federal tax law and regulation update for return preparers

Federal Tax Law and Regulation Update for Return Preparers Anticipating Issues Affecting Individual Taxpayers Such as Tax Cut Phase-Outs and Expansions of FICA and Medicare Taxes

MONDAY, NOVEMBER 19, 2012, 1:00-2:50 pm Eastern

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Federal Tax Law and Regulation Update for Return Preparers Seminar

Allison Tilton, Reid & Hellyer

[email protected]

Nov. 19, 2012

Jesica Speer, Grant Thornton

[email protected]

Today’s Program

AMT Taxes And Tax Rates

[Jesica Speer and Allison Tilton]

Court Decisions, Regulations And Guidance

[Jesica Speer]

Bonus Depreciation And Expensing

[Allison Tilton]

Possibility Of Marriage Penalty Relief

[Jesica Speer]

Slide 7 – Slide 40




Prospects For AMT Patch

[Allison Tilton]


Future Of Estate Tax

[Allison Tilton]


Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY

THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY

OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT

MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR

RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons,

without limitation, the tax treatment or tax structure, or both, of any transaction

described in the associated materials we provide to you, including, but not limited to,

any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are

subject to change. Applicability of the information to specific situations should be

determined through consultation with your tax adviser.

AMT TAXES AND TAX RATES



© Grant Thornton LLP. All rights reserved. 8

Disclaimer

In accordance with applicable professional regulations, please understand that, unless

expressly stated otherwise, any written advice contained in, forwarded with, or attached to

this document is not intended or written by Grant Thornton LLP to be used, and cannot be

used, by any person for the purpose of avoiding any penalties that may be imposed under

the Internal Revenue Code.

This presentation addresses certain U.S. federal income tax issues only and does not

address state, local or other foreign tax issues. These authorities are all subject to change,

and such change could have retroactive effect. Any such changes could thus have an

effect on the validity of our conclusions. Unless specifically requested, we will not update

this presentation for subsequent changes or modifications to these authorities. Further,

this presentation is based on our interpretation of these authorities; another knowledgeable

party (such as the IRS or a court hearing the same facts) might reach different conclusions.

The advice expressed in the presentation is not an opinion as to the tax consequences of

any transaction.


A Road Map

AMT taxes and tax rates

• History of Bush tax cuts

• PEP limitation

• Pease limitation

• Modified education tax incentives

• Marginal rates

• Capital gains rates

• Expanded tax credits

• FICA and Medicare taxes


History Of Bush Tax Cuts

Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)

Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA)

Dec 31, 2010

Tax Relief, Unemployment Insurance Reauthorization, and Job Creation

Act of 2010

Extended through Dec 31, 2012

Slide Intentionally Left Blank

11


History Of Bush Tax Cuts (Cont.)

"Taxmageddon"

fiscal cliff


A Road Map (Cont.)



• PEP limitation



• Marginal rates





PEP Limitation

Reduced by 2% for each $2,500 (or $1,250 for MFS) over applicable threshold


A Road Map (Cont.)



• PEP limitation



• Marginal rates





Pease Limitation

Sunset of the phase-out of the phase-out …

Reduced by lesser of 3% of amount by which AGI exceeds applicable

threshold, or 80% of otherwise allowable itemized deductions


Alternative?

Limit deductibility so that maximum benefit is a 28% reduction in

federal income tax for individuals in proposed 36% and 39.6% tax

brackets


_______________________________________________________________

Example


_______________________________________________________________

Example (Cont.)


Example (Cont.)

_______________________________________________________________


A Road Map (Cont.)



• PEP limitation



• Marginal rates





Modified Education Tax Incentives

Higher education tuition deduction – Up to $4,000

Student loan interest deduction – Up to $2,500


24


Modified Education Tax Incentives (Cont.)

American Opportunity Tax Credit

Up to $2,500 credit · $0 refundable · (currently up to $1,000

refundable) for qualified expenses incurred during first two years

(currently first four years) of post-secondary education


Modified Education Tax Incentives (Cont.)

Coverdell education savings account

- Contribution limits revert to $500 (currently $2,000)

- No elementary or secondary school expenses

Employer-provided education assistance

- No more

- Working condition fringe


A Road Map (Cont.)



• PEP limitation



• Marginal rates




Marginal Rates

IRC §1(a)

• Current rates are reduced individual tax rates (10%, 15%, 25%, 33%,

35%).

• Rates in 2013 rise (to 15%, 28%, 31%, 36%, 39.6%).

• * In 2013, the dollar amount of the ceiling for the 15% tax bracket and

the floor for the 25% tax bracket will decrease/increase to $58,900,.

That represents a decrease to 167% of the amount for unmarried

taxpayers in the same bracket, rather than 200% of the amount for

unmarried taxpayers under current law (see table on next slide).

• Effect: This change will have the effect of putting more middle-

income joint filers in the 28% bracket and increasing the

“marriage penalty” for many taxpayers.

28

Marginal Rates (Cont.)

Tax Brackets (2012 Dollar Amounts) Marginal Rate IRC §1(a)

Unmarried Married Joint

Over But Not Over Over But Not Over 2012 2013

$0 $8,700

$0 $17,400

10% 15%

$8,700 $35,350

$17,400 $70,700*

15% 15%

$35,350 $85,650

$70,700* 142,700

25% 28%

$85,650 $178,650

142,700 217,450

28% 31%

$178,650 $388,850

217,450 388,350

33% 36%

$388,850 … 388,350 … 35% 39.6%

29

A Road Map (Cont.)



• PEP limitation



• Marginal rates




30

IRC §1(h) Reduced LTCG Rates

• Current law – Long-term capital gain (LTCG) rate of 15%

• 2013 maximum LTCG rate 20%

• Other effects:

― Currently, individual taxpayers in the 10% and 15% ordinary income tax

brackets pay no tax on LTCG.

― These taxpayers (new marginal rates 15%) are scheduled to be

subject to a 20% LTCG in 2013.

― An 18% maximum rate will apply to capital assets purchased after 2000

and held for more than five years.

― The 3.8% Medicare contribution tax discussed later will increase the

effective rate of tax on LTCG for certain higher-income taxpayers, to as

high as 23.8%.

31

IRC §1(h) Reduced LTCG Rates (Cont.)

Maximum Rates 2012 2013 2013 (including Medicare contribution Tax)

LTCG 15% 20% 23.8%

Qualified 5-year Capital gain

15% 18% 21.8%

32

Reduced Qualified Dividends Rates

• The Bush tax cuts created the concept of “qualified dividend income”

• Sections 1(h)(11), 163(d)(4)(B), 854(a) and (b), and 857(c); and Sect. 303 of Pub.

L. No. 108-27

• 2013 – Taxed as ordinary income

Maximum Rates 2012 2013 2013 (including Medicare contribution Tax)

Qualified dividend income

15% 39.6% 43.4%

Ordinary dividend income

35% 39.6% 43.4%

33


34

A Road Map (Cont.)



• PEP limitation



• Marginal rates




35

Expanded Tax Credits

• IRC §32(b) earned income tax credit (EITC) [sections 32(b)(2),

(c)(2)(A)(i), (h), and 6213(g)(2); and Sect. 901 of Pub. L. No. 107-

16]

• IRC §24 child tax credit (CTC) [sections. 24(a) and (b)(3) and

sections 203 and 901 of Pub. L. No. 107-16]

• IRC §21 dependent care tax credit [sections 21(a)(2) and 21(c) and

Sect. 901 of Pub. L. No. 107-16]

36

Payroll Tax Cut

• FICA imposes two taxes:

― Old age survivor and disability insurance (Social Security

tax)

― Hospital insurance (Medicare tax)

• The 2% reduction to the employee Social Security rate has

been extended through 2012 by the Middle Class Tax Relief and

Job Creation Act of 2012.

― First $110,100 of wages during 2012

― 4.2% Social Security and 10.4% Medicare

• In 2013, revert to 6.2% Social Security and 10.4% Medicare on

all wages

37

A Road Map (Cont.)



• PEP limitation



• Marginal rates




38

New Taxes: Medicare Contribution Tax

• IRC §1411 - Enacted as part of the Patient Protection and Affordable Care Act (PPACA); is

scheduled to take effect regardless of whether Congress extends the Bush tax cuts

• A new 3.8% Medicare contribution tax ) on higher-income individuals, estates and trusts

• Before IRC §1411, Medicare tax has been assessed only on earned income (wages earned by

employees and self-employment income).

• Individuals: The new tax is equal to 3.8% of the lesser of:

― The individual’s net investment income for the year, or

― The amount by which the individual’s modified adjusted gross income (MAGI) exceeds

a threshold amount.

Filing Status Threshold

Individual $200,000

Married joint $250,000

Married separately $125,000

39

Medicare Contribution Tax

• “Net investment income”

― Investment income (for purposes of this act) includes:

― Interest

― Dividends

― Income from trades or businesses that are passive activities

or that trade in financial instruments and commodities

― Net gains from the disposition of property held in a trade or

business that is a passive activity or that trades in financial

instruments and commodities

― Investment income excludes:

― Distributions from qualified retirement plans (IRC sections

401 (a), 403 (a), 403 (b), 408, 408A or 457 (b)).

40

COURT DECISIONS, REGULATIONS AND GUIDANCE



A Road Map (Cont.)


Court decisions, regulations and guidance

Bonus depreciation and expensing

Possibility of marriage penalty relief

Prospects for AMT patch

Future of estate tax


National Federation of Independent

Business et al. v. Sebelius SCt, 2012-2 USTC ¶50,423

Patient Protection and Affordable Care Act

Health Care and Education Reconciliation Act

- All tax provisions upheld

- Largest set of tax law changes in more than 20 years


National Federation (Cont.)

INDIVIDUAL MANDATE

- Effective Jan. 1, 2014

- All non-exempt individuals must carry minimum essential health coverage for

themselves and their dependents, or face a shared responsibility penalty for each

month of non-compliance.

The individual mandate requires most Americans to maintain

"minimum essential" health insurance coverage. For individuals

who are not exempt and do not receive health insurance through

a third party, the means of satisfying the requirement is to

purchase insurance from a private company.

- Chief Justice Roberts



MEDICAL DEDUCTION THRESHOLD


- Deductible only to the extent they exceed 10% (currently 7.5%) of AGI

- Exception for individuals ≥ 65 before Dec. 31, 2012



ADDITIONAL MEDICARE TAX


- Additional 0.9% Medicare tax on wages and self-employment income that exceed

applicable thresholds ($200,000 single – $250,000 MFJ – $125,000 MFS)

- Employee’s obligation

- Considerations for married filing separately



MEDICARE TAX ON NET INVESTMENT INCOME


- A 3.8% Medicare contribution tax on the lesser of net investment income

or the amount of modified AGI that exceeds applicable thresholds

($200,000 single – $250,000 MFJ – $125,000 MFS)



HEALTH FSA CONTRIBUTIONS


- Contributions limited to $2,500 (currently $5,000)

- Excess contributions taxed on distribution

- Notice 2012-40



MEDICAL DEVICE EXCISE TAX


- A 2.3% excise tax on sale of certain taxable medical devices

- Retail exception, NPRM REG-113770-10



DISCLOSURE OF PERSONAL INFORMATION

PREMIUM ASSISTANCE TAX CREDIT (§36B)

- Authority to disclose certain personal information to HHS (NPRM REG-

119632-11)

- Starting Jan. 1, 2014

- Premium assistance tax credit (Notice 2012-31, TD 9590)

BONUS DEPRECIATION AND EXPENSING


A Road Map (Cont.)







52

Bonus Depreciation And Expensing • Encouraged taxpayers to invest in new property and equipment

• Allowed business taxpayers to accelerate recovery of the costs of purchasing certain

assets by providing accelerated depreciation deductions or immediate expensing

• Bonus depreciation – Additional first-year depreciation

• Job Creation and Worker Assistance Act of 2002

• Accelerated first-year depreciation deduction equal to 30% of the qualifying

property’s cost, for property placed in service after Sept. 10, 2001, and

before Sept. 11, 2004

• Qualifying property generally included new assets with a tax useful life of

20 years or less, purchased pursuant to a contract entered into after Sept. 10,

2001

• In 2003, federal legislation increased the first-year depreciation deduction to

50%, expanded the definition of qualifying property and extended bonus

depreciation through Dec. 31, 2004.

53

Bonus Depreciation And Expensing (Cont.)

• Extended and expanded by the Tax Relief, Unemployment Insurance

Reauthorization, and Job Creation Act of 2010

― Allowed first-year depreciation equal to 100% of the cost of

qualifying property placed in service after Sept. 8, 2010 and

before Jan. 1, 2012

― A deduction of 50% of the asset’s cost is allowed for qualifying

property placed in service after 2011 and before Jan. 1, 2013.

[IRC sections 168(k)(1) and (2)].

• Scheduled to expire Dec. 31, 2012

― After expiration, use modified accelerated cost recovery system

(MACRS) or other alternative depreciation methods for

determining annual depreciation deductions

54

Example Of Expiring Bonus Depreciation

• Business purchased $10,000 of new office furniture in 2011

― Under bonus depreciation provisions, all of the $10,000 cost

could be deducted on the business taxpayer’s 2011 tax return. A

purchase of $10,000 of new office equipment in 2012 would

result in bonus depreciation of 50%, or $5,000, and depreciation

of the remaining $5,000 over a seven-year period beginning in

2012.

― Under the MACRS depreciation provisions, office furniture is

generally depreciable over a seven-year recovery period, with

first-year depreciation limited to 14.29%. So, the total

depreciation deduction in 2012 for the $10,000 of office furniture

purchased would be $5,715 ($5,000, plus $5,000 x 14.29%).

55


• Elections to expense costs to acquire business assets, §179

― Allows certain small business taxpayers to deduct some or

all of the costs of acquiring certain depreciable assets

― Prior to 2011, Sect. 179 allowed for a deduction of up to

$25,000 of qualifying depreciable personal property used

in trade or business activities.

― Elective, made annually and generally available only in

the year the property is first placed in service

56


• Sect. 179 also has been revised in recent years to further encourage

investment in depreciable assets.

• After 2012, the annual deduction limit under Sect. 179 is scheduled to

return to its pre-2003 level of $25,000.

57

POSSIBILITY OF MARRIAGE PENALTY RELIEF



A Road Map (Cont.)








Possibility Of Marriage Penalty Relief


- Standard deduction for MFJ only 167% of singles (currently 200%)

- Upper limit of lower tax brackets for MFJ only 167% of singles

(currently 200%)

- Will affect > 40% of the taxpaying public, per CBO

PROSPECTS FOR AMT PATCH


A Road Map (Cont.)







62

Prospects For AMT Patch

• What is the AMT?

― Additional tax when tentative AMT liability exceeds

regular income tax liability

― Different rate schedule, and different tax base, than

the regular income tax

― The AMT owed is equal to the difference (if any) between

tentative AMT liability and liability under the regular

income tax.

63

Prospects For AMT Patch (Cont.)

• How does the AMT patch work?

― Temporary AMT exemption to prevent AMT liability

― Temporary legislation has allowed taxpayers to use personal,

non-refundable tax credits - (i) credits for child care and (ii) for

higher education - to reduce tentative AMT liability.

― Without “the AMT patch”:

― Exemption would stay at the nominal levels established in

1993;

― Personal, non-refundable credits would be limited or

disallowed by the AMT; and

― AMT would affect more than one-third of all taxpayers in

2012.

64


65

Prospects For AMT Patch (Cont.)

• 2011 patch: The Tax Relief, Unemployment Insurance

Reauthorization, and Job Creation Act of 2010 extended the

AMT patch through 2011.

― Exemption of:

― $48,450 for single and head-of-household filer,

― $74,450 for married people filing jointly and

qualifying widows or widowers, and

― $37,225 for married people filing separately.

― The AMT patch also generally included a provision allowing

taxpayers to reduce their AMT by non-refundable personal

tax credits.

― The AMT has two tax rates.

66

AMT Patch 2012

• Absent another patch – AMT exemption amounts are $45,000

for married individuals and $33,750 for unmarried individuals.

― Most non-refundable credits will not be allowed against

the AMT.

AMT Exemption Single Married Filing Jointly

2011 $48,450 $74,450

2012 $33,750 $45,000

67

FUTURE OF ESTATE TAX


A Road Map (Cont.)







69

Future Of Estate Tax

• Not clear what will happen with the estate tax in 2013

• Under current law - Revert back to the 2001/2002 IRC

― The estate tax exemption is scheduled to drop significantly from

$5,120,000 in 2012 to $1,000,000 in 2013 [Sect. 2010].

― The estate tax rate is scheduled to jump from 35% to 55% [IRC

sections 2001 and 2502].

― Modifications of estate and gift taxes to reflect differences in

credit resulting from different tax rates [sections 2001(b)(2),

2001(g), and 2505(a)]

― “Portability” rules permitting a surviving spouse to use the

unused estate and gift tax exemptions of the last deceased spouse

[Sect. 2010]

70

Future Of Estate Tax (Cont.)

• Estate tax deduction for state death taxes paid [IRC sections 2011,

2053, 2058, 2102, 2106 and 2604]

• Expansion and clarification of estate tax conservation easement rules

[IRC sections 2031(c)(2) and (c)(8)(A)(i)]

• Repeal of the qualified family owned business deduction [IRC Sect.

2057]

• Modifications to generation-skipping transfer tax rules regarding

deemed allocations of exemption to certain transfers in trust, severing

of trusts, valuation and relief for late elections [IRC sections 2632(c)

and 2642(a)(3), (b)(1), and (b)(2)(A)]

• Modifications to estate tax installment payment rules [IRC sections

6166(b)(1)(B)(ii), (b)(1)(C)(ii), (b)(8)(B), (b)(9)(B)(iii)(I) and (b)(10)]

71

Estate Tax: Example Of Proposal

• Estate tax provisions in the president’s FY13 budget proposal would:

― Return permanently the estate, gift and generation-skipping

transfer (GST) tax regimes to the 2009 rules (45% top tax rate and

$3.5 million exemption for estate and GST tax, and $1 million for

gift tax, starting in 2013)

― Make permanent the portability of unused exemption amounts

between spouses (starting in 2013)

― Require consistency in value for transfer and income tax purposes

(effective date of enactment)

― Modify the rules on valuation discounts (for transfers after the

date of enactment)

72

Estate Tax: Example Of Proposal (Cont.)

― Require a minimum 10-year term for grantor-retained annuity trusts

(GRATs), and a maximum term of the life expectancy of the

annuitant plus ten years – affecting the ability to use GRATs for

estate tax planning (applicable to trusts created after the date of

enactment)

― Coordinate certain income and transfer tax rules for grantor trusts -

affecting planning with intentionally defective grantor trusts (IDGTs)

― Limit the duration of GST exemption to 90 years (for additions to

pre-existing trusts and trusts created after the date of enactment)

― Extend the lien on estate tax deferrals provided under Sect. 6166 up

to 15 years and three months from the date of death, for decedents

dying after the effective date and pre-existing unexpired liens on the

effective date

73

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