Net Investment Income Tax
Don’t get stuck paying higher tax rates or unnecessary additional tax on trust income imposed under the 3.8% net investment income tax (NIIT). The NIIT, beginning with the 2013 tax year, begins to be phased in after $11,950 income to a trust, as opposed to $200,000 income to a single individual ($250,000 married filing jointly). Individuals can take an income distribution to shift the income to their personal return and, if under the $200,000 threshold, avoid the additional NIIT tax. Most trusts allow for a 65-day period after the close of the year to make this income distribution, so consult your adviser.
–Tiffany Kuntemeier, manager of tax services, Mueller Prost PC
Sale of Small Business Stock
To encourage investment in new “small” business ventures, Section 1202 of the Internal Revenue Code (the IRC) grants relief to individual investors on the sale of small-business stock acquired after Sept. 27, 2010, and before Jan. 1, 2014; issued by a C corporation; and held for at least five years. The sale will be tax-free, i.e., 100% of the capital gain is excluded from tax and will not generate alternative minimum tax (AMT). Certain exclusions and limitations apply, and careful analysis and consideration of your exit strategy should be conducted before taking this route.
–Douglas M. Mueller, president, Mueller Prost PC
Health Flexible Spending Accounts
The Treasury and the IRS have recently modified the “use-or-lose” rule regarding health flexible spending accounts (health FSAs). Under the new provision, participating employees may carry over up to $500 of unused amounts remaining at the end of the plan year, provided that the plan does not incorporate the grace period rule. Plan sponsors will now have the option, but are not required, to either allow employees a carryover of up to $500 or allow them the 2½-month grace period but not both. This opportunity is available for plan years beginning in 2013.
–Scott J. Burle, Mueller Prost PC
Take advantage of the potential tax savings when you make qualified energy-efficient improvements to your residence by Dec. 31, 2013. The expiring, nonbusiness energy property credit applies to relatively inexpensive, easy-to-do improvements, such as the installation of:
* extra insulation
* energy-saving windows and doors
* energy-efficient heaters and air conditioners
The credit is not phased out for higher-income taxpayers. However, this nonrefundable credit is limited to $500 ($200 for windows) less any credits claimed in previous years and is scheduled to expire in 2013.
Higher Education Expenses
Take advantage of the tax savings by prepaying qualified higher education expenses by Dec. 31. The above-the-line deduction, called the “tuition and fees deduction,” is set to expire after 2013. The deduction is a maximum of $4,000 for taxpayers with modified adjusted gross income (AGI) of not more than $65,000 ($130,000 for those married filing jointly) or a maximum of $2,000 for taxpayers with modified AGI of not more than $80,000 ($160,000 for those married filing joint). Qualifying expenses include tuition and attendance fees but not books, room and board, or student activity fees. To qualify, the expense must be in connection with enrollment during 2013 or the first three months of 2014.
–Rebecca A. Kibler, Bergman,Schraier & Co. PC
Self-employed individuals paying premiums for medical, dental or long-term care insurance may qualify for a 100% tax deduction from adjusted gross income allowed on Form 1040. This is more favorable than deducting the premiums as a medical expense itemized deduction, which is limited based on a percentage of your adjusted gross income. The insurance plan must be established under your business and can cover you, your spouse and your dependents. Self-employed individuals who qualify for the deduction include sole proprietors, general partners, limited partners receiving guaranteed payments and more-than-2% S corporation shareholders. Additional restrictions may apply.
–Alexandra R. Suhre,Bergman, Schraier & Co. PC
Small Business Health Care Tax Credit
For 2013, the maximum refundable credit for small-employer-paid health insurance is 35% of premiums paid. To be eligible:
1. The employer must pay at least 50% of the cost of single health care coverage for each employee.
2. There must be fewer than 25 full-time employees.
3. Average wages must be less than $50,000 per year.
In general, the credit works on a sliding scale – the smaller the workforce and the lower the wages, the bigger the credit. For S corporations, partnerships and sole proprietorships, the credit is used by the owners. –Jennah Purk, Purk & Associates, P.C.
Purchase Equipment in 2013
Business owners wanting to reduce business profits can utilize Section 179 of the IRS tax code. Section 179 allows businesses to deduct the full purchase price of qualifying equipment purchased or financed during the tax year. For 2013, the expensing limit is $500,000, with a phase-out beginning at $2 million. To qualify, the equipment must be placed in service by Dec. 31, 2013. For 2014, the Section 179 deduction is scheduled to drop to $25,000, with a phase-out range starting at $200,000 of equipment purchases. However, for tax planning purposes it seems like purchasing equipment in 2013 will be a smart decision.
–Jeff Mortland, Mortland & Co. LLC
New Investment Income Tax
Any difference in withholding too much or too little is due/refunded with your 1040 at the end of the year. This additional 0.9% tax applies to employees (not employers). Caution should be exercised to avoid “lumping” income into one year (instead possibly try and spread it over a period of years). This strategy may prove helpful in keeping your income under the threshold before this tax is assessed.
New Wage And Self-Employment Income Tax
There is a potential new tax on wage/employment income earned in 2013 and later years. An additional 0.9% Medicare tax will be imposed on certain high-income taxpayers who have W-2 or certain types of business income. The tax is assessed on married-filing-joint-return taxpayers whose adjusted gross income exceeds $250,000; however, employers will begin withholding when wage income exceeds $200,000 (they assume your spouse will make the difference to put you over the $250,000 limit). There is a potential new tax on net investment income for 2013 and later years. An additional tax of 3.8% will be imposed on certain high-income taxpayers. This tax does not impact all types of income; rather, it is assessed on “unearned” income such as interest, dividends, annuities, rents, etc. The threshold is $250,000 of adjusted gross income for married-filing-joint-return taxpayers. We suspect this is a lot like the issue prevalent with the alternative minimum tax (AMT) in prior years in that the threshold is not adjusted for inflation (so each year more and more people will be subject to this tax).
–Roger G. Toennies,Schmersahl Treloar & Co. PC
What To Report
What to report on information returns – 1099
* Amounts paid over $600 for rents, services, prizes and awards, other income payments, medical and health care payments, crop insurance proceeds, fish/aquatic life
* Amounts paid to an individual, partnership or estate (corporations are exempt)
* Fishing boat proceeds
* Gross proceeds to an attorney
* Amounts of $10 or more of royalties, broker payments or interest payments
Each vendor paid during the year must supply a W-9. The IRS website allows a tax practitioner to match the tax identification number to the IRS database. This eliminates the possibility of a vendor providing an incorrect or invalid TIN.
Rules For Retaining Financial Records
When storing records, put a destruction date on the storage box (or put “Permanent” for items that should not be destroyed).
* Rule of thumb: Most financial information is to be kept seven years, although many documents can be destroyed earlier.
* Some records must never be destroyed ing:
* Auditor’s reports, annual financial statements, tax returns
* Fixed-asset records, chart of accounts, general ledgers, cash receipt and purchase journals, trial balances
* Deeds, mortgages, bills of sale, patent/trademark paperwork
* Articles of incorporation, bylaws, buy/sell agreements, capital stock/bond records
–Karen Stern, Small Business Services, Brown Smith Wallace LLC
Business Use Of Home
There is a new optional safe harbor method for home office deduction that allows the following:
* Maximum 300 square feet
* Flat deduction of $5 per square foot
* $1,500 deduction – no substantiation
* Limited to gross income
* Cannot be carried over
–Darlene M. Davis, Davis Associates, Certified Public Accountants
The state of the real estate market in recent years has made the acquisition of rental property attractive for many investors. This year the IRS has demanded substantially more information about your rental property for your tax return. If you own rental property, you will need to record details for each property separately, including the physical location of the property, the type of property, Forms 1099-K received and a record, by property, of the number of days rented and the number of days used for personal purposes.
St. Louis is known as one of the most generous cities, and we’re proud of the fact that our community is so supportive of local charities. Be sure to keep receipts and good records of all of your charitable giving. In order to be included on your taxes, all deductions, in any amount, must be accompanied by a receipt. Furthermore, any individual contribution over $250 must have an acknowledgement letter from the charity, the date and amount of contribution, and should state that no goods or services were received in return for the contribution.
–Sandy Furuya, senior accounting manager, Wamhoff Financial Planning & Accounting Services Inc.
Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year. If you become eligible to make health savings account (HSA) contributions in December of this year, you can make a full year’s worth of deductible HSA contributions for 2013.
–Anne Phelps, manager, Stone Carlie Tax & Business Services
Realize Losses On Stock
Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. If you believe a Roth IRA is better than a traditional IRA and want to remain in the market for the long term, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA, if eligible to do so. Keep in mind, however, that such a conversion will increase your adjusted gross income for 2013.
–Debbie Maret, principal, Stone Carlie Wealth Advisors LLC
It may be advantageous to try to arrange with your employer to defer a bonus that may be coming your way until 2014. If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2013 if doing so won’t create an alternative minimum tax (AMT) problem.
–Kelli Lewis, principal, Stone Carlie Tax & Business Services
Accelerate Big-Ticket Purchases
Accelerate big-ticket purchases into 2013 in order to ensure a deduction for sales taxes on the purchases if you will elect to claim a state and local general sales tax deduction instead of a state and local income tax deduction. Unless Congress acts, this election won't be available after 2013.
–Richard Kraner, senior member, Stone Carlie Tax & Business Services, Stone Carlie Wealth Advisors LLC
Work Opportunity Tax Credit
Nail down a Work Opportunity Tax Credit (WOTC) by hiring qualifying workers (such as certain veterans) before the end of 2013. Under current law, the WOTC won’t be available for workers hired after this year. Depending on your particular situation, you may want to consider deferring a debt-cancellation event until 2014 and disposing of a passive activity to allow you to deduct suspended losses.
–Mark Paluczak, senior manager, Stone Carlie Tax & Business Services
Self-Employed Retirement Plan
If you are self-employed and haven’t done so yet, set up a self-employed retirement plan. If you own an interest in a partnership or S corporation, you may need to increase your basis in the entity so you can deduct a loss from it for this year.
–Mike Klein, principal, Stone Carlie Tax & Business Services
Marketplace Fairness Act
The conversation around the Marketplace Fairness Act has been quiet recently due primarily to the budget debate. However, for 2014 this act could have significant impact on small to large companies. In essence, the act pushes a mandate to require businesses exceeding a bright line sales test projected to be $1 million to begin to collect and remit sales tax on retail transactions to the jurisdiction in which the product was shipped. This will require businesses to increase their compliance cost without any increase in sales. As businesses begin to register, they could open themselves up to historical exposure.
Currently there are various options for businesses to minimize the impact of this exposure. For example, many states offer a voluntary disclosure agreement or tax amnesty program, which could reduce the period of review and tax determination for those businesses that may currently have a filing obligation in states due to an independent contractor or traveling salespeople working on the business’s behalf. A further review of a business’s operations could identify areas where filing in another jurisdiction may allow the business to purchase equipment exempt from sales and use tax or to restructure the business to improve operational flow while reducing their overall income or franchise taxes. To see if you might be able to take advantage of these strategies, consult your tax adviser.
–Jack Rodriguez, UHY Advisors
Make Major Purchases Now
If you own a business and plan to make any major purchases or improvements in the near future consider doing so before the end of the year. For tax years beginning in 2013, the maximum first-year depreciation write-off (Section 179 deduction) is $500,000, but it is scheduled to drop to $25,000 in 2014. There are limits for most vehicles and if the business generates a loss this deduction may not be available. However, 50% bonus depreciation for most new equipment and software placed in service by December 31, 2013 can be taken even if the business has a loss.
–Kimi L. Butler, Philip G. Brumbaugh CPA, Manager
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