Tax Planning For 2013: Keeping The American Taxpayer Relief Act In Mind

Francis J. O'Shea for Berry Dunn writes: The budget negotiations in Congress defined the first quarter of 2013, leaving many businesses in a wait-and-see mode for many months. With spring about to end, many businesses would like to come out of "planning" hibernation and look ahead to future years. Given where the American Taxpayer Relief Act (ATRA) stands now, what should you be thinking about?

As you seek to gain control of the opportunities presented by the new tax laws, we've got a few planning ideas for you to consider in 2013 and beyond, including installment sales and a heads-up about possible exposure for taxpayers with foreign assets.

Note the capital gains changes

Under ATRA, the top rate for capital gains increases from 15% to 20% for taxpayers with taxable income exceeding $400,000 for single filers and $450,000 for those filing a joint return.

Understand the new 3.8% Medicare funding surtax

As part of the funding for the Affordable Care Act, effective in 2013, an additional 3.8% surtax will apply to individuals on their "net investment income." This generally includes interest, dividends, and capital gains. It also includes business profits and gains from the sale of business assets if the business is a passive activity with respect to the individual owner. The tax applies when an individual's income exceeds certain minimum threshold amounts ($200,000 for single individuals and $250,000 for married couples). It is applied to the lesser of the amount of net investment income or the amount by which total income exceeds the minimum thresholds.

Structure installment sales

Planning for installment sales in 2013 or later is a little trickier than it used to be. It isn't just about tax deferral anymore—good planning will often reduce the total tax paid. In many situations you will still want to structure sales to spread proceeds over a longer period of time in order to stay under the surtax threshold limits. But suppose your income is normally high enough that some or all of your net investment income is almost always subject to the surtax. In that case, a year in which your other income is much lower than usual or you have big losses might be a good year to elect out of installment treatment on a sale that year. Good planning will be necessary to minimize your taxes.

High-income earners who have income other than wages: Monitor your income

If you used a "prior-year safe harbor" to calculate your 2013 estimated tax payments, the surtax may result in a big bill in April 2014. If you are relying instead on the alternative rule and paying only 90% of the current-year estimated tax, the surtax increases the need to monitor your income throughout the year in order to avoid underpayment penalties.

Pay attention to the changes to the qualified charitable distribution (QCD)

A QCD is an otherwise taxable distribution from an IRA, available for individuals age 70½ and over, that is paid directly from an IRA to a qualified charity. It can be used to satisfy an RMD for the year, and an IRA owner can exclude from gross income up to $100,000 of a QCD made for a year.

A QCD could keep a taxpayer who would otherwise be subject to a higher tax rate in a lower bracket. In addition, for taxpayers with adjusted gross income of $300,000 or higher, your itemized deductions, including charitable contributions, will be limited (i.e., reduced by formula). In that case, a QCD will get you a bigger deduction than a normal gift to charity. Also, a QCD is not reported as income, which could keep you below the surtax income thresholds.

Gifting appreciated securities to qualified charities may be better than ever

A gift of appreciated securities or other property has long been a great way to get a full fair market value deduction while permanently avoiding the tax on the gain. If you are flirting with the surtax, this strategy could be better than ever.

Plan your purchases to take advantage of new dates and higher caps

Bonus first-year depreciation has been extended for one year. The new law extends the 50% first-year bonus depreciation allowable for qualified property placed in service before Jan. 1, 2014. In addition, the rules treating qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property as 15-year property have also been extended through 2013.

The law permits a so-called "Section 179 expense" in the year of purchase of certain property that would normally have to be capitalized and depreciated. The maximum Section 179 amount has been increased for 2012 and 2013 to $500,000. The cap on eligible purchases has been increased to $2,000,000. An extension has also been granted to allow up to $250,000 of qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property to be eligible for expensing under code Section 179.

The allowable increase in first-year deprecation for autos and trucks of $8,000 has been extended through 2013.

Expand hiring, R&D, and education assistance

Now might be a good time to grow your business by hiring new workers or investing in research and development:

• The Work Opportunity Tax Credit has been extended through 2013.
• The Research Credit has been reinstated for 2012 and has been extended so that it applies for amounts paid or accrued before Jan. 1, 2014.
• ATRA permanently extends the exclusion from income and employment taxes of employer-provided education assistance up to $5,250.

Do an FBAR "check-up"

It pays to make sure you're doing your Foreign Bank Account Reporting (FBAR). Penalties are high if you don't comply, even unknowingly.

A "foreign financial account" is defined as an account such as a savings, demand, checking, deposit, securities, or brokerage account that is located outside the US.

• Form TDF 90-22.1
  If you (as a US resident) have a financial interest or signature authority over foreign financial accounts and if the aggregate value exceeds $10,000 at any time during the year, you need to file Form TDF 90-22.1 by June 28 with the Department of the Treasury. Civil penalties can be up to $10,000 per violation, and the penalty for willful failure to report could be the greater of $100,000 or 50% of the account balance.
• Form 8938
  Currently only individuals need to file Form 8938 if ownership of specified foreign financial assets exceeds the applicable threshold amount of $100,000 at end of year. If you are married filing joint, the threshold is $150,000 at any point during the year. These are generally assets held for investment or any interest in a foreign entity. To file, attach the form to your annual income tax return filed with IRS. Penalties for failure to file can be up to $60,000. You are not required to file if income tax filing is not required.
• For more on this subject
  See the more comprehensive article and chart on foreign financial activity reporting requirements.

There are numerous additional provisions in the tax law for 2013 and beyond for both businesses and individuals. Remember to include tax planning in your annual review of your overall financial planning and investment strategies.