Although at the stroke of 12:01am New Year’s Day, this country officially fell off the fiscal cliff (the combination of increased taxes and decreased spending which would have slowed the economy), Congress and the President agreed to measures that allowed us to glide to a soft landing. The president has signed the bill, via autopen from Hawaii. Although it has been criticized in the media, the fact is that the law contains a lot of good rules to help business owners and individuals.
Capital Gains and Dividends
First, for those making under $200,000 individually / $250,000 per couple (200/250 taxpayers), the capital gains rates stay the same at 15%. Taxpayers making over the 200/250 threshold, pay an additional 3.8% on investment amounts under the Patient Protection and Affordable Care Act (PPACA). For those making $400,000 individually and couples making $450,000 (400/450 taxpayers) capital gains tax rate is now 20% plus 3.8%. This makes the capital gains tax rate 23.8% on high income 400/450 taxpayers.
Ordinary Tax Rates
The law permanently extends the lower income brackets to middle class families. This means that income tax rates generally remain where they were in 2012 for the majority of Americans in 2013 and beyond.
For couples earning over the 200/250, an additional 0.9% tax will apply under the Patient Protection and Affordable Care Act (PPACA) For taxpayers earning 400/450, taxes go back to 39.6% for upper income amounts in addition to the 0.9% increase under the PPACA.
Unemployment Insurance Extensions has been extended for the year of 2013. Without the extension 2 million people would have lost their benefits in January.
Child Tax Credit
The law also continued the extended child tax credit and the earned income credit. These are substantial credits for many middle class families and have been extended for one year.
Section 179 is $500,000 for 2012 and 2013. Even though it is not permanent, it keeps the door open this year to purchase more equipment and immediately depreciate the expenses. It is subject to a $2,000,000 phase out, dollar for dollar until $2,500,000.
The 50% deduction on business investment on new equipment has been extended for 2013 for most purchases. However, for certain long-term assets and transportation equipment, the law is extended through the 2014 tax year
Estate and Gift Tax
Under the new law, the estate tax exemption generally stays at the $5,000,000 mark established in 2011. It was indexed to inflation for 2012 at 5,120,000. The tax rate in 2013 goes from 35% in 2012 to 40% in 2013. Portability remains in place.
The payroll tax will increase for most Americans. In 2011 and 2012, the regular 6.2 reserved for social security on the employee’s end was reduced to 4.2%. As of January 1, 2013, the rate will return to 6.2%.
This law also extends the farm bill, avoiding the “Dairy Cliff”, which would have likely shown us a 100% rise in dairy prices.
Mortgage Debt Relief
The mortgage interest deduction also stays with us. It had been considered for cutting; however, many in Congress consider this middle class benefit to be too important to abandon.
Tax planning has become even more important for those planning on selling a business or passing a business. Taxes on wealthy individuals will certainly be higher this year and in the future. It is our recommendation that any planning include tax planning. This is particularly important for those selling businesses and those having estates worth more than $5,000,000. There are tools to utilize if you wish to sell or pass on your business. Please call the Center for further advice.
Known as the “American Taxpayer Relief Act of 2012”, the law contains 9 titles within it affecting business, individuals, energy, agriculture, and various other items. Dr. Basi and his staff will be publishing articles and speaking on the subject well into 2013.
By: Dr. Bart Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors