TAX LAW SNAPSHOT Key Provisions for Individuals and Small Businesses Updated Dec. 17, 2014
Jul 18, 2015
TAX LAW SNAPSHOTKey Provisions for Individuals and Small Businesses
Updated Dec. 17, 2014
What Sweeping Tax Changes Mean to You
• Affordable Care Act
- New health care coverage reporting
• High-income taxpayers need to consider
tax-deferral options due to:
- Higher rates
- Additional investment taxes
- Curtailed deductions
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Tax Rates on Ordinary Income and Capital Gains
• The top tax bracket personal income tax rate is 39.6%.
• The top tax bracket for qualified dividend income and long-term capital gains
tax rate is 20% (23.8% if the net investment income applies) with the breakout
below:
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0% rateTaxpayers in lower
income tax brackets
($36,250 or less)
15% rateTaxpayers in middle
income tax brackets
($36,251–$400,000)
20% rateTaxpayers in highest
tax bracket
($400,001 and over)
20% Capital Gains Rate — Example
• Facts:
Single taxpayer with $420,000 in taxable
income ($100,000 from capital gains)
$89,458 Tax on ordinary income
(per tax tables)
• Calculating the tax on capital gains:
$ 2,650 (20% on the income in excessof $406,750)
13,013 (15% on the remaining capitalgains income)
$15,663 Tax on capital gains
• $105,121 Total Tax (before 0.9% HI and 3.8%
Net Investment Income Tax)
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Tax on Net Investment Income (NIIT)
• Affects individuals with income
above certain thresholds
• Applies to capital gains, interest
and dividend income from
investment assets
• May also apply to rental and royalty
income
• Provides for an additional 3.8% tax on
qualified investment income
• Medicare surcharge of .9% may also
apply to earnings
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Alternative Minimum Tax (AMT)
• Created to prevent the wealthy from using tax loopholes to avoid paying
income 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 whichever
results 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 exemption
level phases out were not increased
• Possible pitfall:
- Triggering the AMT when taking certain
tax breaks
• AMT Exemption Amount for Tax Year 2014:
- $52,800 (Single/head of household)
- $82,100 (Married filing jointly)
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Personal Exemptions
• Exemption for 2014 is $3,950 per eligible person
• Phase-out of personal exemptions for higher income taxpayers
• Total amount of personal exemptions for taxpayers and dependents
is reduced if the taxpayer’s adjusted gross income is greater than:
- $305,050 for married couples
- $254,200 for single taxpayers
- $279,650 head of household
- $152,525 married filing separately
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Itemized Deductions
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• There is a limitation on itemized deductions for
high-income taxpayers
• Deductions reduced by 3% of amount by which
taxpayer’s AGI exceeds threshold
• Reduction is limited to 80% of otherwise allowable
deduction (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
Tax Benefits Revived
• Deductions and credits include:
- Deduction for state and local sales taxes
- Exemption for cancellation of debt on a
principal residence
- Deductions for premiums of mortgage
insurance
- Tax credits for making qualified energy-saving improvements
to a personal residence
• Unclear if these benefits will be extended again
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Retirement Planning
• Contribution limits for 401(k)s:
- Up to $17,500 ($23,000 if you are age
50 or older); possible to qualify for an
employer match for some or all
contributions
• All assets in non-Roth retirement accounts
can 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 tax
and indexed for inflation in future years. For 2014, the exemption
is $5.34 million.
• Estate tax rate raised to 40%.
• The “portability” law enabling a surviving spouse to make use of a
deceased spouse’s unused exclusion has been made permanent.
- Example: If husband dies with estate worth $3 million, his unused
exemption amount of $2.34 million will not be lost; wife will have
new exemption amount of $7.68 million.
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Higher Education Incentives
• American Opportunity Tax Credit
- Extended through 2017
- Provides up to $2,500 for
qualified post-secondary
education expenses
• Lifetime Learning Credit
- Provides up to $2,000 for
qualified college or graduate
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 for student loan
interest (without a 5-year limitation)
- $2,000 maximum
contribution for
education savings
accounts
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Health Care Timeline
• Open enrollment in the newly created Health
Insurance Marketplace began Fall 2013
• Coverage started Jan. 1, 2014
• Open enrollment period reopened October 2014
• Self-reporting of minimal essential coverage for
individuals begins on 2014 tax returns
- Must provide proof of coverage
- Penalties assessed if not covered
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TOP TAX ISSUES FOR SMALL BUSINESS
Business Expenses — Part 1Tangible Property Changes
• New rules take effect that:
- Affect businesses that acquire,
produce, or improve tangible property
- Apply to all businesses regardless of the size
- Provide a higher de minimis safe harbor
limit for taxpayers who file an applicable
financial statement
What does this mean for you?
• Review your overall accounting procedures
for compliance. If you are not in compliance
with the new rules, you must file a change
in method of accounting (Form 3115).
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Business Expenses — Part 2 Expired/Expiring Tax Breaks
Expensing of first-year purchases under Section 179
- Until Dec. 31, 2014: Immediately deduct up to $500,000
of eligible tangible business property
- If not extended: Maximum deduction plunges to $25,000
Additional first-year bonus depreciation for business assets
- Extended through 2014
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Small Business Health Care Tax Credit
• Small businesses can qualify for a credit based
on health insurance premiums paid if they:
- Have fewer than 25 FTE employees
- Pay an average annual wage of less
than $50,000
- Contribute 50% or more to employee
health insurance premiums
Small Business Health Care Tax Credit
• For tax years beginning in 2014, the credit is 50% of premiums paid
(35% for small tax-exempt employers)
• Credit will apply only to participants in the Small Business
Health Options Program (SHOP) Marketplace
• SHOP opens to companies with up to
50 employees; expected to expand in 2016
Home Office Deduction
• Part of a business owner’s personal residence
must be used regularly and exclusively as either
the principal place of business or as a place to
meet with patients, customers or clients.
• Using an optional, new safe harbor method
(effective for tax years beginning in 2013),
taxpayers can deduct $5 per square
foot of home office space (up to
300 square feet).
Saving for Retirement
Options include:
• IRA-based plans such as
- Savings Incentive Match
for Employees (SIMPLE)
- Simplified Employee Pension
(SEP) plans
• Profit sharing plans
• A variety of 401(k) plans
State and Local Tax Concerns
• Businesses that provide services
or products in more than one state
may be subject to requirements for:
- tax withholding
- filing
- payment
in many of those states.
• Sales tax rules vary widely
state to state and there may
be differences on the types
of products or services
to which they apply.
Planning Opportunities
• Although new tax laws add complexity,
they also often open up new opportunities.
• We can help you understand your tax
situation and determine the best
steps to address your tax
challenges and any other
financial concerns.
Copyright © 2011 American Institute of CPAs
Copyright © 2013 American Institute of CPAs
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