Year End Tax Planning

YEAR END TAX PLANNING SEMINAR
Presented By:
Anthony J. Madonia
November 21, 2013

ANTHONY J. MADONIA
 Founder and President of Anthony J. Madonia & Associates, Ltd.,
a law and tax firm located at the Willis Tower, 233 S. Wacker
Drive – Suite 6825, Chicago, IL.
 Tony is an Attorney and Certified Public Accountant who focuses
in the areas of Estate Planning and Administration, All Aspects of
Business Planning from Start to Finish, Corporate Law, and
Taxation.
 Tony has a Bachelor of Arts degree in Accounting from the
University of Illinois and a Juris Doctorate from John Marshall
Law School.
 He teaches Estates & Trusts and Estate Planning & Drafting as
an adjunct faculty member at John Marshall Law School.
 He is a member of the American Bar Association, the American
Association of Attorney-CPAs, and the Justinian Society of
Lawyers.
 He has served as Chairman of the Asset Protection Committee of
the Chicago Bar Association.

ADDITIONAL MEDICARE TAX
 Starting this year, the Additional Medicare Tax increases
the employee-share of Medicare tax by an additional 0.9%
of covered wages in excess of certain “higher income-
level” threshold amounts.
 $200,000 for single taxpayers
 $250,000 for married taxpayers filing jointly
 Unlike Social Security tax, there is no cap on the amount of
compensation subject to the Medicare tax.
 Also applies to self-employment income.

NET INVESTMENT INCOME TAX
 Starting this year, higher income taxpayers may be liable for a
3.8% Net Investment Income Tax (NII).
 The NII tax on individuals equals 3.8% of the lesser of:
 Net investment income for the tax year or
 The excess, if any of:
 The individuals modified adjusted gross income for the tax
year, over
 The threshold amount.
 $200,000 for single taxpayers
 $250,000 for married taxpayers filing jointly
 Net investment income includes capital gains, dividends,
interest, annuities, royalties, net rental income, and all income
from a business in which the taxpayer is a passive participant.

ILLINOIS INCOME TAX RATES
 The Illinois personal income tax rate is currently 5%.
 Barring any future legislative action, this rate will revert to
3.75% on January 1, 2015.
 The rate will drop again to 3.25% starting on January 1,
2025.
 The corporate income tax rate is similar – it will stay at
9.5% until December 31, 2014, drop to 7.75% until
December 31, 2024, then revert to 7.3% starting on
January 1, 2025.

ALTERNATIVE MINIMUM TAX:
WHEN DOES IT APPLY?
 Applies when income, as adjusted for certain preference items,
exceeds certain exemptions, but the rate applied to that income
falls below the Alternative Minimum Tax (AMT) rate.
 The AMT essentially functions as a tax leveling mechanism.

ALTERNATIVE MINIMUM TAX: RATES AND
EXEMPTION AMOUNTS
Note: these exemptions are phased out for higher income taxpayers.

PERSONAL EXEMPTION PHASEOUT
You can generally claim one personal exemption for yourself,
your spouse (if joint filing), and any qualifying dependents.
Each exemption reduces your taxable income.
However, beginning in 2013, higher income taxpayers will see
their exemptions begin to phase out.
Reduced by 2% for each $2,500 by which AGI exceeds
threshold.

PEASE LIMITATION ON ITEMIZED DEDUCTIONS
The Pease Limitation reduces the total amount of a higher-
income taxpayer’s otherwise allowable itemized deductions by
3% of the amount by which AGI exceeds applicable threshold.
Amount of itemized deductions is not reduced by more
than 80%.
Utilizes same thresholds as those used to determine the
personal exemption phaseout.
Certain deductions – medical expenses, investment interest,
casualty losses – are excluded.

ITEMIZED DEDUCTIONS SUBJECT TO
“FLOORS”
 Certain types of itemized deductions are subject to “floor” amounts set
by law.
 For these deductions, only amounts over and above the floor are
deductible.
 You can “bunch” two years of expenses into one year by accelerating
or delaying deductible expenses so that you exceed the deduction
floor and gain the tax advantage.

YEAR-END TAX PLANNING
STRATEGIES FOR
INDIVIDUALS

LIFE CYCLE CHANGES IMPORTANT TO YEAR-
END TAX PLANNING STRATEGIES
 Change in filing status: marriage, divorce, death, etc.
 Birth of a child
 Child no longer young enough for child credit
 Child has outgrown “kiddie” tax on unearned income
 Casualty losses
 Changes in medical expenses
 Moving
 College and other tuition expenses
 Employment changes
 Retirement
 Bankruptcy
 Large inheritance
 Business successes or failures

TIMING OF INCOME AND
PAYMENTS
 For those taxpayers who can control when they receive
income or when deductible expenses are paid, an
opportunity exists to reduce tax liability by postponing
income and/or accelerating deductions, particularly for
taxpayers who are:
 In different tax brackets in 2013 compared with 2014;
 Subject to the AMT in one year and not the other;
 Subject to the 3.8% NII tax in one year and not the
other; or
 Subject to the 0.9% Additional Medicare tax in one year
but not the other.

POSTPONING INCOME AND
ACCELERATING DEDUCTIONS
 Postpone income until 2014 and accelerate deductions into
2013 to lower your 2013 tax bill.
 May enable you to claim larger deductions, credits and other
tax breaks for 2013 that are phased out over varying levels of
AGI.
 Child tax credits
 High education tax credits
 Student loan interest

HOW TO: POSTPONE INCOME
 Arrange with your employer to have a bonus delayed until
2014
 Delay billable services
 Delay debt forgiveness income
 Hold onto appreciated assets
 Structure or avoid mandatory like-kind exchange treatment
 Minimize retirement distributions
 Take an eligible rollover distribution from a qualified
retirement plan
 No part of the distribution will be includible in income for 2013, but
the withheld tax will be applied over the full 2013 tax year to
reduce previous underpayments of estimated tax.

 Postpone a conversion from a traditional IRA to a Roth IRA
 Enter into installment contracts
 Hold onto U.S. Savings Bonds
 Purchase qualified small business stock
 No tax on gain from the sale if it is purchased after
September 27, 2010 and before January 1, 2014 and is
held onto for more than five years. For stock acquired
outside of this period, a taxpayer may exclude 50% of gain
realized.
 Stock must be issued by a regular C corporation with total
gross assets of $50 million or less.

 Take advantage of the cancellation of indebtedness exclusion.
 Taxpayers facing debt modification, a short sale, or a
foreclosure can exclude from income any cancellation of
mortgage debt up to $2 million.
 Must be from qualified principal residence
 Expires in 2013
 If you become eligible to make health savings account
contributions in December, you can make a full year’s worth of
deductible HSA contributions for 2013.
 However, note that the Affordable Care Act caps annual
contributions to health FSAs at $2,500.
 Any salary reductions in excess of this cap will subject the
employee to tax on distributions from the health FSA.

 If you are over age 70 ½, you can make a tax free distribution
of up to $100,000 from your IRA to a qualified charity before
December 31, 2013.
 Under current law, this opportunity will not be available for
2014.
 The IRA is not included in your Modified AGI, so you may
be able to reduce exposure to the new NII tax.

HOW TO: ACCELERATE
DEDUCTIONS AND CREDITS
 Bunch itemized deductions into 2013
 Use a credit card to prepay expenses that can generate
deductions for this year.
 Match passive activity income and losses
 Settle an insurance or damage claim in order to maximize
casualty loss deduction.
 Make energy saving improvements to a home, such as installing
energy saving windows or a new corn stove.
 Credit is 10% of the cost of building materials, up to $500.
 Credit is cumulative back to 2006.

HOW TO: ACCELERATE
 Prepay state and local income taxes
 Helpful to use deduction now if you anticipate it could be lost
through the AMT in 2014
 Can also have employer increase withholding of state and
local taxes
 Prepay real estate taxes
 Be mindful of the AMT – real estate taxes on your residence or
other personal real estate are not deductible for AMT
purposes.
 However, real estate tax on rental property is deductible
whether or not you are subject to the AMT.
 Pay contested taxes this year while continuing to contest them
next year

HOW TO: ACCELERATE
 Utilize the plug-in elective drive motor vehicle credit
 Credit limited to $7,500
 For 2 or 3-wheeled vehicles, cap is the lesser of $2,500 or
10% of its cost.
 Eligible vehicles include:
 2012-2014 Ford Focus Electric
 2013 Ford Fusion Energi
 2013 Ford C-MAX Energi
 2011-2012 Nissan Leaf
 Original use of the vehicle must start with the taxpayer.
 Credit begins to phase out for a manufacturer’s vehicles when
at least 200,000 of its vehicles have been sold for use in the
United States.

HOW TO: ACCELERATE
 Consider contributing appreciated securities that you have held
for more than one year to a charity.
 You will receive a charitable deduction for the full value of the
securities and will avoid the capital gains tax that would have
incurred upon sale.
 If selling a significant asset, consider a charitable remainder trust.
 Avoids capital gains tax on the sale
 Retains income from investing sale proceeds
 Secures a charitable deduction for at least part of the value of
the asset
 Prepay eligible higher education expenses to take advantage of
the up-to-$4,000 above the line deduction.
 Can use for expenses paid in 2013 or for an academic period
beginning in 2013 or first 3 months of 2014.

ESTATE AND GIFT TAX CONSIDERATIONS
 Maximum federal unified estate and gift tax rate of 40%
 Inflation adjusted $5,250,000 lifetime exclusion amount for gifts and
estates
 Projected to increase to $5,340,000 in 2014
 Inflation adjusted $14,000 annual gift tax exclusion
 Allows taxpayers to give up to $14,000 each year to any
individual, gift tax free, and without counting toward lifetime
exclusion.
 Maximum Illinois inheritance tax rate is 16%
 Exemption, which is not indexed for inflation, is $4 million

YEAR-END TAX PLANNING
STRATEGIES FOR
BUSINESSES

BONUS DEPRECIATION DEDUCTIONS
 50% bonus depreciation deduction available for qualified property.
 Qualified property = new business equipment placed in
service by end of 2013.
 Consider buying equipment you plan to purchase in the next
few years now to take advantage of this deduction.
 Set to expire for 2014.
 Luxury car depreciation caps:
 Additional $8,000 first-year depreciation cap for passenger
automobiles placed into service before year-end 2013.
 Scheduled to expire for 2014.

BUSINESS PROPERTY EXPENSING OPTION
 Businesses should consider making expenditures that qualify for
the business property expensing option.
 i.e. machinery, equipment
 For tax years beginning in 2013, the expensing limit is $500,000
and the investment ceiling limit is $2 million.
 Limited amount of expensing for real property.
 Deduction limit set to be drastically reduced in 2014.
 Expensing limit will drop to $25,000 and the beginning of the
phaseout amount will be $200,000.
 No expensing for real property.

OTHER BUSINESS TAX CREDITS
 Work opportunity tax credit – can be used if you hire qualifying
workers (such as veterans) before the end of 2013
 Expiring after 2013 under current law
 Research credit for qualified research expenses before the end of
2013
 Expiring after 2013 under current law
 Small employer health insurance credit
 Available to employers with no more than 25 full time
employees earning, on average, not more than $50,000
annually who contribute at least 50% of total premium cost
 Employer-provided child care credit

Year End Tax Planning

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