Summer 2013 Vol. XVIII. No. 1 Newsletter

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Summer Notes:

winterSince our last newsletter, we’ve been quite busy completing individual and corporate tax returns. The merger of individual tax practices with Travis Raml, CPA, now in year two, has worked out better than expected, especially in the technical areas of hardware, software and e-filing. Travis has added an email newsletter to complement the version you receive by mail. Our associates Jeff Linker and Marilee Turnbull have remained on board for their eighteenth and ninth tax seasons respectively. While they work quietly behind the scenes, their contributions are invaluable. Our goal of e-filing 100% of individual income tax returns has been accomplished, speeding up return processing and refunds. During the months of January and February, we hosted two client appreciation dinners which featured some interesting financial and investment topics. Co-presented with the folks from BB&T/Scott & Stringfellow, the dinner presentations were well received. We also want to thank everybody for the many referrals during the year – they are very much appreciated.

The American Taxpayer Relief Act: Key Changes for 2013

Tax Rates: For tax years beginning with 2013, income tax rates for individuals will stay the same, except for a 39.6% rate applying to taxable income above the threshold of $450,000 for joint filers and $400,000 for single filers. In addition, high income taxpayers are now subject to the 0.9% additional Medicare Tax on earnings as detailed in the health care reform law.

Personal Exemptions: Personal exemption phase outs are reinstated in 2013 for taxpayers earning greater than $300,000 (joint) and $250,000 (single). The amount of exemptions that can be claimed is reduced by which the taxpayer’s adjusted gross income exceeds the threshold. Also, these high earners will have a 3% reduction in their itemized deductions by which the taxpayer’s AGI exceeds the (above) threshold amount.

Capital Gains: Taxpayers will continue to be subject to a 15% rate on capital gains and qualified dividends. But the top rate for capital gains and qualified dividends will rise to 20% for taxpayers with incomes over $450,000 (married) and $400,000 (single). These rates do not include the additional Medicare tax of 3.8% on investment income under the health care reform law, which will apply to high income filers ($250,000 joint/$200,000 single) beginning in 2013.

AMT Relief: The Act includes a permanent Alternative Minimum Tax relief by raising the AMT exemption amounts and indexing these exemption amounts for inflation.
Education Credits: The American Opportunity tax credit, a credit equal to 100% of the first $2,000 of qualified tuition and related expenses, and 25% of the next $2,000 has been extended for five years. The credit can be claimed for up to four years of undergraduate education and was scheduled to expire at the end of 2012. The AOTC caps at $2,500 total credit per year.

Estates: The exemption from Federal estate tax has now been permanently fixed at $5,120,000 and will be indexed for inflation. The top tax rate has risen from 35% to 40%.

Other Extenders: The $1,000 child tax credit has been extended permanently. The educator deduction for $250 has been continued into 2013. The treatment of mortgage insurance premiums as qualified residence interest is continued into 2013. The qualified tuition deduction is continued into 2013.

Social Security: The Social Security wage base rises to $113,700 in 2013, an increase of $3,600.

Five Tips for Hiring a Financial Advisor:

  1. Make sure an advisor’s compensation is in sync with your own interests. Some clients like the commission based model, while others like the fee-only compensation model.
  2. Go with an advisor who is willing to teach, not sell. If your advisor can’t explain it in simple terms, he doesn’t know what he’s talking about.
  3. Ask yourself what you need – for someone to take over the management of everything or just someone to perform a portfolio review.
  4. Check the advisor’s references. Not just his existing clients, but also professionals who know the advisor’s work and can endorse.
  5. Stay involved. Financial planning should involve the exchange of financial records, ongoing discussion, and planning.

Long Term Care Thoughts:

Americans have little idea how much long-term care will cost and believe that Medicare pays for it, when it does not. Families have always looked after their elderly loved ones. But never has old age lasted so long or been so costly. The elderly and their families are left to pay for assisted living (which averages $35,000 a year), or nursing homes ($74,000 a year), or home health aides. Only the very poor receive Medicaid, which pays nursing-home bills nationwide but home care in only a few states, and nothing toward assisted living rent. Care can be expensive and more than likely will continue to increase and varies significantly, depending on type of care.

The properly written long term care insurance allows for care at home, in assisted living and adult day care – not solely a nursing home. The majority of benefits are paid for home care.

Medicare is not designed to take care of this need and the government is tightening Medicaid funding/rules. There are tax advantages to purchasing long-term care insurance.

The industry has faced pricing challenges and this is a young product with a limited history of performance. The company you choose should be strong with high ratings – ratings reflect the philosophy of paying claims, which will often occur later, as well as financial stability to weather market volatility. There are many factors to consider about the right insurance, for instance how do they value mutuality and retroactivity of policy enhancements, and how will new benefits be treated as care evolves. And what about changing costs? All these things need to be considered when evaluating long-term care plans.

Thanks to John Isaac for providing his insights. John holds a CASL designation (Chartered Advisor for Senior Living) from Wharton as well as a CLU and CHFC designation. He can be reached at 301-260-8050.

Health Care Reform:

When the health care legislation was passed in 2010, no one questioned that when the bill’s provisions finally kicked in they would have a profound impact on individuals, businesses, and the health care industry. Several of the most challenging health care-related provisions will become effective in 2014. Here are four important examples:

  • Health Insurance Exchanges will be available in each state to the individual and small group markets. This new venue will enable people to comparison shop for standardized health packages. It facilitates enrollment and administers tax credits so that people of all incomes can obtain affordable coverage.
  • Individuals who don’t obtain insurance coverage for themselves and their dependents will pay a penalty of $95 for 2014.
  • Employers with 50 or more employees who provide no coverage must pay a penalty of up to $2,000.00 for each employee over a 30-employee threshold.
  • Insurers can no longer exclude coverage for treatments based on pre-existing health conditions. Insurance companies are limited as to ability to charge higher rates due to health status, gender, or other factors.

IRA’s and You:

You can kick in more to your IRA in 2013. For both traditional IRAs and Roth’s, the maximum you can contribute rises from $5,000 to $5,500. The catch-up provision is still $1,000 for people age 50 or older, bringing their total to $6,500 in 2013. The income limit for contribution to a Roth also rises slightly – it’s $188,000 for married couples and $127,000 for singles and head of households. Please also note that there is a phase-out amount for Roth’s that starts at $178,000/ $112,000.

There’s no income limit for contributing to a traditional IRA, but there are income limits for deducting contributions. Those limits have also increased slightly for 2013.

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Matthew R. Horowitz, C.P.A.
(410) 312-7622 • email
10015 Old Columbia Rd. Suite B-215, Columbia, Maryland 21046