2013 YEAR-END INDIVIDUAL TAX PLANNING LETTER

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1 Bollenback & Forret, P.A. Michael D. Bollenback, CPA Richard G. Buschart, CPA, ABV, CVA Suzanne E. Patrick, CPA Janet K. Rosenquist, CPA Roderick B. Stuart, CPA J. Patrick Callan, CPA Peter B. Forret, CPA CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS 2013 YEAR-END INDIVIDUAL TAX PLANNING LETTER Dear Client: Gearing up for another busy season, we want to make you aware of some year-end planning opportunities and recap some of the changes affecting 2013 personal income taxes. Please visit our website anytime to view our on-line Tax Planning Guide. ( Latest News: Internal Revenue Service is sending out a warning of phone scam operations going on across the nation. Callers are claiming to be IRS agents and giving enough information for it to appear real. Do not give out information over the phone or in an . If you owe or think you owe tax, hang up and call IRS back at and an agent should be able to assist you. If you do not owe, hang up and report the incident to IRS by calling Due to the government shutdown, IRS has stated there will be a delay in the filing season start date. IRS will neither accept nor start processing returns until sometime between January 28, 2014 and February 4, This will only affect those early filers looking for their refunds. Due date of April 15, 2014 has not been extended. As of January 1, 2014, all individuals (with limited exceptions) will be required to have health insurance or be subject to penalty. The penalty in 2014 is $95 per adult and $47.50 per child, up to a maximum of $285 or one percent of taxable income, whichever is greater. Foreign Financial And Bank Accounts Reporting (Form TD F ) The form has been replaced with FinCEN Form 114. U.S. citizens with foreign accounts totaling over $10,000 at anytime during the year must e-file the form no later than June 30, We will work with you on the best method for you to file your return in a timely fashion Pinellas Street, Clearwater, FL (o) / (f ) Website: bollenback.com 1

2 Tax law changes and expiring tax incentives: There are three new taxes for 2013 o Net Investment Income Tax (NIIT) This is the Medicare surtax of 3.8% on the lesser of (1) net investment income (NII) or (2) modified adjusted gross income (MAGI) above a specified threshold. Individuals are subject to the 3.8% of NIIT if their MAGI exceeds the following thresholds: singles and head of households over $200,000; married couples filing jointly over $250,000; married filing single over $125,000. NII includes interest income, dividends, annuities, royalties and rental income from a trade or business that is a passive activity, gains from the disposition of property not held in a trade or business, and partnership and S corporation income from entities in which you do not materially participate, (not wages or self-employment income). o Additional Medicare Tax -.9% additional tax applies to FICA wage and selfemployment income exceeding $200,000 for individuals and $250,000 for married couples filing jointly. o Most tax rates remained unchanged for the middle to lower income individuals. The higher taxable income exceeding $400,000 for individuals and $450,000 for married couples filing jointly will now be subject to the top marginal rate of 39.6%. Capital gain rates increase to 20% (23.8% with Net Investment Income Tax with income thresholds of $400,000 for individuals and $450,000 for married filing jointly). The favorable rate of 0% remains in place for taxpayers in the 10 and 15% brackets. The 15% rate for taxpayers is applicable to those in the 25, 28, 33 and 35% brackets. The state and local sales tax deduction and the energy tax credit are both scheduled to expire this year. If you were considering a big purchase (boat or car for example) or planning on making qualified energy efficient improvements in 2014, you may want to push those purchases up to Bonus Depreciation which allows businesses to take a deduction of 50% of the cost of new assets in the first year is also scheduled to expire after Personal and dependent exemptions of $3,900 begin to phase out when adjusted gross income exceeds $250,000 for individuals and $300,000 for married couples filing jointly. For those that itemize qualified medical expenses there is a higher threshold of 10% of adjusted gross income in 2013, meaning you can only deduct qualified medical expenses in excess of 10% of your AGI. There is an exception this year for those 65 and older. 2

3 For 2014 a reduction in itemized deductions claimed begins with income of $254,200 for individuals and $305,050 for married couples filing joint. It phases out completely at $376,700 for individuals and $427,550 for married couples filing joint. Planning for these changes should begin now, since it may involve significant modifications in your tax strategy. In light of the tax law changes, you may want to consider the following: Make sure sufficient withholdings have been made when considering if total wages and self employment income have reached new thresholds as discussed above. Regarding the additional Medicare Tax and possible higher income tax bracket, you may want to contact your employer(s) for additional withholdings to be taken before year end. Many investors own dividend paying stocks (due to the lower tax on qualified dividends) along with taxable bonds to maximize returns in recent years. However, as capital gains rates increase as well as income tax rates, a different mix of investments might need to be considered. You may want to consider a move into tax deferred or federally non-taxable investments like municipal bonds. Defer gain by: using qualified like-kind exchanges with rentals and business real estate. set up an installment sale when selling qualified assets. Lowering your net investment income (NII) or modified adjusted gross income (MAGI) if you may be subject to the 3.8% surtax on certain passive income of individuals, trusts and estates. Or, if you have flexibility on when you can receive payments of taxable income before year end, you may want to defer those payments depending on NII or MAGI. Avoid capital gains tax by donating appreciated capital assets that have been held more than one year. You receive the charitable deduction and avoid the capital gain if you had sold the asset. If you have a business and are considering purchasing equipment or another capital asset for 2014, you may want to push that purchase up to 2013 to take advantage of the Bonus Depreciation that will be gone in Review your medical expenses for the year. Based on your AGI, it may be beneficial to accelerate or defer payments for the year. 3

4 Take Sound Tax Planning Steps Some of our recommendations are always good items to check off your year-end tax planning checklist. They include: Make the greatest possible contribution to your 401(k) or other employer-based retirement plan. A contribution of pretax income to a plan not only lowers your taxable income, but also it may be eligible for a matching contribution from your employer to your retirement account. You can enhance your retirement income by contributing enough to receive the maximum match offered. Do not leave your 401(k) investments on auto pilot - review the investment mix to determine if you are maximizing value. Set up or contribute to a 529 college savings plan. Your earnings on these accounts grow tax free as long as they are ultimately used for qualified education expenses. If you become eligible to make health savings account (HSA) contributions in 2013, you can make a full year's worth of deductible HSA contributions for 2013, as long as you are in the plan on December 31, You have until April 15, 2014 to make your contribution. If you did not set aside enough funds in your employer's health flexible spending account (FSA) during 2013 make sure you do that during Keep in mind the maximum contribution to a health FSA is $2,500, or less depending on your plan. Don't forget that overthe-counter drugs, such as aspirin and antacids are no longer eligible for FSA reimbursement. Postpone income until 2014 and accelerate deductions into 2013 to lower your 2013 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2013 that are phased out over varying levels of AGI. These include child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. However, in some cases, it may pay to actually accelerate income into For example, this may be the case where a person's marginal tax rate is much lower this year than it will be next year. Estimate the effect of any year-end planning moves on the alternative minimum tax (AMT) for 2013, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes or state sales tax, miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as medical expenses, are calculated in a more restrictive way for AMT purposes than for regular tax purposes. As a result, in some cases, deductions should not be accelerated. Call us for a tax projection. 4

5 The American Opportunity credit which includes a maximum credit of $2,500, for the first four years of post-secondary education for qualified taxpayers was extended to December 31, There is a higher income phase out range of $80,000 to $90,000 for single filers and $160,000 to $180,000 for joint filers. Eligible taxpayers may want to front-load paying 2014 education expenses before the end of 2013 to take advantage of the credit that might not be extended the following year. Retirement Plans for your business generally should be established by December 31, 2013 in order to deduct contributions for the 2013 tax year. Contact us if you would like to start your business retirement plan. Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan) if you have reached age 70-½. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70-1/2 in 2013, you can delay the first required distribution until April 1, 2014, but if you do, you will have to take a double distribution in 2014 the amount required for 2013 plus the amount required for Think twice before delaying 2013 distributions to 2014 bunching income into 2014 might push you into a higher tax bracket or bring you above the modified AGI level that will trigger the 3.8% extra tax on unearned income such as dividends, interest, and capital gains. However, it could be beneficial to take both distributions in 2014 if you will be in a substantially lower bracket that year. If you are age 70 ½ or older, own IRAs and are thinking of making a charitable gift, consider arranging for the gift to be made directly by the IRA trustee. Such a transfer, if made before year-end, can achieve important tax savings. Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save on future gift and estate taxes. You can give $14,000 in 2013 to each of an unlimited number of individuals but you can't carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax. Keep in mind, the kiddie tax applies to children under 18 and full-time students between ages whose earned income does not exceed 50% of their support. Savings for next year could be even greater if rates go up and/or the income from the transfer would have been subject to the 3.8% tax in the hands of the donor. The current estate and gift tax effective through 2013 is set at a maximum rate of 40 percent with a $5,250,000 exemption amount. The maximum estate tax rate will remain at 40 percent after 2013 with a $5,340,000 exemption. Do you think you may be facing a penalty for underpayment of estimated tax and the increased withholding option is unavailable or won t sufficiently address the problem? Do you have a qualified retirement plan? Take an eligible rollover distribution before the end of 2013 and have the applicable withholding withheld from the distribution. The income tax withheld will be applied toward your 2013 taxes. You can then timely roll over the gross amount of the distribution, as increased by the amount of withheld tax, to a traditional IRA. No part of the distribution will be included in income for 2013, but the withheld tax will be applied pro rata 5

6 over the full 2013 tax year to reduce previous underpayments of estimated tax. Be sure not to miss the 60 day rollover period, or the entire withdrawal becomes taxable. Don t forget, if you have household employees you paid $1,800 or more in 2013, you are required to report the wages paid and related payroll taxes. Please contact us if we may assist you. This is just a sampling of some of the changes and tax planning opportunities available. Please contact us to discuss your individual tax planning needs, and go to for more information. Sincerely, Bollenback & Forret, PA, CPAs IRS CIRCULAR 230 DISCLOSURE: Any tax advice included in this written or electronic communication (and any attachments) was not intended or written to be used, and it cannot be used by the taxpayer, for the purpose of avoiding any penalties that may be imposed on the taxpayer by any governmental taxing authority or agency. 6

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