Tax Law: Year-End and New Year Planning

Related Attorney(s): David S. De JongMark W. SchweighoferDavid B. Torchinsky Eric J. Rollinger

Media Type: Alert

As every new year does, 2014 will usher in a variety of updates and changes to tax law and IRS policy. By familiarizing yourself with these updates and changes now, you may avoid unnecessary taxes and penalties. In addition, some taxpayers may see new opportunities for significant tax planning. In this alert, we’ve summarized a few key points of particular interest as 2014 approaches.

Affordable Care Act Individual Mandate to Take Effect January 1

In spite of a delay until 2015 in the federal mandate that most larger businesses provide employee health coverage, the individual insurance mandate is scheduled to take effect January 1, 2014. This means the implementation of the Affordable Care Act’s requirement that most U.S. Citizens, with limited exceptions, obtain health care coverage or face a penalty. Taxpayer penalties will be calculated as the greater of a percentage of household adjusted gross income or a preset applicable dollar amount.

DOMA’s Repeal to Have Implications for Individuals and Employers

The IRS has issued notices regarding the implications for federal tax purposes of the unconstitutionality of Section 3 of the Defense of Marriage Act pursuant to the U.S. Supreme Court’s June decision in U.S. v. Windsor. These implications are greatest for same-sex married couples who were previously treated as unmarried for tax purposes under DOMA. Regardless of same-sex couples’ state of residence, IRS Revenue Ruling 2013-17 states that legally married same-sex couples will be treated the same as heterosexual married couples for federal tax purposes. In addition, couples may, but are not required to, submit amended returns to file as married if they were legally married at year-end for tax years in which the statute of limitations period is still open (generally three years from the date of initial filing). Taxpayers facing this scenario should consult a tax professional to determine whether amending past returns is in their best interests. In some cases, submitting an amended return to file as married could result in a higher tax liability.

Also affected by the repeal of DOMA are employers with same-sex married employees. Historically, employer-paid benefits offered to an employee’s same-sex spouse have been treated as additional compensation to the employee and therefore subject to FICA taxes and withholding. In Notice 2013-61, the IRS outlined a simplified system for employers to amend past employment tax returns should they wish to seek a refund of the employment taxes paid on same-sex marital benefits. IRS’ recommended procedures depend on whether or not the employer refunds the withholding amounts to the affected employee prior to the end of 2013. Therefore, employers considering amending past returns should seek advice on the best course of action prior to year-end.

Capital Expenditures: 2014 Could Mean Slower Write-Offs

Business owners who are in the market for new equipment or furniture may want to consider making these purchases prior to year-end. Currently, small and midsize businesses may deduct off the top up to $500,000 of the cost of qualified business property in the year it is purchased plus 50 percent of the excess. In 2014, these limits are scheduled to shrink to a de minimis $25,000. Business owners relying on higher deduction limits should strongly consider making equipment and furniture purchases prior to January 1, 2014, as an extension of faster write-offs is unclear.

Continued Increase in Offshore Reporting Compliance Efforts Expected in 2014

As in recent years, in 2014 it is likely the IRS will continue to increase its attention on discovering unreported offshore assets held by U.S. citizens and residents. As time passes, IRS detection of offshore assets grows keener due to recent agreements reached between the U.S. Government and certain foreign banks. A taxpayer’s failure to report any of the assets or interests listed below can result in substantial penalties.

  • Ownership interests in or signature authority over certain foreign bank accounts above a certain threshold;
  • Interests in certain foreign entities and trusts; or
  • Certain gifts from foreign individuals.

In some cases, penalties can far exceed the value of the unreported assets or interests. An option available to taxpayers with such unreported assets is the IRS’ Offshore Voluntary Disclosure Program (OVDP). For many taxpayers, this program offers significant reductions in applicable criminal and civil nondisclosure penalties. Given the complexity of these issues, and the increased risk in avoiding the reporting of these assets and interests, we suggest affected clients make it their New Year’s resolution to seek advice regarding any undisclosed foreign assets or income.

Planning for Increased Tax Rates: It’s Never Too Late

This past year a number of significant tax hikes took effect. These included increased tax rates on higher earners as well as Medicare surtaxes on high-income investors. These increases mean that the titling and location of personal and business assets are more important than ever. By consulting one of our tax attorneys, clients can engage in tax bracket management and planning and, in some cases, mitigate their 2014 tax burden. Additionally, we recommend that business owners or co-owners review their choice of legal entity and current compensation structure. This may help identify opportunities to avoid unnecessary Medicare surtaxes. Finally, no tax planning discussion is complete without an estate plan update. Older estate plans, especially for residents of Maryland and the District of Columbia, should be reviewed for possible revision to minimize federal and state death taxes.

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