Beginning in 2013, a new Medicare tax may apply to your dividend and interest income. Under the Affordable Health Care Act, taxpayers with modified adjusted gross income (MAGI) over $200,000 per year ($250,000 for joint filers and $125,000 for married filing separately) may owe a new Medicare contribution tax, also referred to as the “net investment income tax” (NIIT). The tax equals 3.8 percent of the lesser of your net investment income or the amount by which your MAGI exceeds the threshold.

Only individuals with some amount of net investment income and MAGI above the applicable threshold amount will be subject to the 3.8 percent NIIT. For example, if a married couple has $200,000 of wage income and $100,000 of interest and dividend income (i.e., MAGI totaling $300,000), the 3.8 percent NIIT applies to the $50,000 that is over the $250,000 MAGI threshold.

Trusts and estates may also be hit with the 3.8 percent NIIT. But for them, the tax applies to the lesser of their undistributed net investment income or AGI in excess of the threshold for the top trust federal income tax bracket. For 2013, that threshold is only $11,950, so many trusts and estates will likely be affected.

The components of net investment income generally include gross income from interest, dividends, royalties and rents; gross income from a trade or business involving passive activities; and net gain from the disposition of property (other than property held in a trade or business in which the owner materially participates). All of these components are reduced by any allocable deductions.

The rules on what is or isn’t included in net investment incomer are somewhat complex, so consult your Whalen tax adviser for additional information.

Finally, many of the strategies that can help you save or defer income tax on your investments can also help you avoid or defer NIIT liability. Because the threshold for the NIIT is based on MAGI, strategies that reduce your MAGI, such as making retirement plan contributions, can also help you avoid or reduce NIIT.

Please contact your tax adviser to discuss the 3.8 percent NIIT or any other tax compliance or planning issue.

Since 2010 a tax credit has been available for certain small employers providing health insurance coverage for their employees. For the first three years the maximum credit amounts remained the same. Starting in 2014 the amount of the credit increases.

Included in the Affordable Care Act enacted in March 2010, the small business health care tax credit was designed to encourage both small businesses and small tax-exempt organizations to offer health insurance coverage to their employees for the first time or to maintain coverage they already have.

In general, the credit is available to small employers that pay at least half of the premiums for single health insurance coverage for their employees. It is specifically targeted to help small businesses and tax-exempt organizations that primarily employ moderate- and lower-income workers.

For tax years 2010 to 2013, the maximum credit was 35 percent of premiums paid by eligible small businesses and 25 percent of premiums paid by eligible tax-exempt organizations.

Beginning in 2014, the maximum tax credit will increase to 50 percent of premiums paid by eligible small business employers and 35 percent of premiums paid by eligible tax-exempt organizations, but only if employers select from qualified plans through a Small Business Health Options Program (SHOP) Marketplace.

The maximum credit goes to smaller employers –– those with 10 or fewer full-time equivalent (FTE) employees –– paying annual average wages of $25,000 or less. The credit is completely phased out for employers that have 25 or more FTEs or that pay average wages of $50,000 or more per year.

Because the eligibility rules are based in part on the number of FTEs, not the number of employees, employers that use part-time workers may qualify even if they employ more than 25 individuals.

For additional details about the tax credit changes, CLICK HERE.

In Ohio, the federal government is running the health insurance Marketplace, and small-business owners in the state can now start shopping for employee health insurance. Open enrollment began October 1 for coverage beginning January 1.

Although the Ohio Department of Insurance approved rate filings for six insurers in the small-group market of the exchange, only two are marketing plans statewide: Anthem Blue Cross and Blue Shield in Ohio and Medical Mutual of Ohio. The other four plans are affiliated with regional hospital systems, not in the central Ohio region.

Anthem is offering seven plans ranging from the ACA defined bronze level to the gold level with lower out-of-pocket costs. Medical Mutual is offering two plans, one silver and one gold. Both sell group insurance off the exchange for businesses that don’t qualify for the credits.

For more information about the credit and how it might apply to your business or organization, contact your Whalen tax adviser.

Medical expenses that aren’t reimbursable by insurance or paid through a tax-advantaged account (such as a Health Savings Account or Flexible Spending Account) may be deductible — but only to the extent that they exceed 10% of your adjusted gross income.

Before 2013, the floor was only 7.5% for regular tax purposes. (Taxpayers age 65 and older can still enjoy that 7.5% floor through 2016. The floor for AMT purposes, however, is 10% for all taxpayers, the same as it was before 2013.)

By “bunching” nonurgent medical procedures and other controllable expenses into alternating years, you may increase your ability to exceed the new 10% floor. Controllable expenses might include prescription drugs, eyeglasses and contact lenses, hearing aids, dental work, and elective surgery.

If it’s looking like you’re close to exceeding the floor this year, consider accelerating controllable expenses into this year. But if you’re far from exceeding it, to the extent possible (without harming your health), you might want to put off medical expenses until next year, in case you have enough expenses in 2014 to exceed the floor.

Have questions about the 10% floor or exactly what expenses are deductible? Ask us!

In response to the U.S. Supreme Court’s June decision regarding same-sex marriage, the IRS recently clarified that married same-sex couples will be treated as married for all federal tax provisions in which marriage is a factor, such as filing status, dependent exemptions and child credits, and gift and estate tax breaks.

Significantly, the Supreme Court decision extended federal marriage-related benefits only to same-sex married couples in states recognizing their union; the IRS ruling expands eligibility for marriage-related federal tax benefits to same-sex married couples in all states, as long as they were married in a jurisdiction recognizing their marriage.

In light of the ruling, same-sex married couples should:

• Evaluate how changing their filing status to “married” will affect their 2013 tax liability, and factor that into their year end tax planning
• Determine whether they can receive a tax refund for previous years if they file amended returns as a married couple
• Decide whether any changes to their estate plans are warranted to take advantage of the federal gift and estate tax benefits available to married couples

These are only some of the tax areas requiring attention. Please contact us for more information on the impact of the IRS ruling.

This ruling will also require employers to make significant changes to their benefit programs.  We will be hosting a workshop on October 9, which will help to clarify how this ruling will affect your business and employees.  Click here to register for this workshop.

 

In January, Congress extended some depreciation-related tax breaks that can benefit owners of leasehold, restaurant and retail properties:

50% bonus depreciation. Congress extended this additional first-year depreciation allowance to qualifying leasehold improvements made in 2013.

Section 179 expensing. Congress revived through 2013 the election to deduct under Sec. 179 (rather than depreciate over a number of years) up to $250,000 of qualified leasehold-improvement, restaurant and retail-improvement property.

The break begins to phase out dollar-for-dollar when total asset acquisitions for the tax year exceed $2 million.

Accelerated depreciation. Congress revived through 2013 the break allowing a shortened recovery period of 15 — rather than 39 — years for qualified leasehold-improvement, restaurant and retail-improvement property.
If you’re anticipating investments in qualified property, you may want to make them this year to take advantage of these depreciation-related breaks while they’re available. It’s currently uncertain whether they’ll be extended to 2014. Please contact us if you’d like to learn more about qualifying for these breaks.