Re-election of President Obama for a second term now sets in motion negotiations between Democrats and Republicans over Bush-era tax cuts and expiring tax extenders.
DEADLINES
At this point effective January 1, 2013:
- Bush-era tax cuts, extended by the Tax Relief and Job Creation Act of 2010, expire
- Across-the-board spending cuts take effect under the Budget Control Act of 2011
- The employee-side payroll tax holiday ends
- More individual and business tax extenders expire
INDIVIDUALS
Any extension of the Bush-era tax rates will most likely be accompanied by deficit reduction measures, such as increased marginal tax and elimination of certain tax preferences for higher-income individuals. As a result, higher-income individuals must decide whether to wait or take advantage of current rates now through various strategies. Here are the proposed tax brackets under President Obama’s plan for 2012 taxable income:
|
Tax Rate |
Married Filing Jointly |
Single |
|
10% |
$0-$17,850 |
$0-$8,925 |
|
15% |
$17,850-$72,500 |
$8,925-$36,250 |
|
25% |
$72,500-$146,400 |
$36,250-$87,850 |
|
28% |
$146,400-$223,050 |
$87,850-$183,250 |
|
33% |
$223,050-$266,400 |
$183,250-$213,200 |
|
36% |
$266,400-$398,350 |
$213,200-$398,350 |
|
39.6% |
$398,350+ |
$398,350+ |
The President’s proposal also includes increasing the tax rate on qualified capital gains to 20% for single individuals with incomes over $200,000 and married taxpayers filing jointly with incomes over $250,000. Regarding dividends, single individuals with incomes over $200,000 and joint filers with incomes over $250,000 would pay tax on dividends as ordinary income. The current zero and 15% capital gains and dividend tax rates would be extended after 2012 for single individuals with incomes below $200,000 and joint filers with incomes below $250,000. As a result, higher-income individuals can consider such strategies as accelerating long-term capital gain, or increase carryover losses into potentially higher rates in years after 2012. For those in control if C corporations, declaring special dividends to be distributed before 2012 may prove to be wise if top rates on dividends rise from 15% to 43.4% (39.6% plus 3.8% Medicare surtax).
For the past two years, the employee-share of Old Age, Survivors and Disability Insurance (OASDI) taxes has been reduced from 6.2% to 4.2% (with comparable relief for self-employed individuals). Under the current law, that reduction is scheduled to expire at the end of 2012. As a possible strategy, accelerating any bonuses and employee recognition payments into 2012 for employees below the wages base of $110,100 will allow them to save 2%. Self-employed individuals in a similar position should try to accelerate self-employment income into 2012.
BUSINESS
Year-end planning for business, like year-end planning for individuals, is complicated by the number of expired or soon-to-expire tax incentives. Although many of these incentives have been extended in past years, it is uncertain what will happen as 2012 comes to a close.
Code Sec. 179 gives businesses the option of claiming a deduction for the cost of the qualified property all in its first year of use. Under current law, the dollar limitation for 2012 is $139,000 with a $560,000 investment limit. The deduction limit is scheduled to drop to $25,000 for 2013 with $125,000 investment limit. Businesses may want to accelerate purchases into 2012 and as long as the equipment is placed in use before the end of the tax year, the taxpayer gets the entire expensing deduction for that year.
Work Opportunity Tax Credit (WOTC) rewards employers that hire individuals from targeted groups. Under current law the WOTC is not available for 2012 except for the target group of qualified veterans, but the qualified veteran must begin work for the employer before January 1, 2013 and the credit for qualified veteran can be as high as $9,600.
HEALTH CARE
President Obama’s re-election will result in continuing implementation of the Patient Protection and Affordable Care Act. The following are some of the tax-related provisions in that Act that are scheduled to take effect in 2013 and beyond:
The Medicare contribution tax of 3.8% applies to the lesser of the taxpayer’s net investment income (including interest, dividends, annuities, royalties, rents, and net capital gains) or the amount of modified adjusted gross income above a specified threshold - $250,000 for joint filers and $200,000 for single filers. This tax is essentially imposed on unearned income of higher-income individuals. As a result, taxpayers are facing many important planning decisions – whether to sell assets and recognize gains in 2012, how to reduce net investment income in 2013 and how to reduce modified adjusted gross income in 2013. Taxpayers may want to demonstrate that income is from an active business, not a passive investment.
Additional 0.9% Medicare tax applies to total wages, other compensation, and self-employment income that exceed the applicable threshold amount - $250,000 for joint files and $200,000 for individual files. Consideration should be given to paying annual bonuses, recognizing income on stock-based contingent compensation, and accelerating service-related income in 2012.
Overall, Democrats and Republicans generally agree that the longer they wait to make decisions, the greater the likelihood of a delayed 2013 filing season. The IRS will need time to adjust its processing systems for late legislation.
If you have questions or concerns about your 2013 tax filing status or planning, please contact us.
