In one of the swiftest moves we have seen by Congress, both the House and Senate passed a bill on February 17 that extends the reduced 4.2% Social Security tax rate (from 6.2%) through the end of the year. Employees and self-employeds are expected to see an average increase in take-home pay of $1,000 for 2012, but at an estimated “unpaid for” cost of $93 billion. The bill extending the rate reduction also repealed the 2% recapture tax on high income workers. Your payroll tax service should be able to make the adjustments easily, but for you do-it yourselfers, make sure you take into account the reduction and keep in mind that it is not applicable to the portion of the Social Security tax attributable to the employer’s portion (which remains at 6.2%).
While the rest of 2012 is expected to be relatively quiet with respect to actual tax legislation being enacted, planning for 2013 will become increasingly important as the year progresses.
Impact of Health Care Reform-The health care reform bill passed about two years ago introduced several important tax provisions that will take place in 2013 if the courts don’t totally strike down the law. A few provisions to consider:
First, there will be a special 3.8% Medicare surtax on unearned income (interest, dividends, capital gains etc.) for those with adjusted gross incomes (AGI) of $200k ($250k married filing jointly). For those contemplating big capital gain transactions that could spill into 2013 and beyond, this additional tax needs to be considered in your timing. Note however, contrary to rumors out there regarding sales of personal residences, the 3.8% tax would only apply to that part of the gain that exceeds the normal $250k/$500k exemption.
Second, the Medicare tax will be raised .9% in 2013 on wages and self-employment income for those with AGI of $200k ($250k married filing jointly).
Third, for those younger than 65 years old, medical deductions in 2013 will only be deductible to the extent they exceed 10% of AGI, up from 7.5%. “Bunching” these medical expenses into 2012 might make sense for some.
Extenders-Legislation at the end of 2010 extended only through 2011 previously expired incentives, including the R&D credit, higher tuition deduction, teacher’s expense deduction, 15-year depreciable lives for certain real estate developments and tax-free distributions from IRAs for charitable purposes. No word on whether these will be extended for 2012 and retroactively to January 1. So for now, don’t bank on it.
Sunsetting “Bush-Era Tax Cuts” -While we have enjoyed a 2-year extension through 2012 of the so-called Bush-era tax cuts, the uncertainty for 2013 will once again pose a planning problem as the year progresses. Conventional wisdom is that the tax cuts will be extended again through 2013, but anything can happen in an election year or shortly thereafter. If these prognosticators are correct (and we certainly provide no assurances), we will see another year of 15% maximum federal tax rate for most long-term capital gains and qualified dividends, and the same tax brackets we have had for 2012. But if the tax cuts are allowed to sunset, the law currently calls for the tax rate on most long-term capital gains to be increased to 20% and for dividends to be taxed at ordinary income rates in 2013 for federal tax purposes. Plus, if the tax cuts are allowed to sunset, the phase outs that severely limit itemized deductions and personal exemptions for upper income taxpayers would come back into play. No matter which tax scheme succeeds, the 3.8% Medicare surtax for 2013 as discussed above would be in addition to the income/capital gains tax.
President Obama 2013 Budget Proposal-On February 13, President Obama proposed his fiscal year end 2013 budget containing $1.5 trillion in revenue raisers. Among them is the sunsetting of the so-called Bush-Era tax cuts in 2013 as discussed above and an increase in the tax brackets for those with income over $200k ($250k for married filing jointly). These were proposed previously and were discussed in our 2010 Back-to-School tax briefing at www.wblcpa.com. The proposal getting the most press is the so-called Buffet Rule, which in actuality was only referenced in the budget as a future goal, not actually in the budget. The rule is a minimum tax of 30% for those making over $1 million and would replace the current alternative minimum tax. As a side note, a similar proposal was introduced by a RI senator this month, but will likely not pass. Not getting much press is the President’s proposal to return the estate tax parameters back to 2009 levels: maximum rate of 45% (up from 35%) and an exemption of $3.5 million (down from $5 million). There are too many other proposals in the budget to list here. While the President’s proposal gives us some insight into White House priorities and expected battle grounds, the presidential budget has historically had little significance in how Congress ultimately decides where to raise and spend funds.
While we don’t typically spend time reporting on the many tax proposals that come and go throughout the years, the President’s framework for corporate tax reform rolled out on February 22 presented some interesting food for thought. There is no way we will see anything passed this year, but again, it gives us some insight into White House leaning. To better compete with other nations, the framework calls for a reduction in the top corporate tax rate from 35% to 28%. Manufacturers would benefit with an enhanced production deduction and the R&D credit would be made permanent. To help pay for these tax benefits, certain other beneficial tax provisions would be on the chopping block such as LIFO, capital gain preferences for fund managers and repeal of certain oil and gas preferences. Although no concrete details were given, one other proposal that is sure to generate controversy is a minimum tax that would be imposed on companies with foreign earnings. Stay tuned.
Alternative Minimum Tax – The “patch” to keep many middle income taxpayers out of AMT’s grip expired at the end of 2011. We expect (hope?) a retroactive fix before the end of the year.
Depreciation – 100% bonus depreciation also expired at the end of 2011 and currently a 50% bonus rule is in place. We are told that President Obama and many lawmakers support extending the 100 percent bonus depreciation through the end of 2012. Up front deductions under Section 179 for small businesses remain available in 2012 for fixed asset acquisitions of up to $139,000 as long as total additions don’t exceed $560,000.
Estate and Gift Tax – For 2012, we remain under the same structure as last year, but indexed for inflation: 35% maximum tax rate with a $5.12 million unified gift and estate exemption. Unless Congress acts, the exemption goes down to $1 million and the tax rate goes up to 55% after 2012. High net worth families should be considering whether 2012 is a good time to use up some of their exemption while it remains at $5 million, particularly for assets that might be valued low right now and expected to increase in the future.
Revamped 1099s Means Hectic Tax Season – Expect different looking 1099s this year from your brokers. They will include cost basis and holding period information for equities purchased in 2011 as required by legislation passed in 2008. Many clients are experiencing delays in reporting and amendments are possible. We will do all we can to help you through this.
Watch Out For “Phishing” Scams – We are hearing about more and more “phishing” scams. Many are emails concerning unclaimed tax refunds or unsuccessful efiling/fund transfers. Please be reminded that the IRS does not send out unsolicited emails to taxpayers. If you get an email from “irs.gov”, please do not open it and never provide any personal information. You can report suspicious emails email@example.com. Also, the American Institute of CPAs has announced that if you get any emails from “aicpa.org” about tax return fraud or your accountant’s license termination, you should delete them as well. You wonder what this world is coming to when the scammers start picking on the CPAs.
IRS Audit News – The IRS announced that it audited one of eight individuals with incomes over $1 million in 2011, an increase over prior years. But the overall audit coverage rate remained around 1.11% for individuals (roughly 1.56 million returns). The overall audit coverage rate for businesses decreased slightly, but still represented over 9.87 million returns. While we believe the IRS is auditing “smarter”, we expect the IRS budget cuts resulting from a $305 million decrease in Congress appropriations will impact their work this fiscal year.
State Audit News – State revenue departments have increased sales tax audits in recent months, trying to generate additional revenue wherever possible. Audit targets are businesses that fail to obtain resale certificates from their customers and purchases from online retailers that were not taxed at the point of sale. We expect this trend to continue.
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There have been less universal tax rulings and court cases that have come down in the past year. We will continue to monitor these and all tax legislation and be your resource should issues arise. In the meantime, if there are any provisions noted above for which you need more detail or if you have any questions, please let us know.
And Finally…..Happy Anniversary……to us! 2012 marks the 30th anniversary of Williams Benator & Libby. Thirty years of providing the first class accounting, tax and business services our clients have come to expect. We never lose sight of the trust and confidence our clients put in us every day and we realize that without them we could not be the successful firm of choice that we are today. Thank you to all our clients, referral sources and employees for 30 great years. We are committed to approaching the next 30 years with a continued passion for excellence and to helping our clients be as successful as they possibly can.