New Tax & New Opportunities

/ January 2, 2014

taxes - iStockWell, it’s that time of the year again.  And by that I mean that its tax planning season! I don’t know about you, but I get pretty pumped about it. This year has been fun for our firm. The fun factor increase is mostly a result of our clients seeing stronger results in 2013 than in recent years. Better results generally mean that higher tax payments are soon to follow. Make sure you are having the appropriate conversations now so you and your clients are prepared for the tax bill.

2013 has presented us with some new taxes and some new opportunities. Early in 2013 our Congress made some changes to our “permanent” tax code.  Most of you have already heard about these changes but don’t really know how they apply. I’ll give you a 10,000 foot view below.

3.8% Medicare Surtax

Although that is not the actual name of this tax, this is what it is commonly referred to as. This is the tax that applies to “net investment income.” The definition of net investment income is typically butchered at friendly gatherings. Basically, this is the tax that applies to earnings generated on interest, dividends, rental income, and capital gains when your income exceeds a certain level. If you don’t make over 200k, you’re not going to be affected by this. Also included in the definition of net investment income includes business income from follow-through entities where you do not materially participate.

One Year Opportunity

If you own business interests in which you do not materially participate, the IRS has given you the opportunity to look at the entities as a group to see if you meet the tests. If you meet the test as a group, you may be able to escape the additional tax. This is the most important thing that should be looked at for people who own more than one business interest for 2013. This could result in a savings of 4% annually going forward. And, for those who might already be paying 50% tax on their income, this will be of interest to them. For our clients, we are looking at this each and every year to see if there are additional opportunities out there.

0.9% Medicare Tax on Wages

There is a new tax on wages over a set threshold. The payroll providers handle this and if this applies, you have likely already noticed it. You need to make over 200k if you are single or 250k if you are married before this kicks in.

Limitation on Itemized Deductions

Back for 2013 is the limitation on itemized deductions. If you make enough over 250k, you might see some of your itemized deductions go away. In recent years, this has not applied. So higher income taxpayers will have to watch for this as well.