To the best clients in the world:

Happy New Year! I hope your holidays were terrific.

Believe it or not the next tax season is upon us. There are a ton of changes and additional complexity that will apply to your 2013 tax returns that I will outline in this letter. In order to address this added complexity and to better serve you, we have made some structural changes to the firm. McCormick & Friman will continue to offer estate planning, real estate, asset protection planning and other legal services while McCormick Tax Group will focus solely on tax preparation and planning. The tax group has hired several new CPA’s and attorneys with strong backgrounds in taxation to help achieve my goal of tax reduction and audit risk mitigation for every client. My Partner, Renee Morawa, and I feel we have a great team in place to aggressively tackle the challenges in this year’s tax code as they apply to your individual returns. In particular, this year may be a challenge for some of my higher income clients due to the many tax changes that were implemented this year. I will go into a little further detail later in this letter, but in a nutshell, there are 4 main areas where a taxpayer will be paying more tax at certain income levels: Higher tax brackets, the new Net Investment Income Tax, phase outs of itemized deductions and phase out of personal exemptions. These all have various income thresholds, but they may have an impact on any taxpayer earning over $200,000. My tax team and I will be working diligently to blunt the effect of these tax hikes on your return.

So just to give you a quick run-down of the Act, early in 2013, the 2012 Taxpayer Relief Act was enacted and the “Bush-era” tax cuts, which were scheduled to sunset at the end of 2012, were permanently extended and modified. Unfortunately, along with the good aspects of the law there came a ton of tax hikes for those making over a certain income level. Please note I am not making any political opinion on the Act, but rather am simply pointing out its effect on my higher net worth clients.

Regardless of some of the more expensive aspects of the Act, I am confident that I can unlock some goodies that can save you money at tax time while continuing to reduce your audit risk.


Income tax. The lower income tax rates of 10, 15, 25, 28, 33, and 35 percent are made permanent, but a new tax rate of 39.6 percent is imposed on taxable income over a threshold amount. For 2013, these threshold amounts are:

  • $450,000 for married taxpayers filing jointly and surviving spouses;
  • $225,000 for married taxpayers filing separately;
  • $425,000 for heads of households;
  • $400,000 for single taxpayers.

Capital gains tax. The 15 percent rate for taxpayers is now applicable to those in the 25, 28, 33, and 35 percent brackets, and a new 20 percent rate applies to higher-income taxpayers that are subject to the 39.6 percent income tax rate.

The AMT rates (26 and 28 percent on the excess of alternative minimum taxable income (AMTI) over the applicable exemption amount) remain the same in 2013. However, beginning this year, the threshold amounts are adjusted for inflation.


Higher income taxpayers are again subject to the personal exemption phaseout and the so-called Pease limitation on itemized deductions beginning in 2013. Both of these provisions were repealed through 2012.

Itemized deduction phaseout. The return of the Pease limitation on itemized deductions (named for the member of Congress who originally sponsored the legislation) reduces itemized deductions for higher-income taxpayers. Beginning in 2013, the itemized deduction phaseout reduces itemized deductions when your income exceeds the following threshold amounts, which will be adjusted for inflation beginning in 2014:

  • $300,000 for married taxpayers filing jointly and surviving spouses;
  • $275,000 for heads of households;
  • $250,000 for unmarried taxpayers who are not surviving spouses or heads of households; and
  • $150,000 for married taxpayers filing separately (equal to one-half of the amount for a joint return or surviving spouse, after any adjustment for inflation).

Personal exemption phaseout. The revival of the personal exemption phaseout rules reduces or eliminates the deduction for personal exemptions for higher income taxpayers. Under the personal exemption phaseout, the total amount of exemptions that may be claimed by a taxpayer is reduced by two percent for each $2,500, or portion thereof (two percent for each $1,250 for married couples filing separate returns) by which the taxpayer’s income exceeds the applicable threshold. The same threshold limits used in the Pease limitation above apply to the personal exemption phaseout.


Adoption credit and adoption assistance programs. Two tax provisions assist taxpayers who adopt children: a tax credit, and an income exclusion for employer-paid or reimbursed adoption expenses. Effective in 2013, the maximum amount of the adoption credit and the income exclusion amount are made permanent. In 2013, both the maximum adoption credit and the maximum income exclusion amount are $12,970 (as adjusted for inflation).

Child and dependent care (CDC) credit. The increased credit amounts and higher expense limits for the CDC are permanently extended. For 2013, the maximum amount of qualifying expenses to which the credit may be applied is $3,000 for individuals with one qualifying child or dependent (for a maximum credit of $1,050), or $6,000 for individuals with two or more qualifying children or dependents (for a maximum credit of $2,100). For taxpayers with income between $15,000 and $43,000, the 35 percent credit rate is reduced by one percentage point for each $2,000 of adjusted gross income until the credit percentage is 20 percent for taxpayers with AGI of $43,000.

Child tax credit (CTC). The increased amount of $1,000 for the CTC and the ability to offset CTC against both regular income tax and AMT are permanent. However, the reduced earned income threshold amount of $3,000 for purposes of the refundable component of the credit is extended only through December 31, 2017.


Coverdell Education Savings Accounts (ESAs).The increased maximum contribution amount of $2,000 is made permanent, along with corresponding rules and provisions. Taxpayers who have not contributed the maximum amount to a Coverdell ESA should do so before year end.

Educational assistance programs. Employees are allowed to exclude from gross income and wages up to $5,250 in annual educational assistance provided under an employer’s nondiscriminatory “educational assistance plan.” Employer-provided educational benefits may also be excludable as working condition fringe benefits.

Scholarship programs. Any amount received as a qualified scholarship and used for qualified tuition and related expenses is excludable from income. The exclusion does not apply to any portion of the amount received which represents payment for teaching, research, or other services by the student required as a condition for receiving the qualified scholarship. However, scholarship recipients with obligatory service requirements under the NHSC or Armed Forces Scholarship Program can exclude from income qualified tuition and related expenses, as well as amounts that represent payment for services.

Student loan interest deduction. The increased phaseout thresholds for the student loan interest deduction were made permanent, and continue to be adjusted each year for inflation. In addition, the 60-month limitation on the deduction and the restriction that makes voluntary payments of interest nondeductible are permanently repealed.


There are also new provisions that you must become familiar with, as they may affect your overall tax strategy:

Same-Sex Marriage Ruling
The same-sex marriage ruling states that same-sex couples who are legally married in a state that recognizes their marriage are considered married for federal tax purposes, regardless of whether their state recognizes same-sex marriage. Although this ruling was effective September 16, 2013, it is applied retroactively for 2013. As a result, in 2013 and all future years, legally married same-sex couples must file their federal income tax returns as married filing jointly (MFJ) or married filing separately (MFS).

The ruling opens the door for same-sex married couples to enjoy all of the federal tax-related benefits previously available only to opposite-sex married couples. Any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory or a foreign country is covered by the ruling.

Health Care Reform
Since the U.S. Supreme Court upheld the constitutionality of the health care reform provisions, individuals must comply with those requirements already in effect, and others that are applicable in 2013 or later. Beginning in 2014, some of the most far reaching provisions of this legislation will become effective: the individual mandate to carry minimum essential health coverage for taxpayers and their dependents; the ability to obtain coverage through an insurance exchange; and a special tax credit to help offset the cost of insurance.

The following tax increases relating to the health care reform provisions become effective in 2013:

Net Investment Income Tax (NIIT). Taking effect on January 1, 2013, a Medicare surtax of 3.8 percent is imposed on the lesser of net investment income (NII) or modified adjusted gross income (MAGI) above a specified threshold. However, the Medicare surtax is not imposed on income derived from a trade or business, nor from the sale of property used in a trade or business.

NII includes the following investment income reduced by certain investment-related expenses, such as investment interest expense, investment brokerage fees, royalty-related expenses, and state and local taxes allocable to items included in net investment income:

  • Gross income from interest, dividends, annuities, royalties, and rents, provided this income is not derived in the ordinary course of an active trade or business;
  • Gross income from a trade or business that is a passive activity;
  • Gross income from a trade or business of trading in financial instruments or commodities; and
  • Gain from the disposition of property, other than property held in an active trade or business.

Individuals are subject to the 3.8 percent NIIT if their MAGI exceeds the following thresholds (which are not adjusted for inflation):

  • $250,000 for married taxpayers filing jointly or a qualifying widower with a dependent child;
  • $125,000 for married taxpayers filing separately; and
  • $200,000 for single and head of household taxpayers.

Additional HI (Medicare) Tax. Beginning in 2013, higher income individuals are subject to an additional 0.9 percent HI (Medicare) tax, not to be confused with the 3.8 percent Medicare surtax on NII. The additional Medicare tax means that the portion of wages received in connection with employment in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately) is subject to a 2.35 percent Medicare tax rate. The additional Medicare also applies to self-employed individuals. To avoid an underpayment penalty related to this tax or the NIIT, you can instruct your employer to withhold an additional amount of federal income tax from your wages before year end.

Increased medical expense threshold. In 2013, the threshold for the itemized deduction for unreimbursed medical expenses increases from 7.5 percent of AGI to 10 percent of AGI for regular income tax purposes. For AMT purposes, medical expenses remain deductible only to the extent they exceed 10 percent of AGI. However, taxpayers (or their spouses) who are age 65 and older before the close of the tax year are exempt from the increased threshold of 10 percent for the 2013 through 2016 tax years. These taxpayers can continue to deduct qualified medical expenses that exceed 7.5 percent of AGI.

As you can see there is a lot to chew on with the new tax laws, but with a good tax strategy in place, we can help you weather the storm. For your convenience, below please find the links to this year’s Organizer and Checklist to assist you in compiling and organizing your tax documents. Please also visit our website at for the Business/Rental Financials Template, weekly tax tips and updates in addition to other useful documents and information.

2013 Personal Income Tax Organizer
2013 Personal Income Tax Checklist

My tax team and I look forward to working with you in 2014 and we thank you for your continued business!

Sincerely yours,

Michael T. McCormick, JD, LL.M.