No matter your income, your taxes are likely going to increase in 2013. Although the amount depends on what Congress does about the “fiscal cliff” of budget measures due to expire at the end of 2012, chances are that at least one of many scheduled changes will directly impact your finances.
In addition to automatic spending cuts, the fiscal cliff includes an end to Bush-era tax cuts that will take brackets from current rates of 10 percent, 25 percent, 28 percent, 33 percent and 35 percent back to 15 percent, 28 percent, 31 percent, 36 percent and 39.6 percent, respectively.
Other changes include raising the capital gains rate from 15 percent to 20 percent, reducing the child tax credit from $1,000 to $500, reducing the exemption for estate taxes from $5 million to $1 million and an end to temporary relief for the so-called “marriage penalty.”
“Absent action, we know what’s going to happen — all of these things are going to expire,” says Jim A. Forbes, CPA, a principal with Skoda Minotti. “I read an article calling this the legislative equivalent of a slow-motion train wreck. I’m sure they’ll get something done. It’s a matter of how many things get done before the end of the year.”
Smart Business spoke with Forbes about scheduled tax changes and the impact on families and businesses.
How will these changes impact business owners?
If your business is a closely held corporation, like an S Corp or a partnership, its tax flows through to your personal tax return. So your tax rates are going up if you own a small business that is an S Corp or a limited liability company.
For all businesses, regardless of the type, your ability to write off capital goods or fixed asset purchases will likely be severely limited in the future. Since 2001, we’ve had some form of bonus depreciation — accelerated writeoffs of purchases like computers, machinery, equipment and office furniture. In 2011, you were allowed a 100 percent write off. In 2012, it was 50 percent.
In 2013, absent any action, you’re not going to get an immediate writeoff; you’ll have to depreciate it over five years or whatever the life of the asset is. So incurring capital expenditures before the end of 2012 will give you a much better tax deduction than in 2013.
We’ve been telling clients for a long time to accelerate purchases if it makes good business sense because they’ll get a bigger deduction right now.
How are estate and gift taxes changing?
This year is an ideal time, if you’re wealthy, to gift something to your children. Right now, you can gift up to $5 million per individual, or, if you die today, no estate tax is paid on the first $5 million. Beginning Jan. 1, that reverts back to $1 million. If someone who is 55 or 60 years old wants to get their kid involved in their business that’s worth several million dollars, they can start gifting shares to them now because they can gift up to $5 million.
How will the Alternative Minimum Tax (AMT) change?
Your individual tax is computed under two methods. One is under the regular Form 1040. There is also a separate AMT calculation you have to do. It doesn’t allow you certain deductions, like state and local taxes, and it uses a different tax rate. What happens is that you pay the higher of the two, regular tax or AMT. The AMT captures upper middle class people generally with incomes from about $100,000 to a few hundred thousand — people who are wealthy but not in the top 1 percent of earners.
The AMT exemption is not set to index for inflation, so what’s happening is more people are going to be subject to AMT. That happens every year, but historically, they always put a patch on it. The exemption amount has been around $75,000 and it’s going to drop to $45,000 without action by Congress. About 4 million people paid AMT in tax year 2011. Without a patch, it’s projected that 31 million will pay AMT on their 2012
How will the average family be affected?
The one change that everyone will see in their paychecks is the end of a 2 percent reduction in the Social Security taxes they pay. Since 2011, the rate has been 4.2 percent. That was put into place as part of the stimulus plan. The likelihood of that one getting extended is not very high. That change affects anyone who gets wages. Absent anything else, you’re going to see a 2 percent reduction in take-home pay in January.
Another one that will affect an average family is the reduction of the child tax credit. If you have a child, you’ve been getting up to a $1,000 tax credit per child; that number is going to decrease to a maximum of $500 per child.
Also, the marriage penalty is going to come back. Many years ago, the rule was that the standard deduction and graduated tax rates for a married couple were not two times that of a single person, they were about 167 percent. Congress fixed the marriage penalty and, over the last few years, a married couple’s standard deduction and tax rate were exactly double a single person’s. What’s happening now is that the marriage penalty is returning.
The exemptions and tax brackets that were double the single person amount revert back to around 167 percent. So married couples are going to pay a little bit more tax, absent anything else. That applies whether you file jointly or separately.
JIM A. FORBES, CPA, is a principal with Skoda Minotti. Reach him at (440) 449-6800 or email@example.com.