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FISCAL CLIFF REDUX
© 2012 McDowall Cotter1
FISCALFISCALCLIFFCLIFFREDUXREDUX
© 2012 McDowall Cotter3
Robert D. Vale
© 2012 McDowall Cotter4
Brett S. Lytle
© 2012 McDowall Cotter5
FISCAL CLIFF?
In late February 2012, Ben Bernanke, Chairman of the U.S. Federal Reserve, was the first person to use the term "fiscal cliff" for this crisis. Before the House Financial Services Committee he described that "a massive fiscal cliff of large spending cuts and tax increases" would take place on January 1, 2013.
© 2012 McDowall Cotter6
SEQUESTRATIONSRemember Those?
Still possible?
© 2012 McDowall Cotter7
ESTATE & GIFT TAXESThe Estate and Gift tax remains essentially
unchanged from 2012. The estate tax rate was increased from 35% to 40%, but the Unified (Gift and Estate) Tax remains at the 2010 level and will increase annually through an inflation factor.
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ESTATE & GIFT TAXESThe Estate Tax fix is one which will not need to
be re-determined in 2014.
The Unified Estate Tax Exemption for 2013 is $5.25 million per person. Give it away now or at death is what makes it “unified”.
The same exemption applies to the Generation Skipping Tax which means large gifts can be made to grandchildren without incurring a penalty tax.
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ESTATE & GIFT TAXESPortability of the Estate Tax Exemption is now in
place and will not be subject to phase out in 2014.
Portability = A surviving spouse can use his or her spouse’s unused portion of the Estate Tax Exemption.
In order to do so, the surviving spouse will have to file an estate tax return within the time limits prescribed by law.
No Generation Skipping Exemption available with Portability.
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ANNUAL EXCLUSIONInflation adjusted increase in the annual
exclusion amount. The amount an individual can gift to another on an annual basis with no reporting requirement was increased from $13,000 to $14,000.
- Remember, payments of tuition and medical expenses directly to the institution or the health care provider are not counted as part of the annual exclusion amount.
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INCOME TAX UPDATE
© 2012 McDowall Cotter12
FEDERAL INCOME TAX RATESRate SF MJF HoHF
10% $0 to $8,925 $0 to $17,850 $0 to $12,750
15% $8,925 to $36,250 $17,850 to $72,500 $12,750 to $48,600
25% $36,250 to $87,850 $72,500 to $146,400 $48,600 to $125,450
28% $87,850 to $183,250 $146,400 to $223,050 $125,450 to $203,150
33% $183,250 to $398,350 $223,050 to $398,350 $203,150 to $398,350
35% $398,350 to $400,000 $398,350 to $450,000 $398,350 to $425,000
39.6% $400,000 and up $450,000 and up $425,000 and up
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PAYROLL TAXHeadline: The payroll tax holiday has taken a
holiday
The Story:
If you are a W-2 wage earner, go to the tax-man and pay an extra 2%- the vacation is over:
Single taxpayer pays up to $2,202 more per year
Working couple pays up to $4,404 more per year
Good news*
*extra tax used to cover cost of social security
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TAX RELIEF FOR FAMILIES WITH CHILDREN CONTINUES
Also permanently extended, an expanded adoption credit and adoption assistance program exclusion, an expanded dependent care credit, the credit for employer expenses for child care assistance and the 2001 modifications to the child tax credit, which allowed taxpayers below a certain income threshold to reduce their income tax for each child under 17. The modification increased the credit from $500 to $1,000.
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PHASE OUT OF PERSONAL & DEPENDENT EXEMPTION DEDUCTIONS
Personal and Dependent Exemption write-offs can be reduced or eliminated.
Phase out start at:
$250,000 AGI for Single Filers
$300,000 AGI for Married Joint Filers
$275,000 for Head of Households
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CAPITAL GAINSThose below the thresholds will see a 15%
capital gains and dividends rate (and those in the 10% and 15% brackets will see a permanent 0% rate)
Singles with income of $400,000 or couples with income of $450,000 will pay 20% federal tax
* Don’t forget California Tax
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CAPITAL GAINS
Tax Rate Long Term Capital Gains Tax Qualified Dividend Tax
10% 0% 0%
15% 0% 0%
25% 15% 15%
28% 15% 15%
33% 15% 15%
35% 15% 15%
39.6% 20% 20%
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OBAMA HEALTHCARE TAX3.8% Rate
On the lower of:
Net investment income for the year or
Modified adjusted gross income threshold:
$250,000.00 Couples
$200, 000.00 Individuals
When added to increased capital gains rates, high earners will be paying at a 23.8% federal capital gains rate
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AMTA permanent “patch” for the alternative minimum
tax, so no more annual (or biannual) end-of-year waiting games to see if it will be indexed for inflation.
AMT exemption:
- $51,900 for Single filers
- $80,800 for married joint filers
SOME DEDUCTIONS TO CONSIDER
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EDUCATOR EXPENSE DEDUCTIONSThe bill extends for two years the $250
deduction for teachers who spend money on classroom supplies, materials, books and software.
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DEDUCTION FOR QUALIFIED TUITITION-RELATED EXPENSES
Extended through 2013, college students may deduct a maximum of $4,000 (for taxpayers with an adjusted gross income of $65,000 or less, $130,000 for joint returns) or $2,000 (for taxpayers with an adjusted gross income of $80,000 or less, $160,000 for joint returns).
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MORTGAGE DEBT RELIEFAlso extended through 2013, taxpayers whose
mortgage debt is cancelled or forgiven may exclude from income up to $2 million in forgiven debt ($1 million if filing separately).
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MORTGAGE INSURANCE PREMIUM DEDUCTIBILITYAgain, extended through 2013, taxpayers who
meet income requirements may deduct the cost of mortgage insurance on a qualified personal residence.
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MARRIAGE PENALTY RELIEFPermanently extended are both the increased
standard deduction for married joint filing taxpayers and the increase of income allowable in the 15% tax bracket.
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BUSINESS PROVISIONSA two-year extension (through 2013) on the
Research and Experimentation tax credit, the Work Opportunity Tax Credit, the 15-year straight-line recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements.
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Emergency Unemployment Insurance BenefitsUnemployment Insurance Benefits extended an
additional year
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AND THEN THERE’S CALIFORNIA…….Good News: No Capital Gains Tax
Bad News Capital Gains taxed at ordinary income tax rates
and, there’s more…………..bad news
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INCREASE IN STATEWIDE BASE SALES & USE TAXSales and Use tax increase of .25% from
January 1, 2013 through December 16, 2016
7.25% to 7.5%
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HIGH INCOME EARNERS TO PAY MORE CALIFORNIA TAX
Single Filers
Old Rates New Rates
1.0% > $0 1.0% > $0
2.0% > $7,318 2.0% > $7,318
4.0% > $17,348 4.0% > $17,348
6.0% > $27,377 6.0% > $27,377
8.0% > $38,004 8.0% > $38,004
9.3% > $48,029 9.3% > $48,029
10.3% > $1,000,000 10.3% > $250,000
11.3% > $300,000
12.3% > $500,000
13.3% > $1,000,000
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HIGH INCOME EARNERS TO PAY MORE CALIFORNIA TAX
Married Filers
Old Rates New Rates
1.0% > $0 1.0% > $34,692
2.0% > $14,632 2.0% > $14,632
4.0% > $34,692 4.0% > $34,692
6.0% > $54,754 6.0% > $54,754
8.0% > $76,008 8.0% > $76,008
9.3% > $96,058 9.3% > $96,058
10.3% > $1,000,000 10.3% > $500,000
11.3% > $600,000
13.3% > $1,000,000
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WHAT TO DO IN 2013
Tax tips to consider as suggested by some of our friends
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NANCY PYZEL
Nancy Pyzel A Life Well Spent
920 Saratoga Ave., #100San Jose, CA 95129
Tel: 408-244-2448Fax:408-244-1239
nancy@alifewellspent.net
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TRADITIONAL v ROTH IRAConsider converting from a traditional IRA to a
Roth IRA- Higher tax rates into the foreseeable future mean you may pay more in taxes when you take your IRA funds at retirement.
If tax rates significantly lower during retirment than theyt are now, the strategy is not effective.
Review with your advisor; if you do not have an advisor, Nancy Pyzel will be happy to provide an analysis.
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STEVEN STEINER
Stephen SteinerDirector, Gift Planning
San Francisco Symphony201 Van Ness Ave.
San Francisco, CA 94102Tel: 415-503-5445
ssteiner@sfsymphony.org
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CHARITABLE GIVING IN GENERALCharitable gifting lowers AGI which reduces
taxable income
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THE IRA CHARITABLE ROLLOVERFor a Limited Time can be Used for Tax
Savings in 2012 The American Taxpayer Relief Act of 2012, allows
individuals who are 70½ or older can again transfer up to $100,000 from their IRAs directly to qualified charities.
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THE IRA CHARITABLE ROLLOVERFor a Limited Time can be Used for Tax
Savings in 2012 Qualified distributions made before February 1, 2013 may
be counted retroactively for the 2012 tax year. In addition, a taxpayer who took an IRA distribution in December 2012 may make a contribution to a qualified charity before February 1, 2013 and treat it as a direct transfer.
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THE IRA CHARITABLE ROLLOVERThe American Taxpayer Relief Act of 2012 also
allows your clients who want to make an IRA charitable rollover in 2013 to do so through December 2013.
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WHY CHARITABLE ROLLOVER?Reduction of income for AMT avoidance.
Lower AGI lowers the 2% threshold for itemized deductions and the 10% threshold for health cost deductions.
If taxpayer already exceeds 50% of AGI for charitable contributions.
Taxpayer looking for lower AGI to avoid increased dividend income for high wage earners.
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CHARITABLE REMAINDER TRUSTSFund Charitable Remainder Trust with low cost basis
appreciated property.
1) The charitable deduction will result in greater tax savings due to higher tax rates
2) Any capital gain from the sale of the property is realized inside the tax-free trust. The trust can reinvest all of the proceeds with no taxes being paid, and pay the donor/beneficiary a percentage of the value of the trust assets every year.
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MIKE HOWARD
Mike Howard Emery & Howard
400 S. El Camino Real, #700San Mateo, CA 94402
Tel: 650-579-7100Fax:1-650-579-7313
mike@emeryhoward.com
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TAX FREE INVESTMENT PLANNINGConsider investments in tax free vehicles.
Remember AMT issues
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NORMAN GOLDEN, E. A.
Norman Golden, E.A. 1900 South Norfolk St., #265
San Mateo, CA 94403Tel: 650-212-1040Fax:650-661-1041
norman@goldentax.com
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NONEMPLOYEE’S COMPENSATION FOR SERVICES
The rules about Forms 1099 have changed, and the penalties for failing to follow them have increased dramatically.
Form 1099-MISC is an income-reporting
document required by the IRS. Form 1099-MISC (“Form 1099”) is issued to report payments made for rent, royalties, nonemployee compensation, and other income.
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NON-EMPLOYEE’S COMPENSATION FOR SERVICES
There are now two penalties for failing to issue Forms 1099.
One, the IRS is accessing a $30 to $100 per recipient penalty for failing to timely file the form.
The second and more severe penalty is the disallowance of the deduction for the payments not reported on the Form 1099.
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NON-EMPLOYEE’S COMPENSATION FOR SERVICES
Who must file –
Among those required to file Forms 1099s are:
Individuals Partnerships
LLCs C-Corporations
S Corporations Estates
Trusts Non-Profit Organizations
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NON-EMPLOYEE’S COMPENSATION FOR SERVICES
What is nonemployee compensation and who must be issued a Form 1099?
If the following four conditions are met, you must
report a payment as nonemployee compensation:
1)You paid someone who is not your employee;
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NON-EMPLOYEE’S COMPENSATION FOR SERVICES
2) You made the payments for services in the course of your trade or business (including non-profit organizations);
3) You made the payment to an individual, partnership, estate, trust or, in some cases, a corporation; and,
4) Your payments to the payee totaled at least $600 during the year.
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NON-EMPLOYEE’S COMPENSATION FOR SERVICESPlease note – Over the years, Norm has seen
nonemployees refuse to provide all the information necessary to prepare the Forms 1099, mistakenly thinking that they can avoid reporting the income if they don’t get one. Their refusal puts the payer (you!) in jeopardy, since the penalties are assessed against you for not properly completing the Form. Get a completed and signed Form W-9 before you pay any amount to a nonemployee.
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THANKS FOR ATTENDING
www.mcdlawyers.net
(650) 572-7933
2070 Pioneer Ct.San Mateo, CA
94403Tel: 650-572-7933Fax: 650-572-0834