The 2014 Filing Season Technical Tax Update is a presentation by Jon Karp, Whitley Penn Tax Partner. Karp has more than 20 years of tax, advisory, and financial services and public accounting experience focused on C-corporations, S-corporations, partnerships and high net-worth individuals. This presentation covers a review of new tax rates, surtax on net investment income and new forms, PEP and PEASE limitations and other tax changes.

1. JonKarp,CPA
Tax Partner
214.393.9400
Jon.Karp@whitleypenn.com
2014FilingSeasonTechnicalTaxUpdate

2. TaxRates
• Highesttaxbracketisnow39.6%
– MarriedFilingJointlyandSurvivingSpouses
• 2013-$450,000
• 2014-$457,600
– HeadsofHouseholds
• 2013-$425,000
• 2014-$432,200
– UnmarriedIndividuals
• 2013-$400,000
• 2014-$406,750
– MarriedFilingSeparately
• 2013-$225,000
• 2014-$228,800

3. CapitalGains/Dividends
• Toprateforcapitalgainsanddividendsraisedfrom15%to20%
– Toprateof20%isonlyapplicabletothosetaxpayerswhofallinto
thetoptaxbracket.
– Longtermcapitallosseswhichwouldhaveoffsetcapitalgainsat
the15%ratecanstilloffsetcapitalgainsatthenew20%rate.No
adjustmentfortheratechangeisrequired.
– Considerusingcarryforwardlossesfrom2012tooffsetany gains
in2013.
– Spreadrecognitionofincomebetweentaxyearsinorderto
avoidpushingcapitalgainsintothe39.6%bracketorthe20%
capitalgainsbracket.

4. SurtaxonNetInvestment Income
• Higherincome taxpayersmaybesubjecttoanadditional
3.8%surtaxonnetinvestmentincome(NII).
– TheNIISurtaxisequaltothelesserof:
• Netinvestmentincomeforthetaxyear,or
• Theexcess,ifanyoftheindividual’smodifiedadjustedgross
incomeoverthefollowingthresholdamounts:
– $250,000forjointreturnsandsurvivingspousereturns
– $125,000formarriedfilingseparatelyreturns
– $200,000inanyothercase

5. NetInvestment Income
• NetInvestmentincomeincludes:
• Interest,dividends,capitalgains,rentandroyaltyincome,and
non-qualifiedannuities,
• Incomeandgainsfrompassiveactivities,
• Incomeandgainsfrombusinessesinvolvedinthetradingof
financialinstrumentsandcommodities,and
• GainsfromthesaleofinterestsinpartnershipsandS
corporationstotheextentthetaxpayerisapassiveowner.

6. SurtaxonNetInvestment Income (cont.)
• Thethreshold issignificantlylowerthanhighestcapital
gainsrateandhighesttaxrate. Therefore,awiderrange
oftaxpayerswillbesubjectto3.8%surtax.
• Taxpayersshouldbeawareofwhatitemsfallintothe
categoryofnetinvestmentincome andmonitorthese
itemsforexposuretothesurtax
• Tolessenburdenofthesurtax,taxpayersshouldtryto
spreadincomeoveranumberofyearstostaybelowthe
thresholdamounts.

7. NetInvestment IncomeTax
• Thetaxoninvestmentincomeusesaggregationprinciples
withrespecttospousesinsofarasthethresholdamountis
concerned.
• Thetotalamountforacoupleis$250,000,witheach
spouseentitledto$125,000.
• However,theinvestmentincomeitselfispersonaltothe
ownerandisnotdividedbetweenthetwospouses.
• Thiscouldmeanthatproperdeploymentofassets
coupledwithseparatefilingcouldbemoretax-beneficial
thanajointfiling.

8. NetInvestment IncomeTax
John & Marcia Married Filing Jointly
John - Wages $250,000
Investment Income $50,000
Total $300,000
Tax on NII $50,000
X 3.8%
$1,900

9. NetInvestment IncomeTax
John & Marcia Married Filing
Jointly
Married Filing Separate
John Marcia
John - Wages $250,000 $250,000 $0
Investment Income $50,000 $0 $50,000
Total $300,000 $250,000 $50,000
Tax on NII $50,000
X 3.8%
$1,900
$0
X 3.8%
$0
X 3.8%

10. NetInvestment Income Tax
John & Marcia Married Filing
Jointly
Married Filing Separate
John Marcia
Total $300,000 $250,000 $50,000
Est Tax?? $75,000↓ $72,500↓ $8,000↓
Tax on NII $150,000
X 3.8%
$1,900
$0
X 3.8%
$0
$76,900 $80,500
The structure saves the $1,900 that would have been paid on a joint return, so
the next question is whether, and to what extent, additional regular tax was paid.
Does not look like an alternative……………….

11. Form8960-NetInvestmentIncomeTax

12. Form8960-NetInvestmentIncomeTax

13. Additional Medicare Tax
• Employee–shareofMedicaretaxincreasedby0.9%of
coveredwagesinexcessofcertain“higherincome-level”
thresholdamountsasfollows:
– $200,000forindividualsandheadsofhouseholds
– $250,000formarriedfilingjointly
– $125,000formarriedfilingseparately

14. Additional Medicare Tax(cont.)
• Forexample,asingleindividualwillpay1.45%of
Medicaretaxonthefirst$200,000ofcompensationand
2.35%(1.45%+0.9%)oncompensationinexcessof
$200,000.
• Thereisnocapontheamountofcompensationsubject
totheMedicaretax.
• EmployersarerequiredtocollectadditionalMedicare
taxesforemployeesthatearnover$200,000inwagesin
acalendaryear.

15. Additional Medicare Tax
Withholding
 Note:
 An employee may not request additional withholding
specifically for Additional Medicare Tax.
 However, if the employee anticipates liability for Additional
Medicare Tax, the employee may request that the employer
withhold an additional amount of income tax withholding
on Form W-4.
 The additional income tax withholding will be applied
against taxes shown on the individual income tax return
(Form 1040), including any Additional Medicare Tax liability,
as discussed below.

16. Additional Medicare Tax
Calculatingthetax
• IndividualsliableforAdditionalMedicareTaxwillcalculate
AdditionalMedicareTaxliabilityontheirindividualincometax
returns(Form1040),alongwithnewForm8959presentedand
discussedlater.
• OnthatForm,individualswillalsoreportAdditionalMedicareTax
withheldbytheiremployersontheirindividualtaxreturns,and
anyAdditionalMedicareTaxwithheldbyanemployerwillbe
appliedagainstalltaxesshownonanindividual’sincometax
return,includinganyAdditionalMedicareTaxliability.

17. Additional MedicareTax

18. SurveyingtheLandscape
II.Taxprovisionsappearinganddisappearing(?)in2013
13

19. Additional Medicare Tax
Self-employmentincome
• IndividualswithwagessubjecttoFICAtaxandself-employmentincome
subjecttoSECAtaxcalculatetheirliabilitiesforAdditionalMedicareTax
inthreesteps:
Step1 -CalculateAdditionalMedicareTaxonanywagesinexcessof
theapplicablethresholdforthefilingstatus,withoutregardtowhether
anytaxwaswithheld.
Step2 -Reducetheapplicablethresholdforthefilingstatusbythe
totalamountofMedicarewagesreceived-butnotbelowzero.
Step3 -CalculateAdditionalMedicareTaxonanyself-employment
incomeinexcessofthereducedthreshold.

20. Additional Medicare Tax(Examples1,2,3)
• A:Asinglefiler,has$130,000inself-employmentincomeand$0in
wages.AisnotliabletopayAdditionalMedicareTax.
• B:Asinglefiler,has$220,000inself-employmentincomeand$0in
wages.BisliabletopayAdditionalMedicareTaxon$20,000.
• C:Asinglefiler,has$145,000inself-employmentincomeand
$130,000inwages.C'swagesarenotinexcessof$200,000soC's
employerdidnotwithholdAdditionalMedicareTax.However,the
$130,000ofwagesreducestheself-employmentincomethresholdto
$70,000($200,000thresholdminusthe$130,000ofwages).
– CisliabletopayAdditionalMedicareTaxon$75,000ofself-
employmentincome($145,000inself-employmentincomeminus
thereducedthresholdof$70,000).

21. Additional Medicare Tax Examples
• Example3-E,whoismarriedandfilesajointreturn,has
$140,000inself-employmentincome.F,E’sspouse,has$130,000
inwages.
• F’swagesarenotinexcessof$200,000soF’semployerdidnot
withholdadditionalMedicaretax.
• However,the$130,000ofF’swagesreducesE’sself-employment
incomethresholdto$120,000($250,000thresholdminusthe
$130,000ofwages).
• EandFareliabletopayadditionalMedicaretaxon$20,000ofE’s
self-employmentincome($140,000inself-employmentincome
minusthereducedthresholdof$120,000).

22. 1.AdditionalMedicaretaxonearnedincome
Step 2
Reduce the applicable threshold
for the filing status by the total
amount of Medicare wages
received - but not below zero.
Step 1
Calculate Additional Medicare Tax
on any wages.
Copyright © 2013 Surgent McCoy
CPE, LLC – NFFI

23. 1.AdditionalMedicaretaxonearnedincome
Step 2
Reduce the applicable threshold
for the filing status by the total
amount of Medicare wages
received - but not below zero.
Step 1
Calculate Additional Medicare Tax
on any wages.

24. Additional Medicare Tax
Additional 0.9%
No Benefit for added tax

25. Alternative Minimum Tax
• Exemptionamountsfor2013:
– $51,900forindividualsandheadsofhousehold
– $80,800formarriedfilingjointlyandsurvivingspouses
• TaxpayerswhoarenotliableforAMTfor2013,buthave
beeninthepastyear,maybeeligibletotake minimum
taxcreditagainsttheirregulartaxthisyear.

26. A. Phaseoutofitemizeddeductionsreturnsin2013
• Ifanindividual’sadjustedgrossincomeexceedsthethresholdamount,the
otherwise-allowableitemizeddeductionsmustbereducedbythreepercentof
theamountofsuchexcess.However,thetotalreductioncannotexceed80
percentoftheotherwise-allowabledeductions. Thethresholdfor2013isas
follows:
Filing Status Phase-out of Itemized deductions
begins at
Married Filing Jointly $300,000
Surviving Spouse $300,000
Head of Household $275,000
Single $250,000
Married Filing Separately $150,000

27. Phaseoutofitemizeddeductionsreturnsin2013
MFJ AGI =
$400,000
Medical
Limit
10%
Subtotal AGI Phase-
Out 3% X
$100,000
Net Itemized
Deduction
Medical
Expense
$5,000 ($5,000) $0 Ø $0
Investment
Interest
(Inv Income +
$15,000)
$5,000 $5,000 Ø $5,000
Taxes/
Charity/
Mortgage/
Misc.
$20,000 $20,000 ($3,000) $17,000
Total $30,000 ($5,000) $25,000 ($3,000) $22,000

28. Phaseoutofitemizeddeductionsreturnsin2013
MFJ AGI =
$400,000
Medical
Limit
7.5%
Subtotal AGI Phase-
Out 3% X
$100,000
Net Itemized
Deduction
Medical
Expense
$5,000 ($5,000) $0 Ø $0
Investment
Interest
(Inv Income
+ $15,000)
$5,000 $5,000 Ø $5,000
Taxes/
Charity/
Mortgage/
Misc.
$20,000 $20,000 ($0) $20,000
Total $30,000 ($5,000) $25,000 ($0) $25,000
Tax Increase … yes …
If this were 2012 …

29. Phaseoutofitemizeddeductionsreturnsin2013–Morethan80%
MFJ AGI =
$1,000,000
Medical Limit
10%
Subtotal AGI Phase-
Out 3% X
$700,000
Net Itemized
Deduction
Medical
Expense
$5,000 ($5,000) $0 Ø $0
Investment
Interest
(Inv Income +
$15,000)
$5,000 $5,000 Ø $5,000
Taxes/
Charity/
Mortgage/
Misc.
$20,000 $20,000 ($20,000) $0
Total $30,000 ($5,000) $25,000 ($20,000) $5,000

30. Phaseoutofitemizeddeductionsreturnsin2013
MFJ AGI =
$1,000,000
Medical
Limit
10%
Subtotal AGI Phase-
Out 3% X
$700,000
Net Itemized
Deduction
Medical
Expense
$5,000 ($5,000) $0 Ø $0
Investment
Interest
(Inv Income +
$15,000)
$5,000 $5,000 Ø $5,000
Taxes/
Charity/
Mortgage/
Misc.
$20,000 $20,000 ($20,000) $0
Total $30,000 ($5,000) $25,000 ($20,000) $5,000
80% Max Reduction
($16,000) $4,000
$9,000

31. PersonalExemption Phaseout
• AGIthresholdsmirrorthethresholdsinthePeaseLimitation.
– $300,000formarriedfilingjointly &survivingspouses
– $275,000forheadsofhouseholds
– $250,000forsingleindividuals
– $150,000formarriedfilingseparately
• Underthephase-out,thetotalamountofexemptionsthat
maybeclaimedisreducedby2%foreach$2,500bywhichthe
taxpayer’sAdjustedGrossIncome(AGI)exceedstheapplicable
thresholdlevel

32. PersonalandDependency Exemptions
• Example: TheGosselinshaveeightdependentchildren. Theiradjustedgrossincomeis$400,000
in2013whentheyfileajointreturn.
• Incomputingtheirtaxableincomefor2013,theymaydeductasexemptionsonly$7,800;calculatedas
follows:
• 2013Grossexemptionamount $39,000 ($3,900X10)
• Adjustedgrossincome $400,000
• Less:MFJthreshold (300,000)
• Excess $100,000
• Divideby$2,500 40
• (Iftheresultisnotawholenumber,increaseittothenexthigherwholenumber)
• Multiplyby2%(.02)andentertheresultasadecimal .80
• Multiplygrossexemptionbyexclusionpercentage ($31,200)
• DeductionforExemptions $ 7,800

33. Medical Expense Deduction
• For2013,thethresholdforunreimbursedmedical
expensesislimitedto10%ofAGI
• However,taxpayerswhoare65oroldermaycontinueto
applythe7.5%limitation.

34. Sunsetting “Extenders”
• Scheduledtoendin2013(unlessCongressrenews)
– StateandLocalSalesTaxDeduction
– ExclusionofCancellationofIndebtednessonPrincipal
Residence
– IRADistributionstoCharity
– Mortgageinsurancepremiums
– Teachers’expensededuction

35. Additional Considerations
• ChildTaxCredithasbeenpermanentlysetat$1,000per
qualifyingchild
• HealthFlexibleSpendingArrangements (FSA)arecapped
at$2,500
– Anysalaryreductionsinexcessof$2,500willsubject
employeetotaxondistributionsfromhealthFSA
• Same-SexMarriageisnowrecognizedforallfederaltax
purposes,regardlessofwhereacouplelives

36. EstateandGiftTaxes
• Permanentmaximumfederalunifiedestateandgifttax
rateof40%
– $5milliondollarexclusionforgiftsmadeandestates
ofdescendantsdyingafterDecember31,2012
• Annualgifttaxexclusionpreservedat$14,000

37. Planning forBusiness
• Scheduledtoendorchangeafter2013(unlessCongress
renews)
– Section179deductionscheduledtodropto$25,000 and
thecorrespondingphase-outceilingtodropto$200,000
– 50%BonusDepreciation
– 15-YearRecoveryforLeasehold/RetailImprovementsand
RestaurantProperty
– WorkOpportunityTaxCredit
– ResearchTaxCredit

38. Copyright © 2013 Surgent McCoy
CPE, LLC – LLPW 13/01
§179–2012
RememberNottoForget!!
2003
AND
2013
2003
Restated
2012
With
Inflation
2008 –
2009
2010 - 2013
200,000 400,000 560,000 800,000 2MM
Trade/
Bus Inc.
Trade/
Bus Inc.
Trade/
Bus Inc.
Trade/
Bus Inc.
Trade/
Bus Inc.
25,000 100,000 139,000 250,000 500,000

39. Copyright © 2013 Surgent McCoy
CPE, LLC – LLPW 13/01
§179–2014
RememberNottoForget!!
2003
AND
2014
2003
Restated
2012
With
Inflation
2008
2009
2010 - 2013
200,000 400,000 560,000 800,000 2MM
Trade/
Bus Inc.
Trade/
Bus Inc.
Trade/
Bus Inc.
Trade/
Bus Inc.
Trade/
Bus Inc.
25,000 100,000 139,000 250,000 500,000

40. HomeOffice
Newin2013-SimplifiedHomeOfficededuction
• Newfor2013,taxpayersmayuseasimplifiedoptionwhenfiguringthedeductionfor
businessuseoftheirhome. Thissimplifiedoptiondoesnotchangethecriteriaforwho
mayclaimahomeofficededuction.Itmerelysimplifiesthecalculationand
recordkeepingrequirementsoftheallowablededuction.
• ThesimplifieddeductioniscalculatedonLine30ofScheduleC. Thedeductionallowsfor
$5persquarefootofthehomeusedforbusiness,withamaximum300squarefeet,or
$1,500deduction.

41. HomeOffice
• Comparisonofsimplifiedandregularhomeofficemethods
• Tipsfornewpreparers–SelectingaHomeOfficemethod
• Taxpayersmaychoosetouseeitherthesimplifiedmethodorthe
regularmethodforanytaxableyear.
• Chooseonatimelyfiledreturn
• Cannotlaterchangeforthatsameyear.
• Ifataxpayerutilizesthesimplifiedmethodforoneyearanduse
theregularmethodforanysubsequentyear,theymustcalculate
thedepreciationdeductionforthesubsequentyearusingthe
appropriateoptionaldepreciationtable.

42. EnergyIncentives
• CodeSection25C NonbusinessEnergyPropertyCredit
extended
• Plug-inElectiveDriveMotorVehicleCredit
– Limitedto$7,500
• RenewableResourcesCredit
• ManyEnergyCreditsExpiringafter2013

43. Affordable CareAct
• Mostkeyprovisionshavebeendelayeduntil2015
• EmployerMandate:
– Employerscouldfacepenaltiesiftheydonotofferitsfulltime
employeesopportunitiestoenrollinminimumessentialcoverage
• EmployerandInsurerReporting
– Largeemployerswillhavetofileinformationreportsthatdetail
termsandconditionsofhealthcarecoverage
– Insurerswillberequiredtofilesimilarinformationreports
• SmallEmployerHealthInsuranceCreditisavailabletoencouragesmall
employerstoprovidehealthinsurancecoveragetotheiremployees

44. Whopaysthemosttax?

45. Partingcheer

46. Questions