Medical expenses that aren’t reimbursable by insurance or paid through a tax-advantaged account (such as a Health Savings Account or Flexible Spending Account) may be deductible — but only to the extent that they exceed 10% of your adjusted gross income.

Before 2013, the floor was only 7.5% for regular tax purposes. (Taxpayers age 65 and older can still enjoy that 7.5% floor through 2016. The floor for AMT purposes, however, is 10% for all taxpayers, the same as it was before 2013.)

By “bunching” nonurgent medical procedures and other controllable expenses into alternating years, you may increase your ability to exceed the new 10% floor. Controllable expenses might include prescription drugs, eyeglasses and contact lenses, hearing aids, dental work, and elective surgery.

If it’s looking like you’re close to exceeding the floor this year, consider accelerating controllable expenses into this year. But if you’re far from exceeding it, to the extent possible (without harming your health), you might want to put off medical expenses until next year, in case you have enough expenses in 2014 to exceed the floor.

Have questions about the 10% floor or exactly what expenses are deductible? Ask us!

In response to the U.S. Supreme Court’s June decision regarding same-sex marriage, the IRS recently clarified that married same-sex couples will be treated as married for all federal tax provisions in which marriage is a factor, such as filing status, dependent exemptions and child credits, and gift and estate tax breaks.

Significantly, the Supreme Court decision extended federal marriage-related benefits only to same-sex married couples in states recognizing their union; the IRS ruling expands eligibility for marriage-related federal tax benefits to same-sex married couples in all states, as long as they were married in a jurisdiction recognizing their marriage.

In light of the ruling, same-sex married couples should:

• Evaluate how changing their filing status to “married” will affect their 2013 tax liability, and factor that into their year end tax planning
• Determine whether they can receive a tax refund for previous years if they file amended returns as a married couple
• Decide whether any changes to their estate plans are warranted to take advantage of the federal gift and estate tax benefits available to married couples

These are only some of the tax areas requiring attention. Please contact us for more information on the impact of the IRS ruling.

In January, Congress extended some depreciation-related tax breaks that can benefit owners of leasehold, restaurant and retail properties:

50% bonus depreciation. Congress extended this additional first-year depreciation allowance to qualifying leasehold improvements made in 2013.

Section 179 expensing. Congress revived through 2013 the election to deduct under Sec. 179 (rather than depreciate over a number of years) up to $250,000 of qualified leasehold-improvement, restaurant and retail-improvement property.

The break begins to phase out dollar-for-dollar when total asset acquisitions for the tax year exceed $2 million.

Accelerated depreciation. Congress revived through 2013 the break allowing a shortened recovery period of 15 — rather than 39 — years for qualified leasehold-improvement, restaurant and retail-improvement property.

If you’re anticipating investments in qualified property, you may want to make them this year to take advantage of these depreciation-related breaks while they’re available. It’s currently uncertain whether they’ll be extended to 2014. Please contact us if you’d like to learn more about qualifying for these breaks.

As the kids head back to school, it’s a good time to think about Coverdell Education Savings Accounts (ESAs). One major advantage of ESAs over another popular education saving tool, the Section 529 plan, is that tax-free ESA distributions aren’t limited to college expenses; they also can fund elementary and secondary school costs. That means you can use ESA funds to pay for such qualified expenses as tutoring or private school tuition. This favorable treatment had been scheduled to expire after 2012, but Congress made it permanent earlier this year.
Here are some other key ESA benefits:

• Although contributions aren’t deductible, plan assets can grow tax-deferred.
• You remain in control of the account — even after the child is of legal age.
• You can make rollovers to another qualifying family member.

Congress also made permanent the $2,000 per beneficiary annual ESA contribution limit, which had been scheduled to go down to $500 for 2013. However, contributions are further limited based on income. If you have questions about tax-advantaged ways to fund your child’s — or grandchild’s — education expenses, we’d be pleased to answer them.

Many provisions of the Patient Protection and Affordable Care Act of 2010 have recently gone into effect, and some significant provisions will do so in 2014 and 2015. To help individuals and families, employers (both large and small), and other organizations learn more about how they’ll be affected, the IRS has launched a new website: IRS.gov/aca. The site offers information on the tax benefits and responsibilities for various groups, such as:

• Individuals and families — new additional Medicare taxes, changes to the itemized medical expense deduction and open enrollment for the Health Insurance Marketplace
• Employers — determining whether you’re a large or small employer, shared responsibility payments for large employers, and the small business health care tax credit
• Other organizations — tax provisions for insurers, certain other business types and tax-exempt and government organizations

While the new website provides substantial information on tax-related provisions of the health care act, it’s no substitute for professional advice. So please contact us for more information on how you can take advantage of any benefits available to you and minimize any negative tax consequences.

Congress’s decision not to include a proposed minimum term for grantor retained annuity trusts (GRATs) in the tax legislation passed back in January — combined with low interest rates — may make it an ideal time to add short-term GRATs to your estate planning arsenal.

A GRAT consists of an annuity interest, retained by you, and a remainder interest that passes to your beneficiaries at the end of the trust term. The remainder interest’s value for gift tax purposes is calculated using an IRS-prescribed growth rate. If the GRAT outperforms that rate — which is easier to do in a low-interest-rate environment — the GRAT can transfer substantial wealth gift-tax-free.

If you die during the trust term, however, the assets will be included in your taxable estate. By using a series of short-term GRATs (two years, for example), you can capture the upside of market volatility but minimize mortality risk.

If short-term GRATs might be right for you (consult us for more information), consider deploying them soon in case lawmakers revive proposals that would reduce or eliminate their benefits.

S corporation owners often take modest salaries as a tax-saving strategy. By distributing most of the corporation’s profits in the form of dividends rather than wages, the company and its owners can avoid payroll taxes on these amounts. The tax savings may be even greater now that the additional 0.9% Medicare tax on wages in excess of $200,000 ($250,000 for joint filers and $125,000 for married filing separately) has gone into effect. (S corporation dividends paid to shareholder-employees generally won’t be subject to the new 3.8% Medicare tax on net investment income.)

Although S corporations may be tempted to pay little or no salary to their shareholder-employees, this is a dangerous tactic. The IRS has targeted S corporations, assessing unpaid payroll taxes, penalties and interest against companies whose owners’ salaries are unreasonably low.

To avoid an unexpected tax bill, S corporations should conduct an analysis — using compensation surveys, company financial data and other evidence — to establish and document reasonable salaries for each position. Please contact us if you have questions about the right mix of salary vs. distributions for your S corporation’s shareholder-employees.

If you rent out your vacation home for 15 days or more, you must report the income. But exactly what expenses you can deduct depends on whether the home is classified as a rental property for tax purposes, based on the amount of personal vs. rental use. Adjusting your personal use — or the number of days you rent it out — might allow the home to be classified in a more beneficial way.

With a rental property, you can deduct rental expenses, including losses, subject to the real estate activity rules. You can’t deduct any interest that’s attributable to your personal use of the home, but you can take the personal portion of property tax as an itemized deduction.

With a nonrental property, you can deduct rental expenses only to the extent of your rental income. Any excess can be carried forward to offset rental income in future years. You also can take an itemized deduction for the personal portion of both mortgage interest and property taxes.

We can help you determine how your vacation home rental will affect your tax bill — and whether there are steps you can take to reduce the impact.

Now is the time of year when many Americans are using the frequent flyer miles they’ve built up from work-related travel or credit card rewards programs to take the family on a nice vacation. If you’re among them, you may be wondering if those miles could be taxable.

Fortunately, in most cases the answer is “no.” As a general rule, miles awarded by airlines for flying with them are considered nontaxable rebates, as are miles awarded for using a credit or debit card.

But there are exceptions, so it’s a good idea to review your awards for potential tax liability. Types of mile awards the IRS might view as taxable include miles awarded as a prize in airline sweepstakes and miles awarded as promotions. The value of the miles for tax purposes generally is their estimated retail value.
If you’re concerned you’ve received mile awards that could be taxable, please contact us and we’ll help you determine your tax liability, if any.

If you’re in need of cash, early retirement plan withdrawals generally should be a last resort. With a few exceptions, distributions before age 59½ are subject to a 10% penalty on top of any income tax that ordinarily would be due on a withdrawal. Additionally, you’ll lose the potential tax-deferred future growth on the withdrawn amount.

If you have a Roth account, you can withdraw up to your contribution amount free of tax and penalty. But you’ll lose out on potential tax-free growth.

Alternatively, if your employer-sponsored plan, such as a 401(k), allows it, you can take a plan loan. You’ll have to pay it back with interest and make regular principal payments, but you won’t be subject to current taxes or penalties.

Please contact us if you have questions about potential taxes and penalties on early retirement plan withdrawals. We also can help you determine if there are better options available for meeting your cash needs.