesthe$450,000/$400,000thresholds.Youllstillbenefitfromthe0%rate
oncapitalgainsandqualifieddividendswhenyoureinthe10%or15%taxbrackets.
In2011and2012,taxpayersenjoyedapayrolltaxholidayintheformof2%lowersocial
securitytaxesonwagesandselfemploymentearnings.Thenewlawdidnotextendthelower
ratebeyond2012,andtaxpayerswillonceagainpaysocialsecuritytaxata6.2%,not4.2%,rate.
Onebigareaofuncertaintythealternativeminimumtaxexemptionwasfixed.Withoutthis
latestfix,anestimated30millionfilerswouldhavebeenrequiredtopaythealternative
minimumtaxforthe2012taxyear.The2012exemptionamountof$78,750whenyoure
marriedfilingjointly($50,600forsingles)isnowpermanent,andsubjecttoannualadjustments
forinflation.
Forthoseaged70andolder,taxfreedistributionstoqualifiedcharitiesfromyourtraditional
IRAarestillanoptionfor2013.
Youcanstillexcludecancellationofdebtincomefromaforeclosureorshortsaleofyourhome.
Youcancontinuetotakeadvantageofthechildtaxcredit,thecreditforinstallingenergy
efficientimprovementsinyourhome,andtheAmericanOpportunityCreditwhenyoupay
qualifyingeducationalexpenses.
TheActalsoextendedseveraldeductions,includingtheoptionaldeductionforstateandlocal
salestaxes,mortgageinsurancepremiums,studentloaninterest,andteacherpaidclassroom
expenses.
Newrulestokeepinmindincludethereturnofthelimitationonitemizeddeductionsand
personalexemptions.Whenyouremarriedfilingjointly,andyouradjustedgrossincomeismore
than$300,000,thetotalamountyoucanclaimforthesetwoitemsisreduced.Thethresholdis
$250,000ifyourefilingassingle.
Thenewlawavoidsdrasticchangesforseveralestateandgifttaxprovisionsthathadofficially
endedafter2012.Significantly,theestatetaxexemption,whichhadbeenscheduledtodropto$1
millionfrom$5million(inflationindexedto$5.12millionin2012)remainsat$5millionwith
inflationindexing.Portabilityofexemptionsbetweenspousesispreserved.Thetopestatetax
rate,whichhadbeenscheduledtoincreasefrom35%to55%in2013,isbumpedupto40%.The
estateandgifttaxchangesarepermanent.
Ifyouownabusiness,youcanbenefitfromtheincreasedSection179deductionofupto
$500,000ofthecostofequipmentpurchasedin2012and2013.50%firstyearbonus
depreciationisavailablethrough2013,andthe15yearrecoverylifeforqualifiedleasehold,
retail,andrestaurantimprovementsisalsoreinstated.
TheWorkOpportunityCreditwasextendedtoo,soyoucanreduceyourtaxbillwhenyouhire
employeesfromtargetedgroupssuchasveterans.
TheAmericanTaxpayerReliefActof2012hasanumberofothertaxprovisionsthatmightaffect
you.Callusforallthedetails.Werereadytohelpyoustartyour2013taxplanning.

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Your 2013 tax numbers
The law requires the IRS to make annual inflationary adjustments to a variety of tax numbers. Here
are some of the key tax numbers youll need for your 2013 tax planning.

Provision 2013 2012

Standard mileage rate for business driving 56.5 a mile 55.5 a mile
Mileage rate for medical and moving expense deductions 24 a mile 23 a mile
Mileage rate for charitable driving 14 a mile 14 a mile
Business equipment expensing deduction $500,000 $500,000
Total purchase limit for full expensing deduction $2,000,000 $2,000,000
Maximum wages subject to social security tax $113,700 $110,100
Social security earnings limit
Under full retirement age $15,120 $14,640
Year full retirement age reached $40,080 $38,880
Full retirement age No limit No limit
Top estate tax rate 40% 35%
Amount exempt from estate tax $5,250,000 (est.) $5,120,000
Annual gift tax exclusion (per donee) $14,000 $13,000
Maximum retirement plan contributions
IRA for those under age 50 $5,500 $5,000
IRA for those 50 and over $6,500 $6,000
SIMPLE plan for those under age 50 $12,000 $11,500
SIMPLE plan for those 50 and over $14,500 $14,000
401(k) plan for those under age 50 $17,500 $17,000
401(k) plan for those 50 and over $23,000 $22,500
Kiddie tax threshold $2,000 $1,900
Nanny tax threshold $1,800 $1,800
Personal exemption $3,900 $3,800
Standard deduction
Single $6,100 $5,950
Joint returns and surviving spouses $12,200 $11,900
Married filing separately $6,100 $5,950
Head of household $8,950 $8,700
Additional for elderly or blind (married) $1,200 $1,150
Additional for elderly or blind (single) $1,500 $1,450

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Sometaxbenefitsaretimetravelers
Likeapagefromasciencefictionnovel,yourtaxreturncanreachintothepastandfuture.How?
Throughtheuseoftaxcarryforwardsandcarrybacks.Hereiswhatyoushouldknowaboutthese
timetravelingtaxperks.
Sometaxdeductionshaveamaximumamountthatyoucanuseinanyoneyear.Inthesesituations,
therulesgenerallyallowyoutoapplytheunusedtaxdeductiontoapastorfuturetaxreturn.Oneof
themostpopularexamplesofthisisthenetoperatinglossorNOL.Businessownerswhose
qualifiedexpensesexceedtheirincomeareallowedtoapplytheNOLtotaxableincomeearnedin
thesecondprioryear,andifthereisstilllossavailable,toapplyittolastyearsincome.Anyfurther
unappliedNOLcanbeusedtooffsetfuturetaxableincome.
ButthereareafewtwiststotheNOLrules.IfyourNOListheresultofatheftordisaster,youcan
carryitbackthreeyears.AnNOLfromfarmingcanbecarriedbackfiveyears.Andyoumayoptto
applyallyourNOLtofutureyearsonly,whichmightnotbeabadstrategyifyouexpecttobetaxed
athigherratesinfutureyears.
Netcapitallosses,suchasfromthesaleofstocks,canbecarriedforward(butnotback)tooffset
futurecapitalgainsandupto$3,000ofordinaryincome.Youcanalsocarryforwardcharitable
contributionsthatexceed50%oftaxableincomeforuptofiveyears.
Itsimportanttosaveallrecordsrelatedtocarrybackandcarryforwarddeductionsforatleastthree
yearsaftertheyeartheyareapplied.Ifyouhaveanyquestionsaboutyourpotentialfortaxcarryback
andcarryforwarddeductions,contactouroffice.Wellhelpyoukeepaneyeonyourtaxsituation,
past,present,andfuture.
This Letter is issued annually to provide you with information about minimizing your taxes. Do not
apply this general information to your specific situation without additional details. Be aware that the tax
laws contain varying effective dates and numerous limitations and exceptions that cannot be
summarized easily.
As you do your planning for 2013, stay informed about any changes Congress is planning to make to
the tax code. See us prior to making business and financial decisions so that current rules and pending
changes can be considered.

Sincerely,

Gallovic, Granito & Co. Ltd.

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