Dear Clients and Friends,
We have seen a tremendous amount of tax law changes pending from our friends on the Hill. As the New Year is fast approaching, it’s important that you contact us so we can consider potential tax planning strategies for 2012. It is alarming and frustrating but we still do not know if our friends on the Hill will allow several provisions to expire or permit several new provisions to go into effect – making tax planning difficult.
The following is a brief overview of some of the pending tax law changes scheduled for the upcoming year (2013).
Expiring Provisions Related to Individuals
• Individual income tax rates will increase (maximum of 39.6%)
• Long-term capital gains rates will increase (to 20%)
• Qualified dividend rate will cease to be taxed at 15% and will instead be taxed at ordinary income tax rates (maximum 39.6%)
• Phase out of itemized deductions and personal exemptions
Expiring Provisions Related to Businesses
• Section 179 expense will decrease to $25,000
• The 50% bonus depreciation provision will expire
Expiring Provisions Related to Estate and Gift Exemptions
• The estate and gift tax exemption will decrease from $5.12 million to $1 million
• Estates with assets greater than the $1 million exemption will see tax rates increase
• 3.8% Medicare surtax on net investment income for certain taxpayers
• Increase in employee Medicare tax of 0.9%
• Alternative minimum tax
Itemized Deductions and Personal Exemptions
Those high income taxpayers will lose up to 3% of their itemized deductions as well as their personal exemptions resulting in an increase of the effective tax rate without raising the actual tax rate.
Capital Gains and Losses
If capital gains rates increase as scheduled you may want to consider selling capital assets before yearend to take advantage of the lower rates before they increase in 2013.
If the qualified dividend rate is allowed to expire, closely held C corporations and S corporations with earnings and profits may want to consider paying a dividend before year-end. In 2012, a qualified
dividend will be taxed at a federal income tax rate of 15% while for 2013 it may be taxed at the highest marginal income tax rate (39.6%) as well as be subject to the additional 3.8% Medicare surtax on high
Business Asset Expensing
If the Section 179 deduction is allowed to expire, the Section 179 deduction will go from $139,000 in 2012 to $25,000 in 2013. Also the 50% bonus depreciation provision may be allowed to expire.
Estate and Gift Tax Exemptions
The tax on estates is 35% but is scheduled to increase to 55% in 2013 with the exemption schedule to decrease significantly. For 2012 the lifetime individual gift tax exemption is $5.12 million (or $10.24
million for a married couple) and gifts above that amount would be taxed at a 35% rate. For 2013 the exemption is scheduled to drop to $1 million per taxpayer and the rate is set to increase to 55%.
Alternative Minimum Tax
AMT was originally designed to eliminate deduction loopholes for the wealthy but in recent times it started to come into effect for those income earners of more modest means. To alleviate this burden an
“AMT patch” was created during the Bush era to lessen the impact but is scheduled to expire at year-end. Without a patch, the AMT will affect more taxpayers because it has not been indexed for inflation. If this patch is allowed to expire at year-end, it will increase taxes paid for millions of Americans not just the wealthy.
Jesse T. Singer, CPA
Cowheard, Singer and Company, P.A.