Tax Legislation Knowns and Unknowns



Tax Rate ComparisonFormer U.S. Secretary of Defense, Donald Rumsfeld once said, “There are knowns; there are things we know that we know. There are known unknowns; that is to say there are things that, we now know we don’t know. But there are also unknown unknowns – there are things we do not know, we don’t know.”

No better words could describe the current state of affairs with regard to our tax laws. So here are 13 key known knowns:

  • Tax rates are set to increase in 2013. See chart to the right.
  • Personal exemption and itemized deduction phase-outs will return in 2013.
  • In 2013, child tax credit will drop from $1,000/child to $500.
  • 0% capital gains rates for taxpayers in the 10% and 15% brackets expire on 12/31/12.
  • Maximum capital gains tax rate increases from 15% in 2012 to 20% in 2013.
  • Dividends will no longer be taxed at capital gains rates but instead as ordinary income (like wages and interest earnings) in 2013.
  • Bonus depreciation expires 12/31/12.
  • College tax credit reduces from maximum of $2,500/year per person to $1,500/year per person in 2012.
  • Medicare surtax begins in 2013 on upper income taxpayers which is 3.8% on the lesser of net investment income or the amount that modified AGI (Adjusted Gross Income) exceeds $200,000 single/$250,000 married.
  • Wages and self-employment income in excess of $200,000 single and $250,000 married are subject to .9% Medicare surtax.
  • Many more taxpayers will be affected by the AMT (Alternative Minimum Tax) due to lower exemption amounts and fewer allowable credits.
  • Section 179 (expensing election for capital assets) decreases from $139,000 in 2012 to $25,000 in 2013.
  • Tax-free estate limit drops from $5.1 million to $1 million and exemption portability expires 12/31/12.

And how about the known unknowns? Quite simply no one knows what Congress and the President may do before the end of the year relative to extension of expiring tax provisions or the economic stimulus. Here, however, are the significant provisions of the Family and Business Tax Cut Certainty Act of 2012, as passed by a bipartisan vote of 19-5 by the Senate Finance Committee:

  • Raises exemption and allowable tax credits of the AMT (ie AMT Patch).
  • Reinstates tax-free distribution from IRAs for charitable purposes.
  • Increases (effective for 2012 and 2013!) Section 179 expensing election to $500,000 ($250,000 for qualified leasehold improvements, restaurant and retail improvement property).

And what about the unknown unknowns? Well…I don’t know! Perhaps this best describes our government today. So, let’s wrap this up with some planning strategies as best we know.

  • Contrary to conventional wisdom, 2012 may very well be a year to accelerate income, especially if you anticipate greater income in 2013. This sort of strategy should not be undertaken without counsel from your tax advisor.
  • You may want to consider selling capital assets on an installment basis in 2012 and electing to pay all the tax in 2012, rather than as you collect on the contract. In this situation, the election does not need to be made until the filing of your return.
  • Business owners will likely wish to accelerate equipment purchases in 2012 to take advantage of bonus and write-off provisions, in spite of impending higher tax rates in 2013.
  • Those of you who may be affected by the lower estate tax rates and are in a financial position to do so, may want to do some gifting to your loved ones before year-end.

For more information contact Dorothy Paris

Dorothy Paris
Certified Public Accountant
231.924.8015
dorothyp@hscompanies.com

 


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