As a small business specialist and IRS Registered Tax Preparer, here is my summary of what you need to know right now:
• For 2012, the AMT = Alternative Minimum Tax has been averted and fixed permanently by having it indexed to inflation. Instead of affecting 34 million tax payers, it will be limited to 4 million higher income tax payers in 2012. The delay for this resolution will affect everyone, since the IRS has to change their computer systems and won’t start to accept returns until mid-February. The average refund this year is expected to be $3000 and your refund, a.k.a. your interest-free loan to the government will most likely be delayed until March.
• For 2012 and 2013, here in Washington State we can still deduct sales tax – make sure you organize your receipts for large ticket purchases such as cars, furniture and appliances.
• You will be paying 6.2% into Social Security again starting as of January 1, 2013. It’s a retirement system that needs to be funded in order to work. If you have employees, I encourage you to explain it to them in terms of forced savings rather than a tax. They will recoup this money once they retire. You might also mention, that you as the employer matched the full 6.2% for all of 2011 and 2012 while they only contributed 4.2%. The social security wage limit is $113,700 for 2013.
• In 2013, there is no medicare wage limit, however, there is a new $200,000 threshold that adds .9% to any employee’s 1.45% medicare tax already in place for a total of 2.35%. This has to do with funding of Obamacare and I’ll provide special information for small businesses on this health care topic over the next few months.
• There is a new permanent top federal income tax rate of 39.6% starting in 2013. The threshold for the top rate is $450,000 of taxable income for married couples filing jointly and $400,000 for single filers.
• In 2013, the top capital gains and dividend rate will be 20%. If you’re planning on selling your business or any other appreciated assets over $250,000, you’ll probably also pay the new investment tax of 3.8%. It’s a new tax for 2013 and beyond, designed to pay for Obamacare. Meanwhile, the 15% rate will continue to apply to taxpayers in the 25%, 28%, 33% and 35% income tax brackets, and people in the 10% and 15% brackets will continue to have a 0% rate on capital gains and dividends. Please speak to your tax advisor to strategize about shifting investment income to lower wage earners such as your children.
• For your business, be aware that lawmakers passed a 1-year extension of the current “bonus” depreciation rules, which allow businesses to deduct up to 50% of the cost of a wide variety of property and equipment, excluding real estate.
• The estate- and gift-tax exemption will remain $5 million or more per individual – indexed to inflation and the “portability” rules will be permanent. If your estate is more than $5 million, you’ll need to plan for the new 40% estate tax.
Permanent extensions include:
• Expanded dependent care credit.
• Expanded adoption tax credit and other adoption assistance.
• The 2001 modifications to the child tax credit.
• Expanded Coverdell education accounts.
• Expanded benefits for employer-provided education assistance, expanded student loan interest deduction and scholarship tax exclusion.
• Marriage-penalty relief for the standard deduction, the 15% bracket and the earned-income tax credit.
Temporary extensions include:
• IRA charitable contribution. This highly popular provision allows IRA owners 70 1/2 and older to contribute up to $100,000 of account assets directly to a charity and have it count as part or all of their required minimum distribution.
• According to the Senate summary, many individuals who took a distribution in December 2012 will be able to contribute that amount a charity and have it count as a rollover. (Two years, through 2013)
• The American Opportunity Tax Credit. For many taxpayers this credit is worth up to $2,500 per child in a 4-year college and is therefore the most valuable education benefit. (Five years, through 2017)
• The teachers’ classroom-expenses deduction of up to $250. (Two years, through 2013)
• Tax relief on canceled or forgiven mortgage debt. (Two years, through 2013)
• Deduction for state and local sales taxes in lieu of income taxes. (Two years, through 2013)
• Deduction for qualified tuition-related expenses. (Two years, through 2013)
• The 2009 modifications to the child tax credit. (Five years)
• Third-child Earned Income Tax Credit. (Five years)
• Parity for employer-provided mass-transit benefits with parking benefits. (Through 2013)
• Special rules for conservation donations. (Two years)
The most complicated part of the new tax law involves the Personal Exemption Phaseout (PEP) and the “Pease” provision, both of which lapsed in 2010. Both apply to married joint filers with $300,000 or more of adjusted gross income ($250,000 for singles). PEP will cut or eliminate the value of deducting personal exemptions for taxpayers above those income thresholds. In 2012 the personal exemption was $3,800 for most individuals. In 2013, the exemption will phase out completely at about $420,000 of AGI for couples. The Pease provision, named after former Rep. Donald Pease (D., Ohio), is a complex limitation on all itemized deductions—including charitable donations and mortgage interest—that will eliminate up to 80% of deductions for taxpayers above the thresholds. This phaseout’s net effect is to add about one percentage point to the top tax rate, including the top rate on capital gains, say experts.
The good news is, many tax issues regarding individual tax payers have been settled. The bad news is that the spending cuts have been postponed by a couple of months to coincide with the time when the government will run out of money at the end of February.
If your business relies on government contracts, be prepared to feel the impact of some of the upcoming spending cuts.
Your questions and comments are welcome.