Assuming there will be no Congressional intervention, significant tax changes may be on the horizon for 2013. Tax cuts originally enacted in 2001 and 2003 by President Bush were scheduled to expire in 2011. However, in 2010 President Obama temporarily extended the tax cuts through 2012. If Congress does not act before the end of 2012 some tax credits, exemptions and reduced tax rates will expire.
While anything is possible, it appears unlikely that Congress will extend the tax cuts prior to the November election. Therefore, if any changes do occur they will most likely be implemented in December of 2012. However, uncertainty remains as to whether Congress will act following the election. Without action, the changes listed below will take effect in 2013.
These potential changes will make tax and estate planning in 2012 critical. Navigating these complex changes requires in-depth planning based upon your particular circumstances. If you would like to schedule a planning meeting, please do not hesitate to contact our office.
- No bonus depreciation on new assets purchased in 2013 (2012 allows for 100% expensing of new assets purchased)
- Section 179 expensing of assets will be reduced to $125,000 in 2013 from $500,000 in 2012
- Research & Development credit will expire
- Increase in rates for accumulated earnings tax
- Increase in rates for personal holding company tax
- Income tax rates increase (see chart below)
- 15% preferential dividend rate will expire
- Long-term capital gain rate will increase from 15% to 20%
- Employee portion of social security will increase to 6.2% from 4.2%
- Phase out of itemized deductions returns – Adjusted Gross Income (AGI) over $175,000 Single or $250,000 Married Filing Jointly (MFJ)
- Phase out of personal exemptions returns (AGI over $175,000 Single or $250,000 MFJ)
- Limitation of $2,500 on flexible spending accounts for medical expenses
- Ability to exclude discharge of indebtedness from principal residence expires
- Medical expenses must be greater than 10% of AGI to be deductible unless you are 65 or older (7.5% of AGI for 2012).
- Also expiring for 2013: enhanced adoption credit, enhanced dependent care and child credits, and enhanced student loan interest deduction.
Individuals: New Provisions
- Medicare tax on investment income is implemented (3.8%) impacting married taxpayers with AGI of $250,000 or more ($200,000 for single filers)
- Additional Medicare tax (.9%) on wages over $200,000 Single or $250,000 MFJ
Individual Tax Rate Brackets: 10% 15%
Long Term Capital Gains: 15% 20%
Qualified Dividends: 15% Up to 39.6% (Ordinary Income Rate)
Employee Social Security: 4.2% 6.2%
Medicare Surtax on Investment Income: N/A 3.8%
Medicare Surtax on Wages over $200,000: 1.45% 2.35%
Estate Taxes: Changes
- Top rate increases to 55% from 35%
- Exemption decreases from $5,000,000 to $1,000,000
- No longer able to transfer spouse’s unused exclusion
Top Estate Tax Rate: 35% 55%
GST Tax Rate: 35% 55%
Estate and GST Tax Exemption: $5,000,000 $1,000,000
Lifetime Gift Exemption: $5,000,000 $1,000,000