Tax Alert: Individual Income Tax Planning

December 2013

For higher income taxpayers, 2013 was a year of increased tax burden in comparison to previous years. The American Taxpayer Relief Act of 2012 ("ATRA") set the maximum income tax rate at 39.6 percent, and the Patient Protection and Affordable Care Act of 2010 ("Affordable Care Act") created a new 3.8 percent surtax on net investment income (NII) and an additional 0.9 percent Medicare tax on wages in excess of certain "higher income-level" threshold amounts. The combination of these and other factors means deductions and income deferral/shifting strategies become all the more valuable as we end 2013.

Deferral/Acceleration of Income and Deductions. Consider traditional income and deduction acceleration techniques and deferral strategies such as holding or selling appreciated or depreciated assets, postponing or completing Roth conversions, delaying or accelerating debt forgiveness, and structuring or avoiding like-kind exchange treatment. For many taxpayers, large amounts of certain items may trigger AMT liability. These include, but are not limited to, itemized deductions for medical expenses, the addition of certain income from incentive stock options, changes in income from installment sales, and more. Some taxpayers may benefit from participating in an employer's pretax medical deduction plan, which could reduce their taxable compensation and AMT liability.

Sales Tax Deduction Scheduled to Expire. The law that allows taxpayers to deduct state and local sales taxes in lieu of state and local income taxes (a significant benefit for Washington residents) is scheduled to sunset at the end of 2013. Although it appears to be the most politically-backed extender and, therefore, may survive through another extension until tax reform permanently addresses its place, we never recommend relying on Congress. Taxpayers may want to consider big purchases (such as a car or boat) within 2013 to ensure you get the benefit of this substantial tax break.

Consider converting your traditional 401(k) into a Roth 401(k). In 2013, an expanded option is available to taxpayers with 401(k) plans that include Roth accounts (after-tax contributions). A taxpayer may transfer an amount from the pre-tax elective deferral account (the traditional 401(k) account) into a designated Roth account in the same plan (subject to plan rules). Although the transfer is subject to regular income tax, no early distribution penalty applies to the conversion. Subsequent distributions from the Roth account are free of income tax assuming certain timing requirements are met.

Health Flexible Spending Account Planning. For those with health Flexible Spending Accounts ("FSAs"), the 2014 contribution election must be made by December 31, 2013, and you should review your plan's "use-it-or-lose-it" rules. The Affordable Care Act caps annual contributions to health FSAs. (The 2013 cap was $2,500, and the 2014 cap is projected to be the same.) Any salary reductions in excess of $2,500 will subject an employee to tax on distributions from the health FSA. Use-it-or-lose-it rules allow for a 2-1/2 month grace period after the current year to incur expenses and request reimbursement. However, plans are not required to offer this grace period, so be sure to check with your provider.

Recognition of Same-Sex Couples for Federal Tax Purposes. Starting in 2013, married same-sex couples will need to file a joint income tax return or a married filing separately income tax return. For more information, see this article Sussman Shank Fall 2013 Winter 2014 Newsletter for a more complete discussion.

If you would like more information, or have questions about any tax law issues, please feel free to contact us.


 

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