Tax code changes will ding top earners and IRA drawers

Tax season is fast approaching. To catch up with what’s new this year, we reached out to Ryan Kidd, a CPA and managing director of Harris Kidd PLLC on Mercer Island, to ask about changes to both the tax code and retirement savings accounts. Read this, and your tax return won’t hold any surprises.

425B: What significant changes have occurred in IRA taxation?

Kidd: The most significant change we will see beginning in 2015 is the tightening of the IRA distribution and reinvestment regulations. Currently, taxpayers can take a distribution from an IRA account and roll it over or return it to the IRA within 60 days without a penalty. Starting in 2015, taxpayers will be permitted to make only one distribution and reinvestment (within a 60-day period) in any 365-day period without incurring penalties.
The rule is designed to cut down on so-called retirement account financing where individuals use multiple IRAs to access capital for short-term needs and not realize any downside. This change is unlikely to impact most taxpayers, but it could snare those who experience a life event (loss of a job, death of a loved one, retirement) and are trying to make honest, legitimate changes to restructure retirement accounts.

425B: How will shifts in the tax code affect both businesses and individual taxpayers?

Kidd: In 2013, we saw profound changes to the tax code for personal taxpayers. A new top tax bracket was implemented (39.6 percent) that represented an increase over the previous high rate of 35 percent. Two new taxes were also instituted: a 0.9 percent surtax for Medicare on earned income above $250,000 married filing jointly, and a 3.8 percent tax on investment income for people with income greater than $250,000 married filing jointly. On top of those changes, personal exemptions and itemized deductions are being limited for higher-income taxpayers. Many of our clients have been impacted by these changes.

So, 2014 and 2015 could see significant changes for closely held businesses due to changes in the depreciation rules. The 50 percent bonus depreciation allowance was not renewed for 2014 and neither was the $500,000 Section 179 deduction for qualified capital acquisitions. These two deductions allowed many privately held companies to deduct a large portion, and in some cases all, of their capital acquisitions in a given year. These rules didn’t increase the available deductions; they made it so the deductions matched the capital outlay, therefore lessening the tax burden.

It is possible that Congress will extend these popular and impactful items before the end of 2014. However, if nothing is done to change the rules, taxable income likely will increase for affected taxpayers — and that means higher taxes.