Thursday, 28 February 2013 20:57

Understanding the American Taxpayer Relief Act

When President Obama signed the American Taxpayer Relief Act (ATRA) into law in January, the much-feared “fiscal cliff” was avoided, for the most part.

Smart Business spoke with Jim A. Forbes, CPA, a principal with Skoda Minotti’s Tax Planning & Preparation Group, about five key elements of the act affecting both individual taxpayers and businesses.

What item most benefits individuals?

Signage of the act provides permanent relief from the Alternative Minimum Tax (AMT). If the AMT ‘patch’ had not been put in place, as many as 30 million taxpayers could have been affected. Fortunately, a permanent AMT patch has been put in place.

Retroactively, effective for tax years beginning after 2011, the AMT exemption amounts (and indexes for inflation) have been permanently increased to $50,600 for unmarried taxpayers, $78,750 for joint filers and $39,375 for married persons filing separately. This means that, for a single person, the first $50,600 of income is exempt from the AMT calculation.

Do any items have a negative effect on individual taxpayers?

Overall, passage of the act positively impacts most individual taxpayers. The return of the phase-out of itemized deductions and personal exemptions, though, could have a negative impact.

The Personal Exemption Phase-out (PEP) is reinstated with a starting threshold for those making $300,000 for joint filers and a surviving spouse; $275,000 for heads of household; $250,000 for single filers; and $150,000 for married taxpayers filing separately. For 2013, you’ll be able to deduct $3,900 for yourself, your spouse and your dependents. However, if you are over these thresholds, the value of each personal exemption is reduced by 2 percent for each $2,500 above the specified income thresholds. So a married couple making $400,000 would see a $2,000 cut in their personal exemptions.

Also, the ‘Pease’ limitation on itemized deductions was reinstated, with starting thresholds that are the same as for the PEP. For taxpayers subject to the ‘Pease’ limitation, the total amount of their itemized deductions is reduced by 3 percent of the amount by which the taxpayer’s adjusted gross income (AGI) exceeds the threshold amount, with the reduction not to exceed 80 percent of the otherwise allowable itemized deductions. For example, a married couple with income of $400,000 filing their tax return with $50,000 of itemized deductions would see about a $3,000 reduction in their itemized deductions, resulting in about $1,000 more in tax.

How are higher income individuals affected?

The regular tax rate and dividend/capital gains tax rate both increased for higher income individuals. The income tax rates for individuals will stay at 10, 15, 25, 28, 33 and 35 percent, but now a 39.6 percent rate applies for income above $450,000 for joint filers and surviving spouses; $425,000 for heads of household; $400,000 for single filers; and $225,000 for married taxpayers filing separately. The top rate for capital gains and dividends permanently rises to 20 percent for taxpayers with incomes exceeding $400,000 ($450,000 for married taxpayers). When combined with the new 3.8 percent Medicare surtax on investment income, the overall rate for higher income taxpayers will be 23.8 percent.

What are some of the ways that businesses are affected?

Two that are applicable to most businesses are the extension of bonus depreciation and the increase in Section 179 deduction.

The act retroactively extended 50 percent bonus depreciation for property placed in service before Jan. 1, 2014. And some transportation and longer period production property is eligible for 50 percent bonus depreciation through 2014. In other words, businesses can deduct 50 percent of the cost of the property while deducting the remainder of the cost of the property over its useful life. Plus, bonus depreciation can be used to create a loss. The Section 179 deduction can now be taken on new or used property up to $500,000, allowing businesses to fully deduct the cost of the property in the year it acquires it instead of deducting a portion of cost over its useful life. Previously, the deduction could only be applied to new or used property up to $139,000.

Jim A. Forbes, CPA, is a principal at Skoda Minotti. Reach him at (440) 449-6800 or jforbes@skodaminotti.com.

Contact: Have questions on how the American Taxpayer Relief Act affects you or your business? Contact our Tax Planning & Preparation Group at (440) 449-6800.

Insights Accounting & Consulting is brought to you by Skoda Minotti

 

Published in Cleveland
Thursday, 28 February 2013 21:51

What to expect from the M&A market in 2013

Considering the uncertainty in the stock market, 2012 turned out to be a good year for mergers and acquisitions (M&A), and the outlook is even better for 2013, says Albert D. Melchoirre, president of MelCap Partners, LLC.

“Last year was pretty tumultuous, with the overwhelming European debt crisis, a slowdown in certain emerging markets, uncertainty about the presidential election and its potential impact from a capital gains tax perspective, and the fiscal cliff debate,” Melchoirre says. “But there were several factors that would indicate reason to be optimistic about the M&A market in 2013.”

Smart Business spoke with Melchoirre about those factors and his expectations for the M&A marketplace in 2013.

How was 2012 from an M&A perspective?

The number of domestic M&A transactions was down by 4.6 percent from 2011. However, the average deal size increased 13 percent — from $138 million to $156 million. From a private equity standpoint, fundraising increased 31 percent compared to 2011. That bodes well for future M&A.

It’s interesting to note that deal volume was up 56 percent in December compared to November.

What was the reason for the end of the year activity?

The primary driver was the capital gains tax increase in 2013. There was concern that if President Barack Obama was re-elected taxes were going to go up significantly. The M&A process typically takes six to nine months, so that started before the election outcome was known. But there was pressure to try to get something done before the end of the year.

Another situation driving transaction activity was private equity dividend recaps.  Many PEGS were going to the bank and taking out large dividends so the money would be taxed at the lower rates in 2012. They didn’t have enough time after the election to sell the business, so they paid out large dividends instead.

Because of the influx of closing activity in the fourth quarter of 2012, my sense is that 2013 will start out slowly. But I’m cautiously optimistic. When we look back at 2013, the numbers may be flat or down slightly because there isn’t enough time to make up for that lull.

Why are you ‘cautiously optimistic’ about the M&A market in 2013?

Some of the positive signs are the large amounts of cash reserves on corporate America’s balance sheets. The S&P 500 alone has over $1 trillion in cash, which is very strong. Combine that with favorable credit terms in the banking market and improved consumer confidence, and the elements are there for a solid year.

Another positive sign is more clarity with respect to the tax situation. Now business owners won’t be dealing with making decisions based on unknown, pending tax law changes. There’s something to be said for certainty. Uncertainty creates a tendency to be hesitant to make a move. When people know the rules of the game they can make decisions accordingly.

Do you expect corporate cash reserves to be utilized this year?

Absolutely. When you have corporate buyers sitting on these large cash reserves they have to deploy that capital in order to grow their business — there’s only so much equipment you can buy. When companies are sitting on trillions of dollars, one of the ways to accelerate that growth is through acquisitions. Cash is king and you can take advantage of opportunities in the market to grow and expand your business. And that cash will have to be deployed — the public markets will not let them sit on those reserves.

Last year, 75 percent of our sell-side deals were sold to strategic buyers who were sitting on a large amount of cash. Corporate buyers are acquiring competitors or complementary businesses through vertical or horizontal integration. With deals involving a private equity buyer, if they don’t have a portfolio company it would strictly be a financial play.

While I’m cautiously optimistic we’ll see more of the same activity this year, it looks like 2014 could be even better.

Albert D. Melchoirre is president of MelCap Partners, LLC. Reach him at (330) 239-1990 or al@melcap.co.

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Published in Cleveland

Although Congress passed the last-minute fiscal cliff tax deal in a seemingly haphazard way, many changes in the American Taxpayer Relief Act of 2012 will have both positive and negative impacts on executives, says Elizabeth Bunk, partner-in-charge of Houston Tax and Strategic Business Services at Weaver.

“Unlike the Congressional change two years ago, the American Taxpayer Relief Act of 2012 provides permanent changes to certain tax rates and exemption levels,” she says. “Therefore, we won’t be in the same situation again two years from now because many of these tax changes won’t expire. This will allow executives to plan for their future taxes with greater confidence.”

Smart Business spoke with Bunk about what executives need to know about their tax considerations for 2013.

What is the new maximum rate?

Congress added a top income tax rate of 39.6 percent for those with an annual income of more than $400,000 for single filers and more than $450,000 for joint filers. They also kept the same rates of 10, 15, 25, 28, 33 and 35 percent that were available in prior years. Therefore, executives earning above the $400,000 or $450,000 threshold will pay an additional 4.6 percent on the portion of their income that exceeds the highest bracket limit. While it was widely anticipated that income tax rates on high-income earners would increase in 2013, executives can at least be pleased that the final version of the act doubled the threshold amounts at which the 39.6 percent rate begins from the often-mentioned $200,000 and $250,000 threshold amounts.

How are capital gains and dividend rates handled?

Following the same threshold — $400,000 and $450,000 — the capital gains and dividend rates permanently increased from 15 to 20 percent. It is also important to note that higher income taxpayers will get hit by the new 3.8 percent surtax on investment income imposed by the Patient Protection and Affordable Care Act. This surtax, which applies at an income threshold of more than $200,000 for single filers and more than $250,000 for joint filers, will bring the final tax rate on capital gains and dividends to 23.8 percent.

How will health care reform impact other income?

Starting in 2013, high-income taxpayers will be subject to a brand new Medicare tax on their unearned income. The 3.8 percent surcharge applied to capital gains and dividends, as mentioned above, is applied to other investment income as well. A different set of limits — $200,000 for single and $250,000 for those married filing jointly — are the baseline for the surtax to apply. Taxpayers whose adjusted gross income exceeds the threshold will be subject to this tax. This surcharge combined with the increased maximum tax bracket could mean that some taxpayers are paying 43.4 percent on their highest levels of income.

What other provision is noteworthy?

A key provision to be aware of is the reinstatement of the phase out for itemized deductions and exemptions. Itemized deductions, which had avoided phase out during 2010 through 2012, will now be subject to severe limits, depending on income levels. Total itemized deductions in 2013 and beyond, which include real estate taxes, mortgage interest and charitable contributions, will be reduced by 3 percent of the amount by which a taxpayer’s AGI exceeds a threshold of $250,000 for single taxpayers and $275,000 for those married and filing jointly. The reduction cannot exceed 80 percent of the total deductions.

What’s the overall impact?

For many executives, these provisions are probably what they anticipated. There are certainly some negative changes in the act, but there are at least two positive results:

1. Permanent changes to tax rates, including the dividend and capital gain rates.

2. Applying the new top income tax rate to a threshold amount that is double what was originally predicted.

These positives should at least slightly raise revenue without significantly raising taxes for all Americans.

Elizabeth Bunk, CPA, CFP, is partner-in-charge, Houston Tax and Strategic Business Services at Weaver. Reach her at (832) 320-3220 or Elizabeth.Bunk@WeaverLLP.com.

Our coverage of the fiscal cliff law continues next month with more insight into how these taxes will interact with those related to health care reform.

For more information about the fiscal cliff law’s impact to businesses and individuals, see the articles on Weaver’s website: http://weaverllp.com/News.aspx.

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Published in Dallas

Health care reform is on the way, with most mandates starting in 2014, but it will be 20 or 30 years before we really know how the Patient Protection and Affordable Care Act (PPACA) will work, says William F. Hutter, president and CEO of Sequent.

“That creates much uncertainty for small and middle-market companies.

They don’t know what to do. And that uncertainty is bad for the economy and it is bad for business. When business owners can’t make decisions, it’s bad for all of us,” says Hutter.

Smart Business spoke with Hutter about some of the lesser-known aspects of the PPACA.

What are the minimum participation standards?

There are two standards for minimum participation:

• 80 percent of all eligible employees must take coverage from the employer.

• 70 percent of net eligible employees must take coverage from the employer.

Net eligible employees won’t include those who decide to get coverage from a spouse’s plan.

A really unique caveat about this is that if a company cannot maintain those participation requirements, technically no carrier has to write it coverage. That would force the company into a state health care exchange because it would be unable to provide a health insurance program for employees.

You could try to increase employee participation by improving the plan, but then the cost goes up and the company can’t afford it. Or the cost goes up and somebody can go to the state health care exchange and get a subsidized plan for less.

A lot of companies with between 75 and 150 employees are really going to be challenged. If they can’t meet minimum participation requirements and can’t afford to design a plan to compete with the exchange, they can give up and let everybody go to the exchange. But then they have to pay a $2,000, per employee, nondeductible penalty. For a company with 100 full-time equivalents (FTEs), that’s a $200,000 tax and they still don’t have a health plan.

How can companies that provide adequate health insurance still wind up paying penalties?

Say I run a company that has more than 50 FTEs and I’m offering a good health care plan. However, because of the subsidies that are offered, an individual opts out of my health care plan and instead seeks out insurance from a state exchange. A family of four can earn up to $80,000 and get a subsidy for buying on the exchange. I could still wind up paying a $3,000 penalty if I have an employee who opts out.

So companies will be weighing whether it costs more to provide health care or simply pay the penalty?

Correct. If that’s the case, how does that impact my company culture and how do I want to take care of my employees and their families? We don’t know how some of those questions are going to manifest. Or the fact that, as an employee, I get my health care out of an exchange, therefore I can go to work anywhere I want to. That begins to break down the loyalty factors between employees and companies.

What impact will the PPACA have on health insurance costs?

Based on the average cost of $440 per month for an individual, 75 percent is used for claims. That means the remaining 25 percent, or $110, goes for administration costs, profits, compensation, rents and other expenses related to the health care plan. The legislation says that 85 percent of every dollar must be used to pay claims. In order to maintain that same $110 a month, the cost for an individual goes up to $730; it’s just a reverse calculation. This can be attributed to the legislation and how it ultimately impacts the medical loss ratios.

William F. Hutter is president and CEO at Sequent. Reach him at (888) 456-3627 or bhutter@sequent.biz.

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Published in Akron/Canton

Our economic forecast for 2013 comes down to one simple phrase: “It all hinges on Washington.”

“The president and Congress must decide whether tax rates rise or fall, whether fiscal stimulus or austerity rules the day, and whether the long-term budget deficit issues or entitlements will be addressed,” says Robert Leggett, senior investment strategist at FirstMerit Wealth Management Services.

The Federal Reserve has promised to hold short-term rates low until the unemployment rate falls to 6.5 percent, unless it determines inflation is likely to exceed 2.5 percent, he says. Will the Fed’s newest $85 billion monthly quantitative easing — bond buying — program continue to suppress longer maturity bond yields in 2013? To paraphrase the European Central Bank’s Mario Draghi: ‘Believe us, it’ll be enough’ to keep the U.S. Treasury 10-year bond yield from rising much in 2013.

Smart Business spoke with Leggett about what to expect in 2013.

How do you expect Washington to address the fiscal cliff?

The Washington glass seems ‘half full,’ so fiscal cliff compromises should be reached. Taxes will be raised on the ‘rich,’ however that is defined. Tax increases on everyone else will be limited by extending middle class tax cuts, ‘patching’ the Alternative Minimum Tax and gradually ending the FICA (Federal Insurance Contributions Act) 2 percent payroll tax holiday.

Alas, anyone who has a taxable investment account will pay more taxes through higher capital gains rates and higher tax rates on common stock dividends. Entitlement reform will likely be kicked down the road, but credit rating agencies should be assuaged by an agreement to create a congressional commission, lessening the risk of a January ratings downgrade. Likewise, there should be just enough spending cuts to allow a compromise on raising the debt ceiling.

What are some risks with the current situation, and how likely are they to occur?

The downside risk hinges on Washington, where policy errors could take us over the cliff, leaving the economy crushed at the gorge’s bottom by another severe recession.

Sounds horrifying, doesn’t it? But this worst-case scenario is very unlikely. Even if taxes are raised, the increase shouldn’t be too stiff, and history shows the spending impact will be minor. Modestly higher capital gains rates also have a limited impact. Changes to corporate taxes and deductions will be a mix of pluses and minuses, as always. The regulatory burden only goes in one direction — heavier — but who does that surprise?

Despite volatile gasoline prices, the consumer price index inflation rate dropped to roughly 2 percent, and that trend should continue. Energy prices shouldn’t rise significantly, as increased supply meets very slow demand growth. With consumers, housing activity and prices are on the upswing, and residential construction has been additive to GDP for the past six consecutive quarters. Combined with the doubling of the S&P 500 since 2009 and decline in consumer debt outstanding, household net worth has improved sharply. Continued modest but steady 2013 job growth should lower unemployment rates.

So, what should happen next year?

Basically, the economy can do one of three things: improve, stay the same or get worse. The presence of feedback loops often determines which occurs. 2012 began with a positive feedback loop — rising production of goods and services meant more hours worked, and incomes grew, resulting in greater demand for goods and services, leading to rising production of goods and services. Unfortunately, fears arose for both businesses and consumers. Uncertainty weakens the links of a positive feedback loop and can eventually forge a negative chain. Fortunately, much of the uncertainty should be alleviated by even a partial resolution of the fiscal cliff and budget deficit issues.

All in all, expect a slow start to 2013, with hangover from partisan battles and going over the fiscal cliff, or perhaps fiscal slope, to some extent. However, as uncertainties are alleviated, GDP growth should reaccelerate to 2.5 percent or more in the second half.

The opinions and information contained in this message have been derived from sources believed to be accurate and reliable, but FirstMerit Bank N.A. makes no representation as to their timeliness or completeness. This message does not constitute individual investment, legal or tax advice. All opinions are reflective of judgments made on the original date of publication and do not constitute a guarantee of present or future financial market conditions. 

Robert Leggett is a Senior investment strategist at FirstMerit Wealth Management Services. Reach him at Robert.Leggett@FirstMerit.com.

Twitter: Follow @firstmerit_mkt to stay current on market trends.

Insights Banking & Finance is brought to you by FirstMerit Bank

Published in Akron/Canton

Entrepreneurial companies are facing headwinds going into 2013, including fiscal cliff uncertainty, the prospect of higher taxes, more regulation and continued slow economic growth, says Tullus Miller, Bay Area partner-in-charge at Moss Adams.

“Having a trusted business adviser to help navigate these uncertainties and measure the impact on your key business decisions is most important,” he says.

Smart Business spoke with Miller about how a trusted business adviser gives you the information you need to know — not what you want to hear.

What should entrepreneurial companies consider in a trusted business adviser?

Entrepreneurial companies are very dynamic and have various business needs during their life cycle, including, but not limited to, expanding business offerings nationally or internationally, developing new revenue sources and restructuring operations. These types of activities are generally complex and require substantial capital investment, so trusted business advice can help make decisions simpler, while shortening the timeline. For example, with a growing startup company, an entrepreneur can get advice on what kind of systems to use; how many people to have in the back office; or what kind of tax structure to implement, e.g. a pass-through or corporation.

In considering a trusted business adviser, weigh a few key questions:

  • Does the adviser understand your business and how the activities might fit into your long-term goals?
  • Does the adviser have insight into complex areas such as tax consequences and how it affects profitability?
  • Has the adviser provided sound, practical advice over time that helped the business?
  • Does the adviser have your best interest at heart and tells you what you need to hear as opposed to what you want to hear?
  • Does the adviser have a deep network of professionals from which to help provide you with appropriate counsel, including legal, banking, etc.?

Having appropriate business advice — based on your medium- to long-term goals and objectives — from an unbiased, trustworthy and experienced source is, and should be, an important part of any decision-making process.

What mistakes do some entrepreneurs make when seeking an adviser?

A lot of times entrepreneurs are impatient, just by nature, as they are go-getters who want things to happen. Therefore, they need to guard against not taking the appropriate time to vet the business adviser. It’s critical to talk to two or three different advisers to ensure you find the right fit, looking at your personality and their knowledge base and reputation, etc. And, then it’s going to come down to pretty much a judgment call. There’s very little science in this. It’s mostly art.

You want to get as much information, even in a dynamic environment, as possible because you must minimize capital-intensive mistakes in an entrepreneurial company.

Do you have any tips on how to organize your adviser(s)?

Depending where you are in your business life cycle, the more nascent you are, the more external advisers you want to use, while making sure you control their costs, too. As you move up the business life cycle curve to maturity — even in a high growth mode — you have to decide at some point to bring experts in-house, and there’s no bright line on how to do that.

A trusted adviser with integrity will tell you what you need to hear, even at the short-term expense of his or her own business. Someone who says, ‘It looks like you’re spending a lot of money here, and you’re starting to grow. You either need to upgrade your staffing, getting people who are more experienced, or expand the number of folks to help you do what you need to do.’

Once advisers are in place, what can be done to maximize the relationship?

Before you close a deal — even if you’re anxious to move ahead on an expansion, re-organization or a new compensation plan with more performance indicators — you allow your trusted adviser to look at the agreements being drawn up. It may not be in the adviser’s area of expertise, but he or she, or others in that firm, could see something that needs to be changed, allowing you to avoid unintended consequences.

Tullus Miller is Bay Area partner-in-charge at Moss Adams. Reach him at (415) 956-1500 or tullus.miller@mossadams.com.

Insights Accounting & Consulting is brought to you by Moss Adams

Published in National

Our economic forecast for 2013 comes down to one simple phrase: "It all hinges on Washington." The President and Congress must decide whether tax rates rise or fall, whether fiscal stimulus or austerity rules the day, and whether the long term budget deficit issues (entitlements) will be addressed. The Federal Reserve has now promised to hold short term rates low until the unemployment rate falls to 6.5 percent, unless they determine inflation is likely to exceed 2.5 percent. Will the Fed's newest $85 billion monthly quantitative easing (bond buying) program continue to suppress longer maturity bond yields in 2013? To paraphrase the European Central Bank's Mario Draghi: "believe us, it'll be enough" to keep the U.S. Treasury 10 year bond yield from rising much in 2013.

We continue to view the Washington glass as "half full," so we expect fiscal cliff compromises will be reached by early 2013. Taxes will be raised on the "rich" (however that is defined) but the impact of tax increases on everyone else will be limited by extending the middle class tax cuts, "patching" the Alternative Minimum Tax, and gradually ending the FICA 2 percent payroll tax holiday. Alas, anyone who has a taxable investment account will pay more taxes through higher capital gains rates and higher tax rates on common stock dividends. Entitlement reform will likely be kicked down the road, but we expect the credit rating agencies will be assuaged by an agreement to create a Congressional commission, lessening the risk of a January ratings downgrade. Likewise, there should be just enough spending cuts to allow a compromise on raising the debt ceiling.

The downside risk from here hinges on Washington: policy errors that take us over the cliff might leave the economy crushed at the bottom of the gorge by another severe recession.

Sounds horrifying, doesn’t it? Well, it is — but we think this worst-case scenario is VERY unlikely. Even if taxes are raised, the increase shouldn't be too stiff and history shows that the impact on spending will be minor. Modestly higher capital gains rates also have a limited impact. Changes to corporate taxes and deductions will be a mix of plusses and minuses, as always. The regulatory burden only goes in one direction — heavier, but who could be surprised by that? Despite volatile gasoline prices, the CPI inflation rate has dropped to roughly 2 percent and that trend should continue in 2013. Energy prices should not rise significantly as increased supply meets very slow demand growth. With regard to consumers, housing activity and prices are on the upswing. In fact, residential construction has been additive to GDP for the past six consecutive quarters! Combined with the doubling of the S&P 500 since 2009 and decline in consumer debt outstanding, household net worth has improved sharply. Continued modest, but steady job growth should result in lower unemployment rates during 2013.

Basically, the economy can do one of three things: improve, stay the same, or get worse. The presence of feedback loops often determines which of these occurs. We began 2012 with a positive feedback loop — rising production of goods and services meant more hours worked, which meant incomes grew, which resulted in greater demand for goods and services, leading to rising production of goods and services! Unfortunately, fears arose during the year that caused great uncertainty for both businesses and consumers. Uncertainty weakens the links of a positive feedback loop and can eventually forge a negative chain. Fortunately, much of the current uncertainty should be alleviated by even a partial resolution of the fiscal cliff/budget deficit issues.

All in all, we expect a slow start to 2013 due to the hangover from Washington's partisan battles and going over the fiscal cliff (fiscal slope?) to some extent. However, as uncertainties are alleviated, we expect GDP growth to re-accelerate toward 2.5 percent+ in the second half.

Bob Leggett, CFA, is the Senior Investment Strategist at FirstMerit Wealth Management Services. Reach him at robert.leggett@firstmerit.com or follow him on Twitter @firstmerit_mkt.

The opinions and information contained in this message have been derived from sources believed to be accurate and reliable, but FirstMerit Bank N.A. makes no representation as to their timeliness or completeness. This message does not constitute individual investment, legal or tax advice. All opinions are reflective of judgments made on the original date of publication and do not constitute a guarantee of present or future financial market conditions.

 

Published in Chicago

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

returns.

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 jforbes@skodaminotti.com.

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Published in Cleveland