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

2

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

5

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).

11

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.

12

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

13

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

14

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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