Vernoia, Enterline + Brewer, CPA LLC

Posts tagged ‘ATRA’

Post filing-season checkup for 2014 tax savings

Future Display - financialWith the April 15th filing season deadline now behind us, it’s not too early to turn your attention to next year’s deadline for filing your 2014 return. That refocus requires among other things an awareness of the direct impact that many “ordinary,” as well as one-time, transactions and events will have on the tax you will eventually be obligated to pay April 15, 2015. To gain this forward-looking perspective, however, taking a moment to look back … at the filing season that has just ended, is particularly worthwhile. This generally involves a two-step process: (1) a look-back at your 2013 tax return to pinpoint new opportunities as well as “lessons learned;” and (2) a look-back at what has happened in the tax world since January 1st that may indicate new challenges to be faced for the first time on your 2014 return.

Your 2013 Form 1040

Examining your 2013 Form 1040 individual tax return can help you identify certain changes that you might want to consider this year, as well encourage you to continue what you’re doing right. These “key ingredients” to your 2014 return may include, among many others considerations, a fresh look at:
Your refund or balance due. While it is nice to get a big refund check from the IRS, it often indicates unnecessary overpayments over the course of the year that has provided the federal government with an interest-free loan in the form of your money. Now’s the time to investigate the reasons behind a refund and whether you need to take steps to lower wage withholding and/or quarterly estimated tax payments.

If on the other hand you had to pay the IRS when filing your return (or requesting an extension), you should consider whether it was due to a sudden windfall of income that will not repeat itself; or because you no longer have the same itemized deductions, you had a change in marital status, or you claimed a one-time tax credit such as for energy savings or education. Likewise, examining anticipated changes between your 2013 and 2014 tax years—marriage, the birth of a child, becoming a homeowner, retiring, etc.—can help warn you whether your’re headed for an underpayment or overpayment of your 2014 tax liability.
Investment income. One area that blindsided many taxpayers on their 2013 returns was the increased tax bill applicable to investment income. Because of the “great recession,” many investors had carryforward losses that could offset gains realized for a number of years as markets gradually improved. For many, however, 2013 saw not only a significant rise in investment income but also a rise in realized taxable investment gains that were no longer covered by carryforward losses used up during the 2010–2012 period.

Furthermore, dividends and long-term capital gains for the first time in 2013 were taxed at a new, higher 20 percent rate for higher income taxpayers and an additional 3.8 percent net investment income tax surtax for those in the higher income brackets. Short-term capital gains saw the highest rate jump, from 35 percent to 43.4 percent rate, which reflected a new 39.6 percent regular rate and the new 3.8 percent net investment income tax rate. This tax structure remains in place for 2014.

Personal exemption/itemized deductions.

Effective January 1, 2013, the American Taxpayer Relief Act (ATRA) revived the personal exemption phaseout (PEP). The applicable threshold levels are $250,000 for unmarried taxpayers; $275,000 for heads of households; $300,000 for married couples filing a joint return (and surviving spouses); and $150,000 for married couples filing separate returns (adjusted for inflation after 2013). Likewise, for it revived the limitation on itemized deductions (known as the “Pease” limitation after the member of Congress who sponsored the original legislation) for those same taxpayers.

Medical and dental expenses.

Starting in 2013, the Affordable Care Act (ACA) increased the threshold to claim an itemized deduction for unreimbursed medical expenses from 7.5 percent of adjusted gross income (AGI) to 10 percent of AGI. However, there is a temporary exemption for individuals age 65 and older until December 31, 2016. Qualified individuals may continue to deduct total medical expenses that exceed 7.5 percent of adjusted gross income through 2016. If the qualified individual is married and only one spouse is age 65 or older, the taxpayer may still deduct total medical expenses that exceed 7.5 percent of adjusted gross income.


If you cannot find the paperwork necessary to prove your right to a deduction or credit, you cannot claim it. An organized tax recordkeeping system—whether on paper or computerized–therefore is an essential component to maximizing tax savings.

Filing Season Developments

So far this year, the IRS, other federal agencies and the courts have issued guidance on individual and business taxation, retirement savings, foreign accounts, the ACA, and much more. Congress has also been busy working up a “tax extenders” bill as well as tax reform proposals. All these developments can impact how you plan to maximize benefits on your 2014 income tax return.

Tax reform.

President Obama, the chairs of the House and Senate tax writing committees, and individual lawmakers all made tax reform proposals in early 2014. The proposals range from comprehensive tax reform to more piece-meal approaches. Although only small, piecemeal proposals have the most promising chances for passage this year, taxpayers should not ignore the broader push toward tax reform that will be taking shape in 2015 and 2016.

Tax extenders.

The Senate Finance Committee (SFC) approved legislation (EXPIRE Act) in April that would extend nearly all of the tax extenders that expired after 2013. Included in the EXPIRE Act are individual incentives such as the state and local sales tax deduction, the higher education tuition deduction, transit benefits parity, and the classroom teacher’s deduction; along with business incentives such as enhanced Code 179 small business expensing, bonus depreciation, the research tax credit, and more. Congress may now move quickly on an extenders bill or it may not come up with a compromise until after the November mid-term elections. Many of these tax benefits are significant and will directly impact the 2014 tax that taxpayers will pay.

Individual mandate.

The Affordable Care Act’s individual mandate took effect January 1, 2014. Individuals failing to carry minimum essential coverage after January 1, 2014 and who are not exempt from the requirement will make an individual shared responsibility payment when they file their 2014 federal income tax returns in 2015. There are some exemptions, including a hardship exemption if the taxpayer experienced problems in signing up with a Health Insurance Marketplace before March 31, 2014. Further guidance is expected before 2014 tax year returns need to be filed, especially on how to calculate the payment and how to report to the IRS that an individual has minimum essential coverage.

Employer mandate.

The ACA’s shared responsibility provision for employers (also known as the “employer mandate”) will generally apply to large employers starting in 2015, rather than the original 2014 launch date. Transition relief provided in February final regulations provides additional time to mid-size employers with 50 or more but fewer than 100 employees, generally delaying implementation until 2016. Employers that employ fewer than 50 full-time or full time equivalent employees are permanently exempt from the employer mandate. The final regulations do not change this treatment under the statute.

Other recent tax developments to be aware of for 2014 planning purposes include:

  • IRA rollovers. The IRS announced that, starting in 2015, it intends to follow a one-rollover-per-year limitation on Individual Retirement Account (IRA) rollovers as an aggregate limit.
  • myRAs. In January, President Obama directed the Treasury Department to create a new retirement savings vehicle, “myRA,” to be rolled out before 2015.
  • Same-sex married couples. In April, the IRS released guidance on how the Supreme Court’s Windsor decision, which struck down Section 3 of the Defense of Marriage Act (DOMA), applies to qualified retirement plans, opting not to require recognition before June 26, 2013.
  • Passive activity losses. The Tax Court found in March that a trust owning rental real estate could qualify for the rental real estate exception to passive activity loss treatment.
  • FATCA deadline. The IRS has indicated that it is holding firm on the July 1, 2014, deadline for foreign financial institutions (FFIs) to comply with the FATCA information reporting requirements or withhold 30 percent from payments of U.S.-source income to their U.S. account holders.
  • Vehicle depreciation. The IRS announced that inflation-adjusted limitations on depreciation deductions for business use passenger autos, light trucks and vans first placed in service during calendar year 2014 are relatively unchanged from 2013 (except for first year $8,000 bonus depreciation that may be removed if Congress does not act in time.
  • Severance payments. In March, the U.S. Supreme Court held that supplemental unemployment benefits (SUB) payments made to terminated employees and not tied to the receipt of state unemployment benefits are wages for FICA tax purposes.
  • Virtual currency. The IRS announced that convertible virtual currencies, such as Bitcoin, would be treated as property and not as currency, thus creating immediate tax consequences for those using Bitcoins to pay for goods.

Please contact this office at (908) 725-4414 if you’d like further information on how an examination of your 2013 return, and examination of recent tax developments, may point to revised strategies for lowering your eventual tax bill for 2014.

FAQ: What are the tax rates on capital gains and dividends?

Despite the passage of the American Tax Relief Act of 2012 – which its supporters argued would bring greater certainty to tax planning – many taxpayers have questions about the tax rates on qualified dividends and capital gains.


Before ATRA, the maximum tax rate on net capital gains and qualified dividends was 15 percent for taxpayers in the 25, 28, 33, or 35 percent individual income tax brackets (the 35 percent rate was the highest individual tax bracket before ATRA). For 2008 through 2012, taxpayers in the 10 and 15 percent individual income tax brackets enjoyed a zero percent tax rate on net capital gains and qualified dividends. Generally, the 15 and zero percent rates applied to long-term capital gains (resulting from the sale of an asset held for longer than one year) and qualified dividends (such as dividends received from a domestic corporation and certain foreign corporations).

ATRA’s rates

Under ATRA, the 15 percent rate on net capital gains and qualified dividends is made permanent for taxpayers in the 25, 28, 33, or 35 percent individual income tax brackets. This treatment applies for 2013 and all subsequent years unless modified by Congress in the future. ATRA also made permanent the zero percent tax rate on net capital gains and qualified dividends for taxpayers in the 10 and 15 percent income tax brackets. This treatment applies for 2013 and all subsequent years unless modified by Congress.

Additionally, ATRA created a 20 percent tax rate on net capital gains and qualified dividends intended to apply to higher income taxpayers. The 20 percent tax rate applies to qualified capital gains and dividends of taxpayers subject to the revived 39.6 percent income tax bracket. Taxpayers are subject to the 39.6 percent income tax bracket to the extent their taxable income exceeds certain thresholds: $450,000 for married couples filing joint returns and surviving spouses, $425,000 for heads of households, $400,000 for single filers, and $225,000 for married couples filing separate returns. These threshold amounts are projected to be slightly higher in 2014 as indexed for inflation.

Collectibles and unrecaptured Code Sec. 1250 gain

The Tax Code has special tax rates for collectibles and unrecaptured Code. Sec. 1250 gain. These tax rates were not changed by ATRA or other legislation. A 28 percent tax rate applies to collectibles, and a 25 percent tax rate applies to unrecaptured Code Sec. 1250 gain.

Short-term capital gains

The tax rates are significantly different for short-term capital gains than for long-term capital gains. Short-term capital gains are taxed at ordinary income tax rates. This means that the tax rate on short-term capital gains can range from 10 percent to 39.6 percent, depending on the taxpayer’s situation. Income generated from non-capital assets are also subject to these rates.

Net investment income surtax

Unrelated to ATRA’s changes is a new 3.8 percent surtax imposed by the Patient Protection and Affordable Care Act (PPACA) on individuals, estates and trusts that have certain investment income above threshold amounts including $250,000 for married couples filing jointly and $200,000 for single filers. These amounts are not subject to an annual adjustment for inflation. The 3.8 percent surtax took effect January 1, 2013 and therefore will be reflected on 2013 returns filed in 2014.

Timing the recognition of capital gain and offsetting losses when possible can frequently lower overall tax liability. Year-end tax planning can be a particularly advantageous in this regard. If you have any questions about the capital gains and dividends tax rates, please contact our office at (908) 725-4414.

First steps for 2013 year-end tax planning

Even though the calendar still says summer, it’s not too early to be thinking about year-end tax planning. In fact, year-end tax planning has become around-the-year tax planning because of tax legislation (or the lack of tax legislation), new IRS rules and regulations and personal and business considerations. Looking ahead to year-end 2013, there are many tax planning strategies to explore and evaluate.

ATRA brings some certainty

Unlike last year at this time, there is some more certainty to tax planning because of passage of the American Taxpayer Relief Act of 2012 (ATRA). ATRA permanently extended the Bush-era individual income tax rate cuts for most taxpayers but also put in place a top income tax bracket of 39 percent for higher-income taxpayers. In 2012, taxpayers were unsure what the individual rate brackets would be for 2013, which complicated year-end planning. Now, we know the brackets are 10, 15, 25, 28, 33, 35, and 39.6 percent for 2013 and beyond. ATRA also ended uncertainty over the alternative minimum tax (AMT). Previously, Congress had to pass so-called “AMT patches” to prevent the AMT from encroaching on middle income taxpayers. ATRA patches the AMT for 2013 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. In the estate tax area, ATRA brings some certainty to tax planning. ATRA set the maximum estate tax rate at 40 percent, provided for portability and more.

Many expiring provisions

ATRA extended – but did not make permanent – countless tax incentives. They range from incentives targeted to individuals, such as the state and local sales tax deduction, the teachers’ classroom expense deduction and the higher education tuition deduction, to incentives for business, including the research tax credit, bonus depreciation, and enhanced small business expensing. In 2012, for the first time in many years, Congress did not extend all of the expiring incentives (leaving, for example, the District of Columbia homebuyer credit to expire). It is possible that Congress could prune the extenders even more in 2013. President Obama has proposed to eliminate many fossil fuel extenders. If Congress keeps to past practice, the fate of the extenders will not be decided until late in 2013, or in early 2014. Late tax legislation means that the IRS will likely have to delay the start of the 2014 filing season. Our office will keep you posted of developments.

Traditional year-end considerations

Traditional year-end planning considerations should not be overlooked. These include changes in filing status due to marriage, death or divorce. Keep in mind also the Supreme Court’s decision to strike down Section 3 of the Defense of Marriage Act (DOMA), which presumably will open the door to married same-sex couples being able to file as married filing jointly (much-anticipated IRS guidance has yet to be issued). Gift-giving is another valuable year-end tool. For 2013, the annual gift tax exclusion is $14,000 ($28,000 for married couples making split-gifts). Qualified individuals can also make a gift to charity from IRA funds, but only through the end of 2013. If possible, taxpayers may want to project what will be the amount of their 2013 itemized deductions. For some taxpayers, medical expenses may make up a large percentage of their itemized deductions. The floor on deductible medical expenses is 10 percent of adjusted gross income in 2013 (7.5 percent for senior citizens). Others should compare the state and local sales tax deduction (especially taxpayers who have made or may make big ticket purchases in 2013) with the state and local income tax deduction to maximize their savings. Don’t forget the education tax incentives. For 2013, the American Opportunity Tax Credit and the Lifetime Learning credit, along with others, are available to qualified taxpayers. Timing the recognition of capital gains and losses is important, to maximize offsetting short-term gains taxed at ordinary income tax rates, with short-term losses. In 2012, the maximum tax rate on qualified capital gains (and dividends) was 15 percent (with some taxpayers qualifying for a zero percent rate). However, ATRA raises the top rate to 20 percent for certain higher-income taxpayers whose income exceeds the thresholds for the 39.6 percent income tax rate.

Additional business strategies

Along with planning for the extenders and the Affordable Care Act (discussed below) businesses also should be aware of pending revisions to regulations on the capitalization of tangibles (called “repair regs” for short). The rules go far beyond “repairs.” One important ingredient to planning under the repair regs is the provision for de minimis expensing. This rule can be helpful if the tax year in which the cost of qualified materials and supplies is paid or incurred before the tax year of use or consumption. The window for bonus depreciation is also closing, unless extended by Congress. ATRA extended 50 percent bonus depreciation through 2013 (some transportation and longer period production property may be eligible for 50 percent bonus depreciation through 2014). Qualified property must be placed in service before January 1, 2014 (or January 1, 2015 if applicable). Employers that want to take advantage of the Work Opportunity Tax Credit (WOTC), with its enhanced benefits for hiring veterans, need to act before January 1, 2013. The WOTC is a popular incentive and is likely to be extended but the provisions for veterans could be changed.

Affordable Care Act

January 1, 2014 is the start date for many provisions of the Affordable Care Act. The Obama administration has postponed the so-called employer mandate until 2015 but other requirements – including the individual mandate – continue to apply. For example, the Affordable Care Act limits annual salary reduction contributions to a health flexible spending arrangement under a cafeteria plan to $2,500 (adjusted for inflation after 2013). The IRS is also asking that employers voluntarily comply with information reporting requirements for health insurance coverage for 2014. Please contact our office for more details about the Affordable Care Act’s requirements for 2014 and beyond.

NII surtax

On January 1, 2013, the new 3.8 percent net investment income (NII) surtax took effect. The surtax, which was passed by Congress to help fund health care reform, is imposed on the net investment income of higher-income individuals, estates and trusts that exceeds certain thresholds. Generally, the surtax applies to passive income but can also reach capital gains from the disposition of property. Some taxpayers may have sold property or changed their source of income in 2012 to avoid the surtax. Now that the surtax is effective, new strategies should be considered to minimize, if possible, the surtax. There is also a new 0.9 percent Additional Medicare Tax that reaches higher income individuals. We have highlighted a lot of year-end planning considerations. Please contact our office to discuss year-end planning tailored for you.

Heated debate ahead on tax reform proposals

President Obama recently said that he wants a tax reform/deficit reduction package by August and lawmakers have many proposals to consider. The President has introduced a $3.77 trillion budget for fiscal year (FY) 2014 with a host of tax reform proposals, the House and Senate Budget Committees have approved competing deficit reduction and tax reform blueprints, other committees are exploring ideas for tax reform, and private groups, most notably authors of the Simpson-Bowles Plan, are also making proposals. Whatever proposals are adopted, the outcome is sure to impact your tax strategy and planning.

All of the proposals have one common goal: reduce the federal government’s approximate $16 trillion federal budget deficit. To reduce the budget deficit, many of the plans propose to cut spending and raise revenues. Lawmakers and the White House also want to replace sequestration (across-the-board spending cuts for many federal agencies) for FY 2014 and beyond. Replacing sequestration will require spending cuts, new revenue or a combination of both. Let’s take a look at how some of the tax proposals would affect individuals, businesses and others.


The American Taxpayer Relief Act of 2012 (ATRA), signed into law on January 2, 2013, set the individual tax rates at 10, 15, 25, 28, 33, 35 and 39.6 percent for 2013 and beyond. The House GOP budget blueprint would consolidate the current seven individual income tax rate brackets into two rates. The lower rate would be 10 percent with the goal of a top rate of 25 percent. The Simpson-Bowles plan also calls for lower rates but does not specify the amounts; however, lower rates would be contingent on eliminating certain tax credits and deductions, possibly some popular ones such as the home mortgage interest deduction. President Obama has not proposed any changes to the current individual income tax rates.

President Obama has, however, proposed a minimum 30 percent tax on individuals with incomes over $1 million (full phase in at $2 million).  This was known as the “Buffett Rule” (now called the Fair Share Tax).  President Obama would also limit the tax rate at which higher income individuals can reduce their tax liability to a maximum of 28 percent. This limit would apply to all itemized deductions; foreign excluded income; tax-exempt interest; employer sponsored health insurance; retirement contributions; and selected above-the-line deductions. Another proposal would limit contributions and accruals on tax-favored retirement accounts, including IRAs, qualified plans, tax-sheltered annuities, and deferred compensation plans.

The budget blueprint put forward by Senate Democrats makes similar proposals. The Senate plan would impose across-the-board limits on itemized deductions claimed by the top two percent of income earners, by capping the rate at which itemized deductions and other tax preferences reduce tax liability, a percentage of income cap, or a specific dollar cap.  The Senate plan also proposes to change, without giving details, unspecified itemized deductions into tax credits.

Not surprisingly, the House plan, written by the GOP, does not include these proposals.  Along with consolidating the individual tax rates, the House blueprint would repeal the 3.8 percent net investment income (NII) surtax and the 0.9 percent Additional Medicare Tax, both of which took effect in 2013. The House plan also calls for repealing the alternative minimum tax (AMT). The House plan also calls for tax simplification but does not give details.

Another proposal endorsed by the President but which will be a difficult sale in Congress is to increase the federal estate tax. ATRA “permanently” extended the estate tax at a maximum rate of 35 percent with a $5 million exclusion (indexed for inflation).  President Obama wants to raise the maximum rate to 45 percent with a $3.5 million exclusion (not indexed for inflation) after 2017.


Reducing the U.S. corporate tax rate is a common goal of many of the tax reform proposals but they take different approaches. President Obama has said he would support lowering the corporate tax rate in exchange for businesses giving up unspecified tax preferences. These could include tax incentives for fossil fuels, the Code Sec. 199 deduction and more. The House blueprint would reduce the top corporate tax rate to 25 percent, paid for by tax savings elsewhere. The Simpson-Bowles plan also calls for a reduction in the corporate tax rate, contingent on businesses relinquishing unspecific tax preferences.

President Obama and the House and Senate budgets also propose a number of incentives to encourage business spending and job creation. These include:

  • Enhanced small business expensing (Obama and House but at different amounts);
  • Permanent research tax credit (Obama, House and Senate);
  • Temporary tax credit for increasing payrolls (Obama); and
  • Special incentives for manufacturing in the U.S. (Obama).

Another key difference among the competing proposals: the House budget plan would repeal the Patient Protection and Affordable Care Act, including all of its business tax-related provisions, such as employer-shared responsibility provisions, the medical device excise tax, and more.  The Senate approved a non-binding resolution to repeal the medical device tax but is not expected to go along with repeal of the entire Affordable Care Act.

Internet sales tax

In May, the Senate is expected to approve the Marketplace Fairness Act (H.R. 743). The bill gives states the authority to compel online merchants, no matter where they are located, to collect sales tax at the time of a transaction.  However, states would be able to compel collection of sales tax only after they have simplified their sales tax laws, such as by adopting the Streamlined Sales and Use Tax Agreement.  The bill has the support of President Obama. However, the bill may not pass in the House, where many lawmakers view it as a tax increase.

Discussion drafts

The two Congressional tax writing committees – House Ways and Means and Senate Finance – are engaged in discussions among their members over tax reform.  Ways and Means has produced three detailed discussion drafts exploring possible approaches to reforming the taxation of financial products, the taxation of small businesses and moving the U.S. to a territorial system of taxation. Ways and Means Chair Dave Camp, R-Mich., has promised to introduce tax reform legislation this year. Senate Finance has also produced four discussion drafts, less detailed than the House drafts, on simplifying the Tax Code, business taxation and education, and infrastructure, energy and natural resources. Senate Finance Committee Chair Max Baucus, D-Mont., has pledged his commitment to seeing tax reform through before his retirement, which he announced would start at the end of 2014.

Looking ahead

Tax reform coupled with deficit reduction is starting to gain momentum. Whether this will lead to legislation this summer or before year-end is unclear. As long as the key players continue their discussions, there is the chance of tax reform.

Our office will keep you posted of developments. Please contact our office at 908-725-4414  if you have any questions about the tax reform proposals we have reviewed.

How do I….calculate Pease itemized deductions limitation under ATRA?

The limitation on itemized deductions (also known as the Pease limitation after the member of Congress who sponsored the original legislation) is reinstated by the American Taxpayer Relief Act (ATRA) for tax years beginning after December 31, 2012. The reinstated Pease limitation is intended to reduce or eliminate the itemized deductions of higher income taxpayers to raise revenue.


The Pease limitation dates to 1990. At that time, Congress was looking to raise revenue without increasing the income tax rates and lawmakers created the Pease limitation. The Pease limitation effectively limits the benefit of itemized deductions claimed by higher income individuals. Itemized deductions that would otherwise be allowed are reduced by the lesser of three percent of adjusted gross income (AGI) that exceeds a threshold amount or 80 percent of the total amount of otherwise allowable itemized deductions.

In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act (EGTRRA). The 2001 law gradually eliminated the Pease limitation for the years 2006 through 2010. In 2010, Congress extended repeal of the Pease limitation through 2012. Last year, repeal was again up for a vote in Congress. Many lawmakers wanted to extend repeal of the Pease limitation for one or two more years (or make repeal permanent) but ATRA instead reinstated the Pease limitation for 2013 and subsequent years.

Reinstated Pease limitation

ATRA provides that the amount of a taxpayer’s otherwise allowable itemized deductions is reduced or eliminated if the taxpayer’s AGI exceeds “applicable threshold amounts.” The applicable threshold amounts for application of the Pease limitation in 2013 are $300,000 in the case of married couples filing a joint return or surviving spouse; $275,000 in the case of head of household; $250,000 in the case of an unmarried individual who is not a surviving spouse or head of household; and $150,000 in the case of a married couple filing separately. After 2013, the applicable threshold amounts are adjusted for inflation.

Congress selected these applicable threshold amounts to limit application of the Pease limitation to higher income taxpayers. A taxpayer’s AGI must exceed the applicable threshold amount for the Pease limitation to apply.

Certain other rules apply. For purposes of the 80 percent limitation, itemized deductions do not include certain deductions: the deductions for qualified medical expenses, interest expenses, casualty or theft losses, and allowable wagering losses. Additionally, limitations on itemized deductions are applied first and then the otherwise allowable total amount of itemized deductions is reduced. These include the two percent floor for miscellaneous itemized deductions.

Let’s take a look at an example:

Inez, age 30, and Tyler, age 31, are married, have no children and file a joint federal income tax return for 2013. Their AGI for 2013 is $350,000. Inez and Tyler have the following amounts to report as itemized deductions on their 2013 return:


Contributions to charitable organizations:


State and local real property taxes:


Medical expenses (in excess of the 10 percent AGI floor for 2013):


Because their AGI exceeds the applicable threshold of $300,000 for a married couple filing a joint return, the amount of their otherwise allowable itemized deductions ($17,000) must be reduced. The first possible reduction is three percent of the excess of their AGI over the applicable threshold amount (($350,000 − $300,000) x 0.03) which is $1,500. The second possible reduction is 80 percent of the amount of itemized deductions (excluding medical expenses) ($15,000 x 0.80) which is $12,000. The lesser of these two amounts is $1,500. Inez and Tyler must reduce their otherwise allowable deductions to $15,500 ($17,000 − $1,500).

If you have any questions about the reinstated Pease limitation, please contact our office at (908) 725-4414

What does ATRA do for estate planning?

The American Taxpayer Relief Act of 2012 (ATRA) has provided much needed certainty for estate tax planners and for taxpayers who want to arrange their financial affairs. For the first time in 10 years, beginning January 1, 2013, the maximum estate tax rate, the inflation-adjusted exclusion, and other estate tax features have been made permanent.

The top tax rate is 40 percent, the maximum exclusion for both estate and gift taxes is a unified amount of $5 million (indexed at $5.12 million for 2012 and $5.25 million for 2013), the tax basis of property acquired from a decedent is stepped up, and the portability of a deceased spouse’s unused exclusion (DSUE) amount is preserved. The generation-skipping transfer (GST) tax exemption, which is tied to the estate tax rate, is also set at $5 million, adjusted for inflation. However, taxpayers should realize that inheritance taxes imposed by a state may apply to a lower amount, so some estate tax planning for state taxes may be appropriate.

If Congress had not acted on the sunsetting provisions, the maximum estate tax rate would have been 55 percent effective January 1, 2013, and the maximum exclusion would have been only $1 million. However, even though these changes are permanent and do not have an expiration date, one never knows whether Congress may change the law in the future.

Stepped-up basis

Stepped-up basis is preserved for assets passing through the estate. This is particularly important for people whose estates are not large enough to owe estate taxes (under $5 million, as indexed for inflation). In 2010, when there was no estate tax, the Tax Code applied a modified carryover basis regime with $1.3 million worth of assets subject to a basis step-up (plus $3 million for property passing to the spouse). All other properties would have a carryover basis and thus could have significant built-in gains when acquired by the estate tax beneficiary.

Now, all properties passing through the estate for tax purposes are entitled to a step-up in basis, whether or not they are subject to estate tax. This will have a significant impact on income taxes for taxpayers receiving assets from the estate, insulating built-in gains from taxes, and allowing taxpayers to sell assets and invest them in other arrangements.

Unified estate and gift tax

Even though the lifetime exemption under the unified estate and gift tax ($5 million, adjusted for inflation) may never be used up, filing gift tax returns for annual gifts above the exclusion is still necessary. The annual gift tax exclusions ($13,000 for 2012; $14,000 for 2013) are much lower than the lifetime exclusion. However, thanks to the lifetime exclusion, taxpayers often will not owe any gift taxes on a gift, even one that exceeds the annual exclusion.


The portability of the DSUE amount was enacted in 2010 and originally applied where the first decedent in a married couple died in 2011 or 2012. In ATRA, Congress made portability permanent.

In the absence of portability, the first spouse to die could transfer property to the surviving spouse tax-free, by claiming the marital deduction. But the second spouse, as sole owner of the assets, was in danger of exceeding the applicable estate tax exclusion and owing more estate tax.

For example, a husband owns $7 million in property and the wife owns $5 million in property. Upon A’s death, the husband’s estate passes $2 million of property to his children, and $5 million in property to his wife, using the marital deduction. When the wife dies, she has $10 million in property (assuming that the wife’s earnings and expenses offset each other), but only has an exclusion of $5 million. Thus, $5 million of assets are taxable.

Portability eliminates or substantially lessens this problem. If the husband passes $2 million to his children, and $5 million to his wife, he has a DSUE amount of $3 million. The wife, when she dies with an estate of $10 million, has an estate tax exclusion of $8 million ($3 million from the husband, plus her own $5 million exclusion), and will owe estate tax on $2 million, instead of $5 million. At a 40 percent maximum rate, this is a potential savings of $1.2 million to the wife (and to the husband and wife collectively). Portability lessens the need for complex estate planning when the husband and wife together have assets in the $10 million range (more or less).

Other tax provisions

ATRA provides additional certainty for other estate, gift, and generation-skipping transfer (GST) tax provisions. More liberal rules for using installment payments for estate taxes will continue to apply. The five percent surtax on estates and gifts between $10 million and $17,184,000, which is designed to offset the benefits of graduated rates, will no long apply.

Modifications to the exclusion for qualified conservation easements are permanently extended, again facilitating planning in this area. The repeal of certain distance requirements is permanently extended; accordingly, the exclusion is available to any qualified real property, located in the U.S. or a U.S. possession, that was owned during the three-year period ending on the date of the decedent’s death.

ATRA also extended a number of GST tax provisions set to expire at the end of 2012. These included the GST deemed allocation and retroactive allocation provisions; clarification of valuation rules for determining the inclusion ratio; provisions allowing the qualified severance of a trust; and relief from late GST allocations and elections.

Finally, ATRA extended the IRA charitable deduction for two years, through 2013. Taxpayers age 70 ½ and older can make a maximum distribution of $100,000 directly from their IRA (traditional or Roth) to a charity, without including any of the distribution in income.

Not all of ATRA’s provisions are beneficial to taxpayers. ATRA permanently extended the deduction for estate taxes imposed by a state, rather than a tax credit. The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) first repealed the state death tax credit for decedents dying after 2004 and replaced the credit with a deduction. ATRA also extended repeal of the deduction for qualified family-owned business interests, a provision that has been in effect since 2004.

If you would like more specific information on how the American Taxpayer Relief Act affects your estate plans, please contact this office at (908) 725-4414.

ATRA delays start to 2013 filing season

As the 2013 filing season gets underway, some taxpayers may experience delays in filing returns and others need to revisit their returns because of the passage of the American Taxpayer Relief Act (ATRA) on January 1, 2013.  Late tax legislation always complicates tax planning and filing and 2013 is no exception.  ATRA extended many popular tax incentives for individuals and businesses retroactively to January 1, 2012.  This means that qualified taxpayers may claim them on their 2012 returns filed in 2013.  ATRA also made many changes that take effect in 2013, which will require careful planning as this year unfolds.

Delayed start to filing season

The most immediate effect of ATRA is a delayed start to the 2013 filing season.  Shortly after passage of ATRA, the IRS announced that the 2013 filing season would begin on January 30, 2013.  That reflected a delay of eight days from the previously anticipated start date of January 22, 2013.  The IRS explained that it needed time to program its processing systems for ATRA.  As of January 30, the IRS was able to accept returns affected by the AMT patch as well as three very popular “tax extenders:” the state and local sales tax deduction, higher education tuition deduction and teachers’ classroom expense deduction.

However, some taxpayers will experience a further delay.  A number of tax forms affected by late legislation require more extensive programming and testing of IRS systems. The IRS reported that it aims to begin accepting returns including these forms between late February and into March.  The IRS predicted that a specific date will be announced in the near future. Among the forms that require more extensive programming changes are some commonly used forms, most notably Form 4562 (Depreciation and Amortization). Other forms affected by the delay include Form 5695 (Residential Energy Credits) and Form 3800 (General Business Credit).

The IRS also announced special relief for farmers and fishermen who are affected by the delay.  Normally, farmers and fishermen who choose not to make quarterly estimated tax payments are not subject to a penalty if they file their returns and pay the full amount of tax due by March 1. Under the guidance to be issued, farmers or fishermen who miss the March 1 deadline will not be subject to the penalty if they file and pay by April 15, 2013.

Retroactive and prospective extensions

For individuals, some of the most popular incentives are the three mentioned above (the state and local sales tax deduction, the higher education tuition deduction and the teachers’ classroom expense deduction).  Other incentives that were retroactively extended to January 1, 2012 by ATRA, and therefore are available for 2012 returns filed in 2013, include special rules treating mortgage insurance premiums as deductible interest that is qualified residence interest, and special rules for contributions of capital gains real property for conservation purposes.

Another valuable incentive extended by ATRA is a tax break for energy efficient improvements.  ATRA extended retroactively to January 1, 2012 and through 2013 the Code Sec. 25C energy credit. Energy efficiency improvements include adding insulation, energy-efficient exterior windows and doors and certain roofs. The credit has a lifetime limit; qualifying improvements must be placed into service to the taxpayer’s principal residence before January 1, 2014, and there are other restrictions.

ATRA also provided transition relief for individuals wishing to make tax-free transfers of IRA funds to charitable organizations.  For tax year 2012 only, IRA owners could choose to report qualified charitable distributions made in January 2013 as if they occurred in 2012. Additionally, IRA owners who received IRA distributions during December 2012 could contribute, in cash, part or all of the amounts distributed to eligible charities during January 2013 and have them count as 2012 qualified charitable distributions.

For businesses, ATRA extended many temporary incentives.  Among the most commonly claimed are enhanced small business expensing, bonus depreciation, and the Work Opportunity Tax Credit (WOTC).  Under ATRA, the Code Sec. 179 small business expensing dollar limit for tax years 2012 and 2013 is $500,000 with a $2 million investment limit (both amounts indexed for inflation).  Bonus depreciation is available at 50 percent through 2013 and the WOTC is also available through 2013.  Many other business-related incentives that had expired at the end of 2011 are available for 2012 and 2013.

Another extended incentive is transit benefits parity. Qualified transportation fringe benefits include transit passes, van pooling, and qualified parking. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 provided for parity for the exclusion limitation on transit passes, van pool benefits and qualified parking through 2011. ATRA extended transit benefits parity retroactively to January 1, 2012 and through 2013. In Rev. Proc. 2013-15, the IRS reported that the inflation-adjusted maximum monthly excludable amount for 2013 is $245 for transit passes and van pool benefits and also $245 for qualified parking. The IRS has issued administrative relief for employers that provided transit benefits in 2012 at their pre-ATRA rates.

Changes for 2013 and beyond

ATRA’s most far-reaching changes – allowing the Bush-era tax rates to expire after 2012 for individuals with incomes over $400,000 and families with incomes over $450,000 along with increased capital gains and dividend taxes for higher income taxpayers – will be reflected on 2013 returns filed in 2014.  Other important provisions, such as the revived limitation on itemized deductions and the personal exemption phaseout, also will kick-in in 2013 and be reflected on 2013 returns filed in 2014.  Also taking effect in 2013 are an Additional Medicare Tax and a Net Investment Income surtax.  All these changes should be taken into account in planning your 2013 tax strategy.

Please contact our office at (908) 725-4414 for more information about the affect of ATRA on the 2013 filing season and tax planning for future years