While congress remains tied up in discussions of government shutdowns and debt ceiling increases and with the passage of the American Taxpayer Relief Act, and the Patient Protection and Affordable Care Act, there are many changes in the tax law that we need to prepare for. Now is a good time to take a another look at those changes that impact 2013 and 2014 and make any necessary tax planning adjustments to minimize tax liabilities. Here are a few of the tax law changes they may impact you or your business in the coming months.
Patient Protection and Affordable Care Act passed by congress on 3/23/10
a. Added an additional Medicare Tax starting in 2013 of .9% of wages in excess of Married Filing Jointly ("MFJ") >$250,000, Single >$200,000.
b. Added a Net Investment Income Tax starting in 2013 of 3.8% of Unearned Income. This Medicare Contribution Tax is based on lesser of Net Investment Income or Excess Modified Adjusted Gross Income over MFJ $250,000, Single $200,000.
c. Investment Income includes such things as interest, dividends and net gain from sale of non-trade or business property.
d. Created the Small Business Health Insurance Credit starting in 2010 which applies to employers with less than 25 employees and average full time wages <$25,000, For 2010 through 2013, the tax credit can be as high as 35% of employer insurance contributions. For 2014 through 2015, the tax credit can be as high as 50% of employer insurance contributions.
e. Requires minimum essential health care coverage for individuals beginning in 2014. Those who do not comply will be subject to a tax penalty. The individual tax penalty is the greater of 300% of the flat rate ($95 in 2014 ) or a % of excess income (1% in 2014). The act also applies to employers with 50 or more full time equivalent ("FTE") employees where FTE is considered 30 hrs per week or more. Part time employee hours for the month are aggregated and divided by 120 to determine FTE. Insurance must be offered by the employer to full time employees only. The annual business tax penalty for non-compliance is $2000 x # full time employees > 30 or $3000 x full time employees who qualify for insurance the credit.
f. Expanded Medicaid - the act increases state coverage for individuals to 133% of federal poverty line, vs. considerably lower, non-compliance by the state results in a lose federal Medicaid funds
g. Added the Premium Assistance Credit beginning in 2014 to help support the cost of healthcare and is provided to households with income between 100% and 400% of the federal poverty limit
h. Deems Employer Insurance unaffordable if insurance cost to the individual is greater than 9.5% of their household income - self only coverage
i. Increases Dependent coverage to age 26 from age 19 or age 24 for students
American Taxpayer Relief Act of 2012 passed by congress on 1/1/2013
a. Increases the maximum individual tax rate beginning in 2013 from 35% to 39.6% MFJ >$450,000, Single >$400,000, and yes the marriage penalty is back!
b. Increases the Long Term Capital Gain Rate beginning in 2013 from 15% to 20% of gain. This rate could be as high as 23.8% when the net investment income tax is added. This higher rate applies to MFJ >$450,000, Single >$400,000.
c. Phases out Itemized Deductions and Personal Exemptions beginning in 2013 with the phase out limits starting at Adjusted Gross Income ("AGI") of MFJ >=$300,000 and Single >= $250,000
d. Extends some expired tax breaks through 2013, including the Income exclusion for discharge of principal residence indebtedness up to $2,000,000, the 50% bonus depreciation deduction for qualifying personal property and the expanded Section 179 deduction of $500,000 for personal property. The Section 179 deduction begins to phase out when the equipment acquisition is >= $2,000,000.
e. Extends some expired tax breaks through 2017 such as the American Opportunity Credit for higher education (post secondary education) where it increases the possible credit from $1800 to $2500. This credit is now allowed for up to 4years instead of 2 years, 40% of the credit is now refundable.
f. Extends some expired tax breaks retroactively without sunset such as the Student Loan Interest Deduction of up to $2500, the Dependent Care Credit of up to $1200, the Earned Income Credit up to $5,800 and the Child Tax Care Credit up to $1000 per child.
g. Increases retirement plan contribution limits such as the 401K contribution limit which increased from $17,000 to $17,500 and if you are over 50 years old, from $22,500 to $23,000. It also increases the IRA Contribution limit from $5,000 to $5,500, and if you are over 50 years old, from $6,000 to $6,500.
As we near the end of 2013, it is a good time to take a another look at the significant tax law changes that impact 2013 and 2014 and make any necessary tax planning adjustments to minimize tax liabilities.
If you have any questions regarding these changes or any other tax planning questions please give us a call!
Paul J. Beckert MBA, CPA
Pinnacle Business Solutions
Note: The information contained in this material represents a general overview of tax regulations and should not be relied upon without an independent, professional analysis of how any of these provisions apply to a specific situation.