Year-end tax planning is always complicated, given that you need to consider what may lie ahead in the New Year, and 2013 is no different. However, with the introduction of new provisions through the American Taxpayer Relief Act 2012 (ATRA) and the Patient Protection and Affordable Care Act 2010 (ACA), plus many provisions set to expire in 2013, there is even more reason to consider reviewing your tax plans with your tax advisors and making any necessary changes. This is especially important for the higher income group, who have an additional tax burden in the form of the NIIT surtax.
The team at AG Tax have outlined a few key strategic points that U.S. taxpayers may find useful, in addition to the basic planning measures discussed in our earlier article (Qualifying Deductions on your U.S. Tax Return for the October 15th deadline).
Carrying Forward Capital Losses
Taxpayers may consider carrying forward the capital losses from past years to offset increased capital gains of the current year, in order to manage the income subject to the increased tax rates from 2013 onwards. In fact, we recommend consulting your tax practitioner regarding spreading the gains over multiple years, rather than recognizing all the capital gain in one year and paying higher taxes.
NIIT surtax
The newly introduced NII surtax and additional Medicare tax of 0.9% are based largely on Net Investment Income (NII) and Modified Adjusted Gross Income (MAGI). Therefore, a taxpayer should consider certain measures that could help minimize their MAGI or NII, and try keeping their MAGI below the NIIT threshold limit (based on their filing status threshold – $200,000 for single, $125,000 for married filing singly, and $250,000 for married filing jointly). Taxpayers may also consider increasing the contributions into their qualified retirement plan to reduce income subject to taxes.
AMT liability
ATRA also modified the Alternate Minimum Tax (AMT) threshold limit to $51,900 for single-filers and $80,800 for joint-filers, with a 26% tax on the first $175,000, followed by a 28% tax on the remaining amount. Taxpayers should review their AMT liability in comparison to their regular tax liability, since large amounts of certain items (such as itemized deductions for medical expenses, income from incentive stock options and/or an installment sale amount) may trigger AMT. Employees should consult tax advisors and participate in their employer pre-tax medical deduction plans to reduce income subject to AMT liability.
Child Tax Credit
Although the Child Tax Credit has increased to $1,000 per qualifying child, a taxpayer should look into the actual incurred childcare or education expenses, as they may qualify for special tax breaks. In case of a separated couple sharing the expenses of the child, it is important to reach a proper conclusion regarding the dependency status of the child for tax purposes, as both parents may not qualify for the credit.
Health Flexible Savings Account
The ACA capped the Health Flexible Savings Account (FSA) contribution amount to $2,500 per year, subjecting additional contributions to taxes. A taxpayer should look into the tax planning options including the ‘use it or lose it’ available.
Pease Limitation
The revised and modified Pease Limitation will affect individuals with an Average Gross Income (AGI) that exceeds the levels for 2013 below:
• $300,000 for married couples and surviving spouses,
• $275,000 for heads of households,
• $250,000 for unmarried taxpayers,
• $150,000 for married taxpayers filing separately.
Income beyond these limits will face an itemized deduction limitation that is the lesser of:
• 3% of the difference between the actual AGI and the limit, or
• 80% of the amount of the itemized deductions otherwise allowable for the taxable year.
The Pease Limitation does not apply to itemized medical expenses, and the unreimbursed qualifying medical expense deduction limit has been increased to 10% of AGI for taxpayers below the age of 65, providing an opportunity for tax planning with dependent medical expenses. The limit for taxpayers above 65 years of age is 7.5% of AGI.
Additionally, the Personal Exemption Phase-out has been reduced by 2% for each $2,500 or portion by which the taxpayer’s AGI exceeds the threshold for the Pease Limitation.
This list is just a sample of the various concerns of, and opportunities available to, a taxpayer. There are many other topics that a taxpayer should speak to his/her tax advisor about to ensure proper and thorough tax planning, such as legally married recognition status for same-sex couples, deductions and credits for education or tuition costs, moving expenses, casualty losses, natural calamities, change in tax filing status, retirement, employment change etc. are some
AG Tax LLP can help
If you have any tax-related queries or need assistance with tax planning or your personal or business tax filings, please contact AG Tax. Our tax professionals are highly-experienced with U.S. and Canadian personal, corporate and estate tax laws and can provide you with step-by-step guidance to handle your tax situation.
Aylett Grant Tax LLP is a full service accounting firm with a dedicated team of experts, who are highly-qualified and experienced in handling situations related to U.S., Canada and other international tax laws. We can assist with:
• U.S. and Canadian tax planning
• Personal and corporate tax returns
• U.S. tax or cross-border tax considerations
• Retirement planning
• Estate Planning, Inheritance tax advice
IRS Circular 230 Disclaimer: Please note that this document is to be considered other written advice. Any tax advice in this document was not intended or written to be used, and cannot be used, for the purpose of avoiding tax penalties that may be imposed on the taxpayer under the Internal Revenue Code or applicable state or local tax law provisions.
Furthermore, the information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.
