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Overview of 2013Income Tax Changes

Main Line Association for Continuing Education

November 21, 2013

Richard G. Furlong, Jr.Senior Stakeholder Liaison

Small Business/Self-Employed Division

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• Explain significant provisions of the American Taxpayer Relief Act of 2012

• Discuss inflationary adjustments for 2013

• Review new IRS optional simplified method for business use of home deduction

Objectives

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ATRA 2012

• H.R. 8 signed by the president into law on January 2, 2013

• What was not extended:

–No extension of the payroll tax cut

• 6.2 percent rather than 4.2 percent ($113,700 wage base)

• Applies to wages paid and self-employment

P.L. 112-240

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Permanent Extensionsand More

• Individual tax rates retained (in percentages: 10, 15, 25, 28, 33 and 35)

• New top rate of 39.6 percent – high incomes

• Marriage penalty relief

• Increased standard deduction for MFJ

IRC 1

IRC 1(F)(8)(A)

IRC 63c(2); IRC 63 (c) (7)

Rev. Proc. 2013-15

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Permanent ExtensionsCapital Gains

• AMT capital gain rates – same using AMT taxable income

• Zero percent rate retained for taxpayers in 10 – 15 percent brackets

• 15 percent bracket retained for middle income taxpayers

• 20 percent rate applies to capitals gains, dividends, gain amounts beyond the 39.6 percent bracket limitation amounts and 28 percent rate applies to collectibles

IRC1(h)(1)

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• “Pease” limit on itemized deductions

• Personal exemption phase-out

IRC 68

IRC 151

Two Prior Provisions Reinstated

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• Business standard mileage rate 56.5 cents per mile

• Exemption amount $3,900

• IRA deduction and phase-outs increased

• Minimum standard deduction for dependents $1,000

• AMT exemptions increased (permanent)

IRC 55

Inflationary Adjustments

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• Medical expenses (Sch. A)

–Reduced by 10 percent of AGI

–If 65 or older only reduced by 7.5 percent

• Applies if either you or spouse is 65 or older

IRC 213

Medical Deduction Limitations

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• New lines 1a and 8a on Schedule D allow for reporting without using Form 8949, for transactions correctly reported to the IRS with the correct basis amount

• Substitute Form 1099-B reporting guidelines are to follow Form 8949 format

• For the latest information, go to: IRS.gov/scheduled or IRS.gov/form8949

Schedule D/Form 8949Aggregate Transaction Reporting

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Extension and Modification of Bonus Depreciation

• Extends 50-percent additional first year depreciation deduction to include 2013

– through 2014 for certain longer-lived and transportation property

• Claimed on Form 4562, Depreciation and Amortization, Part II

• See Publication 946, How To Depreciate Property

IRC 168

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Extension of 15-Year Straight-Line Cost Recovery

• Retroactively extends rules to include 2012 and 2013

• Allows depreciation over 15 years for leasehold improvement property, qualified restaurant property and qualified retail improvement property

• See Form 4562 and Publication 946 for more information

IRC 168

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Treatment of Certain Real Property as Section 179 Property

• Retroactively extends to include 2012 and 2013

• Maximum amount is $500,000 of the cost of qualifying property placed in service for the taxable year – with exceptions and reduced if exceeds $2 million

• See Form 4562 and Publication 946 for more information

IRC 179

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Extension of Work Opportunity Tax Credit

• Retroactively allows taxable employers to claim the WOTC for all of the targeted group employee categories listed on Form 5884

–If hired on or after Jan. 1, 2011 and before Jan. 1, 2014

• Extends expanded WOTC for hiring qualified veterans through Dec. 31, 2013, for both taxable and tax-exempt employers

(Note: tax exempt employers use Form 5884-C)

IRC 51

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Fringe Benefit for Mass Transit

• Retroactively increased to Jan. 1, 2012, the maximum monthly excludable transit benefit exclusion to $240 per month from $125

• Now the maximum monthly excludable amount for employer-provided transit benefits equals the same excludable amount for qualified parking beginning on January 1, 2012, through December 31, 2013

IRC 132

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Fringe Benefit for Mass Transit

• The maximum monthly excludable amount for employer-provided commuter highway vehicle transportation and transit pass benefits for 2013 is $245

• The exclusion applies whether the employer provided the benefits out of its own funds or whether they were provided through salary reduction arrangements

• Publication 15-B, Employer's Tax Guide to Fringe Benefits

Notice 2013-8

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Extension of Temporary Exclusion of 100 Percent of Gain on Certain Small Business Stock

• Retroactively extends the 100-percent exclusion of the gain from the sale of qualifying small business stock that is acquired before Jan. 1, 2014 and held for more than five years

• The earliest tax year for which this 100-percent capital gain exclusion can be claimed is 2015

• See Pub 550, Form 1040 Sch D and Form 8949 for more information

IRC 1202

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Extension of Basis Adjustment to S Corp Stock/Charitable Contributions of Property

• Extends to include 2012 and 2013

• Provides that if an S corporation contributes money or other property to a charity, each shareholder takes into account the shareholder’s pro rata share of the contribution in determining its own income tax liability

–Reduce the basis by the amount that flows through to the shareholder

IRC 1367

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Extension of Reduction in S-Corp Recognition Period for Built-In Gains Tax

• Retroactively extends to include 2012 and 2013

• Built-in gains are reported on Form 1120S Schedule D, Part III

• See Pubs 544 and 550 for more information

IRC 1374

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Extension of Empowerment Zone Tax Incentives

• Retroactively extends period for which the designation of an empowerment zone is in effect to include 2012 and 2013

• ATRA extension did not automatically extend existing EZ termination dates had as part of its original nomination for designation by a state

• Notice 2013-38, deems the termination date to be extended to December 31, 2013, unless the nominating entity informs the Service that it affirmatively declines the extension IRC 1391

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American Opportunity Credit Extended Through 2017

• American Opportunity Tax Credit

–100 percent of the first $2,000 of qualified expenses

–25 percent of the next $2,000 of qualified expenses

–First 4 years of post secondary education

–Must reduce expense by tax free scholarships and excludable expenses

–Form 8863

IRC 25(A)(i)

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Nonbusiness Energy Credit Extended Through 2013

• One year extension

• Maximum $500 lifetime

• Must disclose prior energy credits taken

• Limit of $200 for windows and skylights

• Other limitations are certain property

• Form 5695 and instructions

IRC 25C

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2011 Expiring Provisions ExtendedThrough End of 2013

• Optional sales tax (Sch. A)

• Conservation easement donations

• Tuition deduction above the line

–1040 adjustment to income

–Retroactively reinstated for 2012

–Form 8917

IRC 164 (b)

IRC 170(b)

IRC 222

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2011 Expiring Provisions ExtendedThrough End of 2013

• Tax free distributions from Individual Retirement Accounts plans for charitable purposes (Sec. 408(d))–Maximum $100,000 annually–Must be a direct transfer–No income/no charitable deduction–Must be over age 70 ½–Must be made to a qualified charitable

organization (Sec. 170)–Required Minimum Distribution will qualify

IRC 408(d)(8)

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2011 Expiring Provisions ExtendedThrough End of 2013

• Teacher deduction

–Restored for 2012 and extended

• Discharge of residence debt excluded from income (Form 982)

• Treatment of mortgage insurance premiums as home mortgage interest (Sch. A)

IRC 62

IRC 108(h)(2)

IRC 163(h)

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Limited EITC Extension Through 2017

• Earned income credit enhancements

–Increased amounts

– Refundable credit

– Form 8867 due diligence requirement

IRC 32

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Limited CTC Extension Through 2017

• Child tax credit enhancements

–Increased amount

–Refundable portion

–New questions to address on Form 8812

–More than four children special procedure

IRC 24

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Permanent Extensions

• Student loan deduction enhancements–Maximum $2,500 a year–Phased out for high income taxpayers–Must meet requirements

• The exclusion of employer-provided educational assistance –Maximum $5,250 per year–Sometimes noted on the W-2

• The employer provided child care credit

IRC 221, 127 and 45F

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Coverdell Education Savings Accounts Made Permanent

• The higher contribution amount and other Economic Growth Tax Relief Reconciliation Act changes to Coverdell Education Savings Accounts

–Max per year $2,000 (total for all accounts)

–Not deductible on Form 1040

–Earnings grow tax free

–Distribution must be used for educational purpose

IRC 530

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Child and Dependent Care CreditEnhancements Made Permanent

• Child and Dependent Care Credit

–Credit between 20 percent and 35 percent

–Maximum $3,000/$6,000

–$15,000 through $43,000 AGI phase out

IRC 21

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• New optional simplified method

–Maximum 300 square feet

–Flat deduction of $5 per sq. ft.

• Form 8829 not required

• For the latest information, go to irs.gov: Search: “Home Office FAQs”

Rev. Proc. 2013-13

Business Use of Home

3131

• Questions?

• www.IRS.gov

• Draft forms and instructions:

–www.IRS.gov/draftforms

• Thomas (The Library of Congress):

–thomas.loc.gov

Summary

Richard G. Furlong Jr.

215-861-1551

Richard.G.Furlong@irs.gov

Contact Information