There’s not much time left for you to make beneficial tax moves for 2013. Consider these possibilities.

* Maximize retirement plan contributions. For 2013, you can put $17,500 in a 401(k) plan, $12,000 in a SIMPLE, or $5,500 in an IRA. If you’re 50 or older, you can set aside even more as “catch-up” contributions.

* Decide whether to sell investments to offset gains or losses already taken this year. You can deduct $3,000 of net losses against ordinary income.

* Estimate your tax liability for 2013, taking the new Medicare tax increases for higher-income taxpayers into account. If you’ll be underpaid, adjust your final quarterly tax payment or your December withholding.

* December 31 is the deadline for taking a 2013 required minimum distribution from your traditional IRA if you’re 70½ or older. Miss this requirement and a 50% penalty could apply.

* Purchase needed business equipment to use the first-year $500,000 expensing option for new and used equipment and 50% bonus depreciation for new equipment.

* Make energy-saving home improvements that could qualify for a lifetime tax credit of up to $500.

* Finalize annual gifts to use the 2013 exclusion from gift tax on gifts of up to $14,000 per recipient.

Contact our office for details on these and other year-end tax moves.

Some tax-cutting strategies make good financial sense. Other tax strategies are simply bad ideas, often because tax considerations are allowed to override basic economics.

Here’s one example of the tax tail wagging the economic dog. Let’s say that you run an unincorporated consulting business. You want some additional tax write-offs, so you decide to buy $10,000 of office furniture that you don’t really need. If you’re in the 28% tax bracket and you deduct the entire cost, this purchase will trim your tax bill by $2,800 (28% of $10,000). But even after the tax break, you’ll still be out of pocket $7,200 ($10,000 minus $2,800) – and stuck with furniture that you don’t really need.

There are other situations in which people often focus on tax considerations and ignore the bigger financial picture. For example:

* Someone increases the size of a home mortgage, solely to get a larger tax deduction for mortgage interest.

* A homeowner hesitates to pay off a mortgage, just to keep the interest deduction.

* Someone turns down extra income, because it might “push them into a higher tax bracket.”

* An investor holds an appreciated asset indefinitely, solely to avoid paying the capital gains tax.

Tax-cutting strategies are usually part of a bigger financial picture. If you are planning any tax-related moves, we can help make sure that everything stays in focus. For assistance, give us a call.

Are you familiar with PEP and Pease? Though they sound like a pop duo, the terms refer to tax rules known as phase-outs that can impact how much federal income tax you owe.

Phase-outs are reductions in the amount of deductions, credits, and other breaks you can claim on your tax return. Though generally based on adjusted gross income, phase-outs vary in rate, amount, and how they’re calculated.

Here’s an overview of PEP and Pease, two tax breaks that are once again subject to phase-out this year.

* Personal exemption phase-out (PEP). If you’re married filing jointly for 2013 and your income exceeds $300,000, the PEP will reduce the amount you claim for yourself, your spouse, and your dependents.

The personal exemption for 2013 is $3,900. But when PEP applies and your income increases, your deduction is reduced accordingly.

* Itemized deduction phase-out. You probably already know that some itemized deductions are limited. For instance, to claim a deduction for medical expenses, your out-of-pocket costs for this year have to exceed 10% of adjusted gross income (AGI). This threshold remains at 7.5% of AGI if you are 65 or older. Miscellaneous itemized deductions, such as unreimbursed employee business expenses, are limited to amounts over 2% of AGI.

* There’s also an additional phase-out called the Pease provision that limits the amount of total itemized deductions – after the above reductions. For 2013, Pease kicks in when your income exceeds $300,000 ($150,000 if you’re married filing separately).

Other phase-outs limit the amount and deductibility of IRA contributions; the education, adoption, and childcare credits; and the alternative minimum tax exemption. Please call for a review of how phase-outs affect you and what you might be able to do to avoid them.

As the population in the U.S. continues to age, more and more people will find themselves caring for their parents. Here are some of the tax breaks that caregivers should consider.

* If you provide more than half of your parent’s support, you may be able to claim your parent as a dependent on your tax return. To be eligible, your parent can’t earn more than $3,900 in 2013, excluding their nontaxable social security and disability income.

* What if you and your siblings all pitch in to support a parent? Anyone who contributes at least 10% of the total support can be the one to claim the $3,900 exemption if all of you sign a multiple support agreement.

* Even if a parent’s income exceeds $3,900 this year, you can still deduct the medical expenses paid on the parent’s behalf, as long as you provide more than half of his or her support.

* If you hire someone to take care of your parent while you work, you might qualify for the dependent care tax credit. Your parent must be physically or mentally incapable of caring for himself.

* Unmarried individuals who support a parent can file their tax returns as “head of household.” To qualify, your parent doesn’t need to live with you. Instead, as long as you pay more than half of the cost of maintaining your parent’s main home, including a rest home or nursing facility, you qualify for this preferential tax treatment.

For more information about the tax issues affecting caregivers and their parents, please give us a call.

The Internal Revenue Service has announced a delay of approximately one to two weeks to the start of the 2014 filing season due to the 16-day federal government shutdown.

The government closure came during the peak period for preparing IRS systems for the 2014 filing season. Updating these core systems is a complex, year-round process with the majority of the work beginning in the fall of each year.

There are additional training, programming, and testing demands on the IRS this year as the agency works to prevent refund fraud and identity theft.

The IRS is exploring options to shorten the delay and will announce a final decision on the start of the 2014 filing season in December.

For federal tax purposes, the determination of “business” or “hobby” is a matter of deduction. If your new venture is considered a business, you can deduct losses against other income.

However, when the activity is classified as a hobby, the “hobby loss” rules limit the amount you can write off. Expenses you incur might be deductible only if you itemize – or they might even be nondeductible.

The distinction affects the amount of tax you owe. So how can you prove you’re trying to run a money-making business despite several years of losses?

One test you’re probably familiar with is the general rule of earning a profit in three of the past five years. If your business has more income than deductions in three of five consecutive taxable years, the IRS generally accepts that you have a profit motive. (The time frame is two years in seven for certain horse-related activities.)

Unable to meet that test? Additional factors play a role as well. For instance, the Tax Court agreed that a volleyball consulting service with multiple loss years qualified as a business, in part because of a businesslike manner of operation. Among other items, the Court mentioned the maintenance of a separate bank account and accurate records as support for a profit motive.

Positive indicators of your profit-making intentions also include your expertise in the activity, the time and effort you put into your new business, and your success in other ventures.

If you’d like a complete list of the IRS “business vs. hobby” criteria, please contact us. We’ll be happy to review the guidelines with you.

It’s massive, and it’s complicated. At more than 2,400 pages, the Affordable Care Act (ACA for short) has left businesses and individuals confused about what the law contains and how it affects them.

The aim of the law is to provide affordable, quality health care for all Americans. To reach that goal, the law requires large companies to provide health insurance for their employees starting in 2015, and uninsured individuals must get their own health insurance starting in 2014. Those who fail to do so face penalties.

Insurance companies must also deal with new requirements. For example, they cannot refuse coverage due to pre-existing conditions, preventive services must be covered with no out-of-pocket costs, young adults can stay on parents’ policies through age 26, and lifetime dollar limits on health benefits are not permitted.

The law mandates health insurance coverage, but not every business or individual will be affected by this requirement. Here’s an overview of who will be affected.

FOR BUSINESSES – It’s all in the numbers
• Fewer than 50 employees
Companies with fewer than 50 employees are encouraged to provide insurance for their employees, but there are no penalties for failing to do so. A special marketplace will be available for businesses with 50 or fewer employees, allowing them to buy health insurance through the Small Business Health Options Program (SHOP).
• Fewer than 25 employees
Small companies that pay at least 50% of the health insurance premiums for their employees may be eligible for a tax credit for as much as 35% of the cost of the premiums. To qualify, the business must employ fewer than 25 full-time people with average wages of less than $50,000. For 2014, the maximum credit increases to 50% of the premiums the company pays, though to qualify for the credit, the insurance must be purchased through SHOP.
• 50 or more employees
For companies with 50 or more full-time employees, the requirement to provide “affordable, minimum essential coverage” to employees has been delayed for one year and is not required until 2015. Originally, employers had been required to file information returns that reported details about the health insurance they provided, with penalties to apply if the insurance did not meet standards. Companies complained that they needed more time to meet the reporting obligations, and in response the IRS made the reporting requirement optional for 2014. Without the reporting, the IRS could not determine penalties, so the penalties also were postponed for a year.

Bottom line: the IRS is encouraging companies to comply in 2014 even though there are no penalties for failure to do so.
• The business play or pay penalty
Starting in 2015, companies with 50 or more employees that don’t offer minimum essential health insurance face an annual penalty of $2,000 times the number of full-time employees over a 30-employee threshold. If the insurance that is offered is considered unaffordable (it exceeds 9.5% of family income), the company may be assessed a $3,000 per-employee penalty. These penalties apply only if one or more of the company’s employees buy insurance from an exchange and qualify for a federal credit to offset the cost of the premiums.

FOR INDIVIDUALS – It’s all about coverage
Currently, attention is focused on the health insurance exchanges or “Marketplace” that opened for business on October 1. Confusion about the Affordable Care Act has left many people thinking everyone has to deal with the exchanges. The fact is that if you are covered by Medicare, Medicaid, or an employer-provided plan, you don’t need to do anything.
Also, if you buy your health insurance on your own and are happy with your plan, you can keep your coverage. However, the only way to get any premium-lowering tax credits based on your income is to buy a plan through the Marketplace.
• The exchanges (Marketplace)
Each state will either develop an insurance exchange (Marketplace) or use one provided by the federal government. The Marketplace will allow those seeking coverage to comparison shop for health plans from private insurance companies.

There will be four types of insurance plans to choose from: Bronze, Silver, Gold, and Platinum. The more expensive the plan, the greater the portion of medical costs that will be covered. The price of each plan will depend on several factors including your age, whether you smoke, and where you live.

Many individuals will qualify for federal tax credits which will reduce the premiums they actually pay. Each state’s Marketplace will have a calculator to assist individuals in determining the amount, if any, of their federal tax credit.
• The individual play or pay penalty
If you’re one of the 45 million or so Americans without health insurance, you will need to get coverage for 2014 or pay a penalty of $95 or 1% of your income, whichever is greater. Low-income individuals may qualify for subsidies and/or tax credits to help pay the cost of insurance.

The penalty increases to $325 or 2% of income for 2015 and to $695 or 2.5% of income for 2016. For 2017 and later years, the penalty is inflation-adjusted. Those who choose not to be insured and to pay the penalty instead will still be liable for 100% of their medical bills.

NOTE: If you will be shopping for health insurance on the Marketplace, be aware that there’s no need to rush to enroll; the enrollment period runs from October 1, 2013, through March 31, 2014. Take the time you need to review your options and select what’s best for you and your family.

MORE ABOUT THE LAW AND YOUR TAXES

In addition to the penalties required by the Affordable Care Act, the law made other tax changes that could affect you. Among them are the following:
• Annual contributions to flexible spending accounts are limited to $2,500 (indexed for inflation).
• The 7.5% adjusted gross income threshold for deducting unreimbursed medical expenses increases to 10% for those under age 65. Those 65 and older can use the 7.5% threshold through 2016.
• The additional tax on nonqualified distributions from health savings accounts (HSAs) is 20%, an increase from the previous 10% penalty.
• The payroll Medicare tax increases from 1.45% of wages and self-employment income to 2.35% on amounts above $200,000 earned by individuals and above $250,000 earned by married couples filing joint returns. This rate increase applies only to the employee portion, not to the employer portion.
• A 3.8% Medicare surtax is imposed on unearned income (examples: interest, dividends, capital gains) for single taxpayers with income over $200,000 and married couples with income over $250,000.

The Affordable Care Act may be one of the most complicated and confusing laws ever passed, but one thing is very clear: the law will affect the taxes of most Americans. In order to manage your tax bill, you will have to factor the new health care rules into your overall personal and business tax planning. For guidance, contact our office.

To begin checking out your state’s exchange (Marketplace), start at www.healthcare.gov – the federal government’s website on the Affordable Care Act.

NOTE: This Memo is intended to provide you with an informative summary of the tax issues connected with the Affordable Care Act. This massive package of legislation contains varying effective dates, definitions, limitations, and exceptions that cannot be summarized easily. For details and guidance in applying the tax provisions of this law to your situation, seek professional assistance.

• You should continue to file and pay taxes as normal. Individuals who filed a personal tax return extension should file their returns by Oct. 15, 2013.

• All other tax deadlines including the payroll tax deadlines remain in effect, including those covering individuals and businesses.

• You can electronically or paper file your tax return. However, paper filing will be delayed until they resume operations. Enclosed payments with paper tax returns will still be accepted by the IRS.

• Tax refunds will NOT be issued until government operations resume.

• Only automated toll-free telephone applications will remain operational.

• Taxpayer can obtain a tax transcript via mail during the shutdown by using the automated tools at irs.gov.

• Taxpayers with audits, collection, Appeals or Taxpayer Advocate cases should assume their meetings are cancelled. IRS assigned to the case will reschedule those meetings after normal operations resume.

• Tax software companies, tax practitioners and Free File will remain available to assist with taxes