Monthly Archives: November 2013

Our 2013 Annual Year-End Tax Planning Letter


 Our 2013 Annual Year-End Tax Planning Letter. 

The clock is ticking on your chances to take 

advantage of great tax savings opportunities!

Tax planning and tips from scarsdale cpa


 Fall, 2013 

To our clients and friends, 

It’s that time of year when we think about spending, spending for the holidays. But I’d like you to also think about savings. That is, thinking about ways to lower your tax bill. I believe ignoring your taxes until next year could be an expensive mistake. I’d like to suggest that you have us (or your preparer if you are not a client of our office) prepare an estimate now of your current year’s tax liability and then review strategies to see if there are ways to keep extra money in your pocket for the holidays and beyond.

We’re going to provide you with lots of food for thought in this letter. 

As I sit down to write this year’s annual tax letter, I am turning nostalgic. I long for the “good old days”. My wife and I were talking at dinner recently about the good old days. We tried to come up with a list of things that are better today than they were back “in the day”. Our list was short, technology, television, phones, automobiles, medical care to name a few things. Unfortunately, one item not on the list was the tax laws. 

The passage very late last year of The American Taxpayer Relief Act of 2012 makes 2012 seem like the good old days! I would have named the new law something else, but they didn’t ask me.

In addition, The Affordable Care Act (“Obamacare”) is kicking in, in full force along with its’ increased taxes on interest, dividends and capital gains (depending on your level of income).

Some of our clients will see little change in their taxes this year as many of the law changes kick in above specified income thresholds. But “There are many, many high-income taxpayers now who are finding themselves facing tax rates in excess of 50%,” said Suzanne Shier, a tax strategist and Director of Wealth Planning at Chicago-based Northern Trust Corp. “That really gets their attention.” Ours too!

So . . . this year-end it makes a great deal of sense to review strategies to reduce your taxes. At this point, you likely have a fairly complete picture of your 2013 income from sources such as salary, retirement plan distributions, and dividends. The total of those, combined with other predictable income items, provides a good starting point for tax planning. Doing nothing could leave you paying significantly more in taxes and is a lousy tax planning strategy. Year-end tax planning is very important this year. At a minimum you should know what to expect on your 2013 tax return which may look quite different than past years’ returns.

I encourage you to make 2013 year-end tax planning a priority and we are here to help and guide you through the process! 

Although we’ve done our best to keep this year’s annual letter as short as possible, it is again considerably lengthier than then we would have liked. As a result, we have divided this year’s letter into two letters of which this is the first. The second letter contains twenty-one strategies for tax reduction.

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Let’s start with income thresholds. Starting in 2013, individual taxpayers with incomes under $200,000 and married taxpayers with incomes under $400,000 will feel minimal impact under the new laws. Keep reading though as there are still opportunities to reduce taxes. Above these levels, your taxes are likely going up and maybe significantly.

Increase in Top Tax Rate. Beginning in 2013, a new top tax rate of 39.6% takes effect. This rate applies to taxable income in excess of $450,000 (joint returns and surviving spouses), $425,000 (heads of household), $400,000 (single taxpayers other than head of household and surviving spouse), and $225,000 (married filing separately).

Increased Tax Rate on Certain Capital Gains and Dividends. While the favorable tax rates in effect before 2013 for capital gains and dividend income were generally made permanent by the American Taxpayer Relief Act of 2012, a new 20% rate has been added for high incomers. Thus, rates of 0%, 15%, and 20% apply to capital gain and dividend income, depending on your tax bracket. These rates apply for alternative minimum tax purposes also.

New Taxes in 2013. There are a couple of new taxes that take effect in 2013: a 3.8% tax on net investment income above a threshold amount, and a .9% additional tax on wages and self-employment income above a threshold amount. For both taxes, the threshold amount is $200,000 ($250,000 if married filing jointly or $125,000 for married filing separately). Net investment income includes most rental income and net gain attributable to the disposition of property other than property held in a trade or business (i.e. capital gains).

Increased Threshold for Deducting Medical Expenses. Medical and dental expenses that exceed a certain percentage of your adjusted gross income (AGI) are deductible. For years before 2013, that percentage was 7.5%. For 2013 and later years, the deduction floor is increased to 10%. So not only are your health insurance premiums likely to be higher, you now cannot deduct as much of your out-of-pockets medical costs as previously. However, for tax years through 2016, the floor is 7.5% if you or your spouse has reached age 65 before the end of that year. Reduction in Personal Exemptions and Itemized Deductions for High-Income Taxpayers There is a reduction in personal exemptions and itemized deductions for taxpayers with adjusted gross income over $250,000 (single people other than head of household and surviving spouse), $300,000 (joint returns), $275,000 (head of household), and $150,000 (married filing separately), which will have the effect of increasing taxes and tax rates on affected taxpayers. We need to consider whether these new taxes affect you and, if so, whether you have paid a sufficient amount of taxes through withholdings and estimated tax payments so as to avoid any underpayment or late payment penalties.

Alternative Minimum Tax. If you are subject to the alternative minimum tax (AMT), some of your deductions may be worthless. Thus, if we anticipate that you will be subject to the AMT, we need to consider the timing of deductible expenses that may be limited under AMT.

What does this mean? Well for many wealthy taxpayers, the rate on long-term capital gains and qualified dividends now can be as much as 25%, including the new surtax and limits on deductions. That’s a 67% increase from the 15% rate in 2012. The tax rate on other investment income such as royalties, interest and rents can exceed 43%.

There is a lot to cover and any one strategy can save you lots. So here we go. 

Tax Rates: 

For 2013, the amount of income needed to reach into a bracket has increased slightly.

This table shows the tax rate that applies on income up to the amount shown. Incomes above the amounts shown in the 35% column are taxed at a rate of 39.6%. 

10% 15% 25% 28% 33% 35%
2013 Joint Federal Tax Brackets 17,850 72,500 146,400 223,050 398,350 450,000
2013 Single Fed’l Tax Brackets 8,925 36,250 87,850 183,250 398,350 400,000
2013 AMT Tax Rates 26% 28%
Applies to AMT income over 80,800 260,300
2013 NY Joint Tax Brackets 4.50% 5.25% 5.90% 6.85% 7.85% 8.97%
Applies to taxable income over 16,000 23,000 26,000 40,000 300,000 500,000
2013 NJ Joint Tax Brackets 1.40% 1.75% 3.50% 5.53% 6.37% 8.97%
Applies to taxable income over 0 20,000 50,000 70,000 80,000 500,000
2013 CT Joint Tax Brackets 3.0% 5.0% 6.5% CTSingle brackets are
Applies to taxable income over Zero 20,000 1,000,000 half of joint brackets

Top Marginal Tax Rates for 2013

Connecticut  6.70%
New Jersey  8.97%
New York  8.82%
New York City  3.648%
California  13.3% 

A Unique Strategy for Your Situation 

In this environment where change is the new normal, we need to consider all options. So let’s see if we can save you some tax dollars and guide you to avoid missteps that could increase your taxes. Each year at this time we give you a number of strategies to consider. Your personal tax situation is

unique to you. Taking advantage of even one or two of these planning strategies could save you real money.

What to do between now and December 31, 2013. 

But first a word from our sponsor, the AMT!

The alternative minimum tax (AMT) 

If you are ensnared in the AMT, remember that many deductions normally allowed, ARE NOT allowed for the AMT calculation…personal exemptions, the standard deduction, state and city income taxes and real estate taxes.

So . . . taxpayers who have significant deductions, such as those who live in states that have relatively high personal income tax rates and high real estate taxes like New York, are a likely victim for the clutches of the AMT. There are other deductions that could trigger the AMT too, such as exercising incentive stock options, taking numerous personal exemptions for a large family, experiencing significant deductible medical expenses, or large miscellaneous itemized expenses (such as employee business expenses).

The AMT makes year-end planning difficult and potentially dangerous if done in a vacuum. By reducing regular tax liability through deductions, deferral and overall rate reductions, the alternative minimum tax liability exposure is increased. Since many of the strategies that are used for reducing your regular taxes will backfire when it comes to the AMT, you really need to know your exposure to the AMT.

If in fact you are in the AMT, the irony is that unlike the basic strategy (discussed below) of postponing income, you may want to actually accelerate income into 2013 since the AMT tax rate is in fact lower. Yes, this is a bit confusing! All planning is highly personalized and unique to each individual and must consider multiple years to be truly effective.

So what to do now? 

Although there are serious tax reform proposals being discussed by Congress, as of now tax rates are not scheduled to increase in 2014. The following are some of the strategies you should review before year end to see if they make sense in your situation. The focus should not be entirely on tax savings. These strategies should be adopted only if they make sense in the context of your total financial picture.

These are the usual and most common strategies:

Deferring Income into 2014Options for deferring income include: (1) if you are due a year-end bonus, asking your employer to pay the bonus in January 2014; (2) if you are considering selling assets that will generate a gain, postponing the sale until 2014; (3) delaying the exercise of any stock options you may have; (4) if you are selling property, considering an installment sale; (5) consider parking investments in deferred annuities; (6) establishing an IRA, if you are within certain income requirements; and (7) if your employer has a 401(k) plan, consider putting the maximum salary allowed into it before year end.

Accelerating Deductions into 2013. Usually we want to accelerate what deductions we can into the current year to offset the higher income this year. This would also be an appropriate strategy if we anticipate lower income next year.

Options include: 

(1) consider prepaying your property taxes in December; (2) consider making your January mortgage payment in December; (3) if you owe state income taxes, consider making up any shortfall in December rather than waiting until your return is due; (4) since medical expenses are deductible only to the extent they exceed 10% (7.5% if you or your spouse are 65 before the end of the year) of your adjusted gross income (AGI), if you have large medical bills not covered by insurance, bunching them into one year may help overcome this threshold; (5) making any large charitable contributions in 2013, rather than 2014; (6) selling some or all of your loss stocks; and (7) if you qualify for a health savings account, consider setting one up and making the maximum contribution allowable.

Generally we want to delay recognizing income to defer the payment of additional taxes. However,

depending on your projected income, it may make sense to accelerate income into 2013 and delay deductions.

Accelerating Income into 2013. Besides harvesting gains from your investment portfolio, other options for accelerating income include:

(1) if you own a traditional IRA or a SEP IRA, converting it into a Roth IRA and recognizing the conversion income this year; (2) taking IRA distributions this year rather than next year; (3) selling stocks or other assets with taxable gains this year; (4) if you are self-employed with receivables on hand, trying to get clients or customers to pay before year end; and (5) settling lawsuits or insurance claims that will generate income this year.

Deferring Deductions into 2014. If you anticipate a substantial increase in taxable income, we may want to explore deferring deductions into 2014 by looking at the following: (1) postponing year-end charitable contributions, property tax payments, and medical and dental expense payments, to the extent you might get a deduction for such payments, until next year; and (2) postponing the sale of any loss-generating property.

Among the services we provide . . . is a tax projection and planning analysis. We gather current year tax information from our clients and use it to project their taxes for the current year. We then determine what strategies we may be able to implement to reduce their 2013 and 2014 taxes.

Gifting Strategies to Maintain Family Wealth 

Anyone is permitted to make gifts of up to $14,000 per year to an unlimited number of people without having to pay gift taxes. Married couples can make combined gifts of up to $28,000. A married couple wishing to make gifts to two married children and four grandchildren can make gifts of up to $224,000 per year ($28,000 to each child, grandchild and child’s spouse) without paying any gift taxes. This is a simple way to reduce the size of one’s future taxable estate. There are a number of other ways to reduce your taxable estate. Please contact us for further insight.

Above and beyond the annual gift exclusion of $14,000, the federal applicable exemption amount for gifts during a lifetime is $5,250,000. This is by far the highest it has ever been. Wealthy individuals, who have both the means and desire to do so, might plan on making the gifts up to the exclusion amount. This amount could be reduced in the future. As every estate and financial planning expert will tell you, making lifetime gifts is a simple and effective estate tax minimization strategy. Giving away assets at no gift tax cost will allow both the present value and its appreciation to forever escape the Federal estate tax.

Retirement Plan Distributions 

Taxpayers receiving retirement plan distributions should note that while such distributions are not subject to the 3.8% surtax, they could raise your adjusted gross income over the $200,000 threshold, making all other unearned income fair game for the tax. One possible solution would be to convert your IRA to a Roth IRA. You will recognize income now, but future Roth distributions will be tax free.

Roth Conversions 

High-income taxpayers with traditional IRAs or rollover IRAs have an opportunity, first available in 2010, to roll over their IRAs into a Roth IRA. Many of you reading this may want to consider this. Over time it could save you and your heirs big taxes. However, it does not make sense in all cases and needs to be analyzed carefully.

For those who previously chose not to convert to a Roth, keep in mind that the Obamacare surtax applies primarily to investment income, not IRA distributions.

Distributions from traditional and rollover IRAs are generally taxable when received. Contributions to Roth IRAs are non-deductible when made, but all principal and earnings will be distributed tax free. Therefore, Roth IRAs may be preferable to traditional IRAs.

When you convert to a Roth IRA, you must pay tax on the converted amount in the year of conversion. 

There’s another important point on this. The government gives you a do over, called re-characterization. You are allowed to change your mind if the value of your now Roth IRA goes down and you don’t want to pay taxes on the old higher value. You can put it back to a regular IRA like nothing ever happened. And what makes this even better is that the government gives you until you file your tax return for that year. So in a perfect world, if you convert on January 2, 2014 and you extend your 2014 tax return, you would actually have until October 15, 2015, to look back, see how it is doing and perhaps re-characterize it. But if you had converted your traditional IRA to a Roth on December 15, 2014, you only have a ten-month window to evaluate its performance. It’s still worth considering.

Last point on this, issues related to transferring wealth to succeeding generations also come into play here and should be considered. There is a lot to think about when it comes to whether or not to convert an IRA to a Roth IRA. Reasons for us to chat!

Expiring Energy-Related Tax Credit 

There is an expiring energy-related tax credit that may be worth looking at. The residential energy credit is available only through the end of 2013. If you are contemplating energy improvements to your home, you may want to accelerate the improvements into 2013. The credit is 10% of the amounts paid or incurred for qualified energy efficiency improvements installed during the tax year and the amount of residential energy property expenditures paid or incurred during the tax year, up to a maximum credit of $500.

Changes enacted in the past few years: For 2013, taxpayers in the lowest two tax brackets will pay zero tax on capital gains and qualifying dividends.

Among the services we provide . . . 

is personal financial recordkeeping. We track your income and expenses and provide comprehensive reports so you’ll know where your money is coming from and where it’s going. We reconcile your bank, credit card and brokerage accounts to monthly statements. Reports show your net worth changes! If you’d like, we can even pay your bills for you. This service is also great for an elderly or disabled relative. 

Some other late-year moves to save 2013 taxes: 

• If self-employed, hold off sending bills to your customers until January or if you want to accelerate income, send bills out ASAP.

• Apply now for a social security number for any children born in 2013 as you’ll need to put the number on your tax return (complete IRS Form SS-5).

• Increase your basis in S corporations or partnerships to make deduction of 2013 operating losses possible.

• If adopting a child in 2013, take advantage of the tax credit for up to $12,970 of qualified expenses, subject to phase outs.

• Use credit cards to prepay deductible expenses.

• Increase withholdings to eliminate or reduce estimated tax penalties.

• One of the biggest deductions available to all businesses, and one that will be dramatically reduced in 2014, is the Section 179 expensing election. This is the last year for expensing up to $500,000 of Section 179 property. The maximum amounts drops to $25,000 next year!

• Keep in mind deductible mileage rates: for unreimbursed business travel – 56.5 cents per mile; for medical and moving – 24 cents per mile; for charitable activities – 14 cents per mile. A log of such travel should be maintained in order to take a mileage deduction.

If you would like to discuss any topic concerning your specific situation, please give us a call. As always we are available to help you with any tax, accounting, bookkeeping, investment, insurance or estate planning needs. But don’t wait until mid-December! If you are not a client of our office and wish to consider implementing any of these strategies, or just want to talk about your particular situation, please call us for a free consultation.


Paul S. Herman, CPA

Circular 230 Disclosure: Any U.S. federal tax advice included in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding U.S. federal tax-related penalties or (ii) promoting, marketing or recommending to another party any tax-related matter addressed herein. Any suggestions contained herein are general, and do not take into account an individual’s specific circumstance or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Recipients who are not clients of this office should consult their applicable professional advisors prior to acting on the information set forth herein.

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Employment Tax Withholding– Refunds and Adjustments for Same-Sex Married Couples

Scarsdale accountant Paul Herman has all the answers to your personal finance questions! Federal income and employment tax rules provide exclusions from gross income and from wages for specific benefits employers provide to the spouse of an employee. Prior to the Windsor decision, married same-sex taxpayers were excluded from receiving the benefit of these provisions. Same sex marriage and tax tips from scarsdale cpaAs a result, employers withheld and paid employment taxes on certain benefits provided to the same-sex spouse of an employee because (1) the marriage was not recognized and (2) the benefits were not treated as excludable from gross income or from wages for federal income or employment tax purposes.

Following the Supreme Court’s decision in Windsor, the IRS provided guidance to employers and employees on how to make claims for refunds or adjustments (corrections) of overpaid payroll taxes. Specifically, taxpayers who overpaid FICA (Social Security and Medicare) taxes and federal income tax withholding for certain benefits provided and remuneration paid to same-sex spouses may now be entitled to a refund of or an adjustment to their withholding.

The IRS has provided two alternative procedures for employers to correct the overpayment of employment taxes attributable to same-sex spousal benefits:

  1. An employer can repay its employees for the over-collected FICA and federal income tax withholding with respect to same-sex spousal benefits for the first three quarters of 2013 during the fourth quarter of 2013. The employer will then reduce fourth quarter wages, tips, and other compensation on its fourth quarter Form 941.
  2. An employer that does not reimburse the employee’s over-withholding by December 31, 2013, can file one Form 941-X for the fourth quarter of 2013 to correct FICA taxes paid in all four quarters of 2013. This procedure will correct overpayments of FICA taxes for same-sex spouse benefits paid in 2013. The employer does not correct for over-withheld income taxes; instead, the employees will receive credit for the over-withheld income taxes when they file their 2013 federal income tax return.

The IRS has also provided a special administrative procedure for employers to make adjustments or claims for overpayments during years before 2013 still open under the statute of limitations (2010, 2011, and 2012). For these years, an employer can file one Form 941-X for the fourth quarter of each open year. This fourth quarter Form 941-X would include adjustments or refunds of all overpayments of FICA (but not income) taxes with respect to same-sex spousal benefits provided during that entire year.

Our Scarsdale tax preparers here at Herman & Company CPA’s are here for all your financial needs. Please contact us if you have questions about these provisions or any other tax compliance/planning issues, and to receive your free personal finance consultation!


Herman and Company CPA’s proudly serves Armonk NY, Bedford Hills NY, Chappaqua NY, Harrison NY, Scarsdale NY, Mamaroneck NY, Stamford CT and beyond.

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New Tax Rules for Legally Married Same-Sex Couples

Scarsdale accountant Paul Herman has all the answers to your personal finance questions! The following new tax rules have been created to accommodate legally married same-sex couples:

The U.S. Supreme Court’s decision in the Edith Windsor Case, invalidating a key provision of the Defense of Marriage Act, raised many questions regarding the federal income tax rights and responsibilities of same-sex couples. New Marriage Tax Rules for Same-Sex Couples from Scarsdale accountant Paul Herman  The U.S. Department of the Treasury and the IRS recently ruled that same-sex couples, legally married in a jurisdiction that recognizes their marriages, will be treated as married for federal tax purposes. This ruling applies regardless of whether the couple lives in a jurisdiction that recognizes same-sex marriage or a jurisdiction that does not. However, the ruling does not apply to registered domestic partnerships, civil unions, or similar formal relationships recognized under state law.

Same-sex couples will now be treated as married for all federal tax purposes (income, gift, and estate taxes) where marriage is a factor. The ruling applies to filing status, personal and dependency exemptions, the standard deduction, employee benefits, IRA contributions, and the earned income and child tax credits.

For 2013, legally married same-sex couples must file their tax return using either the married filing jointly or married filing separately filing status. For years prior to 2013, these couples may, but are not required to, file amended returns choosing to be treated as married for federal tax purposes for one or more prior tax years still open under the statute of limitations.

Our Scarsdale tax preparers here at Herman & Company CPA’s are here for all your financial needs. Please contact us for all inquiries and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Bedford NY, Mount Kisco NY, Larchmont NY, Purchase NY, Rye NY, Harrison NY, Scarsdale NY, Greenwich CT and beyond.

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Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.