Anderson ZurMuehlen Blog

Beware of the AMT when doing year-end tax planning

As year end approaches, you may be trying to accelerate deductible expenses into 2013 to reduce, or at least defer, tax. But you must beware of the alternative minimum tax (AMT) — a separate tax system that limits some deductions and doesn’t permit others, such as:

• State and local income tax deductions,

• Property tax deductions, and

• Miscellaneous itemized deductions subject to the 2% of adjusted gross income floor, such as investment expenses and unreimbursed employee business expenses.

Accelerating these expenses could trigger the AMT, because you must pay the AMT if your AMT liability exceeds your regular tax liability.

The American Taxpayer Relief Act of 2012 (ATRA) set higher AMT exemptions permanently, indexing them — as well as the AMT brackets — for inflation going forward. This will provide some AMT relief, but higher-income taxpayers could still be vulnerable.

We’d be happy to help you determine whether accelerating deductible expenses will reduce your 2013 tax bill — or could trigger the AMT. Contact Patty Nelson, Shareholder, at 406.442.1040.

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2013 may be your last chance for a “charitable IRA rollover”

If you’re age 70½ or older, you can make a direct contribution — up to $100,000 — from your IRA to a qualified charitable organization in 2013 without owing any income tax on the distribution. This “charitable IRA rollover” can be used to satisfy required minimum distributions.

The American Taxpayer Relief Act of 2012 (ATRA) revived this opportunity, but only for 2012 and 2013. So if you’d like to make a charitable IRA rollover, consider doing so this year in case the opportunity isn’t extended. If you already took advantage of the ATRA provision that allowed a charitable rollover made in January 2013 to be treated for tax purposes as if it had been made Dec. 31, 2012, you can make another $100,000 rollover this year for 2013 tax purposes.

Have questions about charitable IRA rollovers or other giving strategies? Contact Cindy Utterback, Shareholder, at 406-442-1040. We can help you create a giving plan that will meet your charitable goals and maximize your tax savings.

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Even with rising exemptions, 2013 annual exclusion gifts still a good idea

Recently, the IRS released the 2014 annually adjusted amount for the unified gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption: $5.34 million (up from $5.25 million in 2013). But even with the rising exemptions, making annual exclusion gifts is still a good idea.

The 2013 gift tax annual exclusion allows you to give up to $14,000 per recipient tax-free — without using up any of your gift and estate or GST tax exemption. (The exclusion remains the same for 2014.)

The gifted assets are removed from your taxable estate, which can be especially advantageous if you expect them to appreciate. That’s because the future appreciation can avoid gift and estate taxes.

But you need to use your 2013 exclusion by Dec. 31. The exclusion doesn’t carry over from year to year. For example, if you and your spouse don’t make annual exclusion gifts to your granddaughter this year, you can’t add $28,000 to your 2014 exclusions to make a $56,000 tax-free gift to her next year.

Please contact Bill Hughes, Shareholder,  for ideas on how to make the most of annual exclusion gifts.

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Re-incorporating in a New State Can Be Costly

By Shirlee Walker, Shareholder

Revenue Rule 67-390 makes it clear that “an exempt organization incorporated under the laws of one state” and then “reincorporated under the laws of another state with no change in its purposes” is a new legal entity.  This new entity must apply for an exemption and cannot qualify under the old entity’s exempt status.  If the new entity does not apply for exempt status, donor contributions will not be deductible and the organization will be required to file Form 1120, U.S. Corporation Income Tax Return.  This ruling has been cited in an IRS exemption revocation as recently as 2012. 

In 2003, the Advisory Committee on Tax Exempt and Government Entities addressed the requirement to file for a new tax exempt status when an exempt organization relocates to a new state.  The committee concluded it would be difficult to ensure that no other changes had taken place in the re-incorporation and recommended no change in the process.  The committee did state that a “new” organization reincorporating under these circumstances should be able to obtain a definitive public support ruling based on the financial data of the “old” organization.  The committee pointed out that if an exempt organization moves to a new state without reincorporating, the organization is not required to file a new exemption application.  In this case, the organization would maintain its incorporation in the old state as a domestic corporation and register in the new state as a foreign corporation. 

The American Bar Association (ABA) Section of Taxation asked the IRS to address this issue in the 2012-2013 Treasury-IRS Guidance Priority List.  The ABA requested that the IRS provide guidance on how to obtain a revised determination letter without having to file a new exemption application when there is a mere change in the form or state of incorporation.  The IRS did not include this issue in the Guidance Priority List.

This brings up another question.  Revenue Rule 67-390 is silent on the status of the old corporation’s Employer Identification Number (EIN).  Several sources believe the re-incorporated entity is required to obtain a new EIN.  Revenue Rule 73-526 indicates that when a corporation re-incorporates in a new state under a section 368(a)(1)(F) type of restructuring, the corporation should continue to use the same EIN.  Other rulings have made this same determination where for-profit corporations were involved. 

If your tax exempt organization is considering a move from one state to another, please contact Suzanne Severin, Shareholder, or Shirlee Walker, Shareholder to discuss your particular circumstances.

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Maximize your 2013 depreciation deductions with a cost segregation study

If you’ve recently purchased or built a building or are remodeling existing space, consider a cost segregation study. It identifies property components and related costs that can be depreciated much faster, perhaps dramatically increasing your current deductions. Typical assets that qualify include decorative fixtures, security equipment, parking lots and landscaping.

The benefit of a cost segregation study may be limited in certain circumstances, such as if the business is subject to the alternative minimum tax or is located in a state that doesn’t follow federal depreciation rules.

For more information on cost segregation studies — or on other strategies to maximize your 2013 depreciation deductions — contact Suzanne Severin, Shareholder,  at 406.442.1040.

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Pack the Place In Pink!

Will your exec comp be subject to expanded Medicare taxes?

Maybe. The following types of executive compensation could be subject to the health care act’s 0.9% additional Medicare tax:

• Fair market value (FMV) of restricted stock once the stock is no longer subject to risk of forfeiture or it’s sold

• FMV of restricted stock when it’s awarded if you make a Section 83(b) election

• Bargain element of nonqualified stock options when exercised

• Nonqualified deferred compensation once the services have been performed and there’s no longer a substantial risk of forfeiture

And the following types of gains will be included in net investment income and could trigger or increase exposure to the act’s new 3.8% Medicare contribution tax:

• Gain on the sale of restricted stock if you’ve made the Sec. 83(b) election

• Gain on the sale of stock from an incentive stock option exercise if you meet the holding requirements

We’d be happy to help you determine the best strategy for your exec comp. With smart timing, you may be able to reduce or avoid exposure to the expanded Medicare tax.

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Why you should max out your 2013 401(k) contribution

Contributing the maximum you’re allowed to an employer-sponsored defined contribution plan, such as a 401(k), 403(b) or 457 plan, is likely a smart move:

• Contributions are typically pretax, reducing your modified adjusted gross income (MAGI), which can also help you reduce or avoid exposure to the new 3.8% Medicare tax on net investment income.

• Plan assets can grow tax-deferred — meaning you pay no income tax until you take distributions.

• Your employer may match some or all of your contributions pretax.

For 2013, you can contribute up to $17,500 — plus an additional $5,500 if you’ll be age 50 or older by Dec. 31.

If you participate in a 401(k), 403(b) or 457 plan, it may allow you to designate some or all of your contributions as Roth contributions. While Roth contributions don’t reduce your current MAGI, qualified distributions will be tax-free. Roth contributions may be especially beneficial for higher-income earners, who are ineligible to contribute to a Roth IRA.

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Family Enterprise Montana Forum on October 18th in Missoula

The inaugural 2013 Family Enterprise Montana Forum, hosted by the Missoula Economic Partnership and The University of Montana’s School of Business Administration, is designed to provide unique learning experiences to those involved with family business throughout Montana.

The Forum is scheduled for Friday, October 18th at the Holiday Inn, Missoula Downtown and the cost is $45.

Find out more.

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Will your investment income be subject to the new 3.8% NIIT?

Under the health care act, starting in 2013, 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% of the lesser of your net investment income or the amount by which your MAGI exceeds the applicable threshold.

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. And 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 liability.

The rules on what is and isn’t included in net investment income are somewhat complex, so please contact us for more information — and to find out what tax-saving strategies may be effective in your particular situation.

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