INDIVIDUAL TAX ISSUESWhat Will Affect Your Return in 2014

Updated Nov. 15, 2013

What Sweeping Tax Changes Mean to You

• American Taxpayer Relief Act (ATRA) — extensivechanges that affect planning

• High-income taxpayers need to considertax-deferral options due to:

- New higher rates

- Curtailed deductions

• Middle-income taxpayers cantake advantage of extendedtax benefits

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New Tax Rates on Ordinary Income and Capital Gains

• The top tax bracket personal income tax rate increased from 35% to 39.6%.

• The top tax bracket for qualified dividend income and long-term capital gains tax rate increased from 15% to 20% (23.8% if the new net investment income applies) with the breakout below:

- Taxpayers in lower income tax brackets ($36,250 or less): 0% rate

- Taxpayers in middle income tax brackets ($36,251-$400,000): 15% rate

- Taxpayers in highest tax bracket ($400,001 and over): 20% rate

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20% Capital Gains Rate — Example

• Facts:

Single taxpayer with $420,000 in taxable income ($100,000 from capital gains)

$89,731 Tax on ordinary income (per tax tables)

• Calculating the tax on capital gains:

$ 4,000 (20% on the income in excess of $400,000)

12,000 (15% on the remaining capital gains income)

$16,000 Tax on capital gains

• $105,731 Total Tax (before 0.9% HI and 3.8% Net Investment Income Tax)

New Tax on Net Investment Income

• Affects individuals with incomeabove certain thresholds

• Applies to capital gains, interestand dividend income frominvestment assets

• May also apply to rentaland royalty income

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Alternative Minimum Tax (AMT)

• Created to prevent the wealthy from using tax loopholes to avoid payingincome tax

• How does it work?

- Re-computes taxable income by adding back certain non-taxable income and removing some deductions

- Re-computed income is then multiplied by a flat rate = AMT

• AMT is compared to regular tax and whicheverresults in the higher tax is the amount owed

• Can be very complex to calculate

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AMT – Good and Bad News

• Good news:

- A higher AMT exemption

- AMT now indexed for inflation

• Bad news:

- The income levels at which the exemptionlevel phases out were not increased

• Possible pitfall:

- Triggering the AMT when taking certaintax breaks

• AMT Exemption Amount for Tax Year 2013:

- $51,900 (Single/head of household)

- $80,800 (Married filing jointly)

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Personal Exemptions

• Phase-out of personal exemptions reinstated

• Total amount of personal exemptions for taxpayers and dependentsis reduced if the taxpayer’s adjusted gross income is greater than:

- $300,000 for married couples

- $250,000 for single taxpayers

- $275,000 head of household

- $150,000 married filing separately

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Itemized Deductions

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• There is a limitation on itemized deductions forhigh-income taxpayers

• Deductions reduced by 3% of amount by whichtaxpayer’s AGI exceeds threshold

• Reduction is limited to 80% of otherwise allowablededuction (i.e., taxpayers will receive at least 20%of itemized deductions)

• Exception for certain itemized deductions:

- Medical expenses

- Investment interest expense

- Casualty or theft losses

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Itemized Deduction Limit — Example

• Married taxpayers (filing jointly) have the following deductions:

- Medical expenses of $6,000 (post 10% AGI floor)

- State income taxes of $30,000

- Mortgage interest of $20,000

- Charitable contributions of $7,000

• AGI is $350,000

• Threshold for 2013 is $300,000

• AGI exceeds threshold by $50,000 ($350,000-$300,000)

• Result: Itemized deductions are reducedby $1,500 (3% x $50,000)

Some Tax Benefits Set to Expire

• The ATRA extended many deductions and credits until Dec. 31, 2013:

- Deduction for state and local sales taxes

- Some credits and benefits for families, such as the $1,000 child tax credit

- Exemption for cancellation of debt on a principal residence

- Tax credits for making qualified energy-saving improvementsto a personal residence

• Unclear if these benefits will be extended again

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Retirement Planning

• Higher contribution limits for 401(k)s:

- Up to $17,500 ($23,000 if you are age50 or older). Possible to qualify for anemployer match for some or allcontributions.

• All assets in non-Roth retirement accountscan be converted to a Roth IRA or Roth 401(k).

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Estate and Gift Taxes

• Estates up to $5 million now permanently exempt from estate taxand indexed for inflation in future years. For 2013, the exemptionis $5.25 million.

• Estate tax rate raised to 40%

• The “portability” law enabling a surviving spouse to make use of adeceased spouse’s unused exclusion has been made permanent.

- Example: If husband dies with estate worth $3 million, his unusedexemption amount of $2.25 million will not be lost; wife will havenew exemption amount of $7.5 million

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Charitable Contributions

• Taxpayers age 70½ and older can once againmake up to $100,000 of tax-free distributionsfrom an IRA directly to qualified charities.

• Contributions are:

- Not deductible, but the IRAdistributions are excludedfrom gross income

- Counted toward the minimumrequired distributions for theyear and may also reduce theamount of taxable SocialSecurity benefits

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Higher Education Incentives

• American Opportunity Tax Credit

- Extended through 2017

- Allows eligible taxpayers toclaim a tax credit for qualifiedpost-secondary education expenses

• Lifetime learning credit andabove-the-line deduction forqualified tuition and expenses

• Above-the-line deduction for qualified tuition and expenses

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Higher Education Incentives

• Permanent extensions of:

- $5,250 exclusion for employer-provided educational assistance

- $2,500 deduction forstudent loan interest(without a 5-year limitation)

- $2,000 maximum contributionfor education savings accounts

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Health Care Timeline

• Open enrollment in the newly created HealthInsurance Marketplace began Fall 2013

• Coverage can start as early as Jan. 1, 2014.

• Open enrollment closes March 31, 2014, andwill not open again until October 2014

• Other key provisions are scheduled to becomeeffective in the coming year

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Planning Opportunities

• Although new tax laws add complexity to the system,they also often open up new opportunities to minimizeyour tax bill.

• We can help you understand your tax situation anddetermine the best steps to address your taxchallenges and any other financial concerns.

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Copyright © 2011 American Institute of CPAs

Copyright © 2013 American Institute of CPAs

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