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As 2013 draws closer, news reports about “taxmageddon” and “taxpocalypse,” describing expiration of the Bush-era tax cuts, are proliferating. Many taxpayers are asking what they can do to prepare. The answer is to be flexible and proactive. Download our 2013 Tax Planning Guide for more information, and read below for what’s coming, what is and isn’t likely to be extended, and what businesses and individuals should be considering this fall.
Business Provisions Set to Expire, Rates Set to Hike
Under current law, 50 percent bonus depreciation applies to qualified property acquired and placed in service after Dec. 31, 2011, and before Jan. 1, 2013 (Jan. 1, 2014, for certain property). For tax years beginning in 2012, the Code Sec, 179 expensing dollar limitation is $139,000 and the investment ceiling is $560,000 for tax years beginning in 2012. After 2012, 50-percent bonus depreciation is scheduled to expire (except for certain property) and the Code Sec. 179 expensing dollar limitation will drop to $25,000 with a $200,000 investment ceiling.
Enhanced Code Sec. 179 expensing is a good candidate for extension after 2012, but at less generous amounts. In July, the Senate approved a Code Sec. 179 dollar amount of $250,000 and an $800,000 investment limitation for tax years beginning after Dec. 31, 2012. The House approved a Code Sec. 179 dollar amount of $100,000 and a $400,000 investment limitation after 2012.
The list of expired business tax incentives is long and includes the research and development tax credit, employer wage credit for military reservists and many more. A host of related energy incentives have also expired and are awaiting renewal. Unlike past years, Congress is not expected to routinely extend all of the expired provisions.
Changes for Individuals
Individual income tax rates are scheduled to automatically increase across-the-board, with the highest rate jumping from 35 percent to 39.6 percent.
Additionally, the current tax-favorable capital gains and dividends tax rates are scheduled to expire. Higher income taxpayers will also be subject to revived limitations on itemized deductions and their personal exemptions. Millions of taxpayers are predicted to be liable for the alternative minimum tax (AMT) because of expiration of the AMT “patch.”
In July, the House and Senate passed competing bills to extend many of these expiring incentives one more year (through 2013). No further action is expected on these bills until after the November elections, but regardless of which party wins the White House and Congress, the probability of a one-year extension appears high.
The 2 percent payroll tax holiday for 2012 is also scheduled to expire. For individuals with income at or above the Social Security wage base for 2012 ($110,100), this represented a $2,202 savings. Unlike the Bush-era tax cuts, an extension is unlikely.
Two new taxes are also scheduled to take effect after 2012: an additional 0.9 percent Medicare tax on wages and self-employment income and a 3.8 percent Medicare contribution tax on unearned income. Both are targeted to individuals with incomes exceeding $200,000 (families with incomes exceeding $250,000). One important misconception about the 3.8 percent Medicare tax is that it is a direct real estate tax. Taxpayers who dispose of real estate may be exempt from the tax either because of income limitations or because of an exclusion provided for primary residence home sales. However, certain high-end homes may feel the sting of the 3.8 percent tax on some or all of the gain realized. It is unlikely the new Medicare taxes will be repealed before 2013.
Estate tax planning is also in flux. Under current law, the maximum estate tax rate is 35 percent with an applicable exclusion amount of $5 million (indexed for inflation) for decedents dying before Jan. 1, 2013. Unless Congress acts, the estate tax will revert to its less generous pre-2001 rates. Gift and generation-skipping transfer (GST) taxes also will revert to their pre-2001 rates.
Individual Planning Strategies
Some variations on traditional year-end planning techniques may be valuable. Instead of shifting income into a future year, taxpayers may want to recognize income in 2012, when lower tax rates are available, rather than shift income to 2013. The same strategy may apply to recognizing income from capital gains and dividends. Consider “running the numbers” for regular tax liability and AMT liability. Taxpayers may want to explore if certain deductions should be more evenly divided between 2012 and 2013, and which deductions may qualify, or will not be as valuable, for AMT purposes. Additionally, keep in mind the new Medicare taxes and how they will impact investments and possibly home sales.
Doeren Mayhew’s Troy, Houston and Ft. Lauderdale CPAs can help you understand all the tax incentives and how you can develop a year-end tax plan in the current climate of uncertainty. Contact us for more information.
This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted.
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