As November 6, 2012, draws near, we hope all eligible Americans are making plans to exercise their inalienable right to vote. As tax advisors, we thought it might be helpful to present our understanding of the tax policies proposed or suggested by the presidential candidates. The chart below is based on information accumulated from publications and research tools to which we subscribe as well as what we have heard from the candidates themselves. It is important to understand that these are just proposals and ideas; they are generally short on details, they are subject to change and there is no guarantee that any of them will become law. It is also important to note that tax policy is only one of many factors to consider in deciding which candidate to vote for.
|2013 Individual Income Tax Rates||Same as 2012 except that for those with income over $200k ($250k joint filers) the 33% bracket would be raised to 36% and the 35% bracket would be raised to 39.6%.||Same as 2012 for all taxpayers.|
|Individual Income Tax Rates After 2013||Lower tax rates for middle and lower-income taxpayers with no limits on typical itemized deductions for this group while limiting deductions for those in the top 2 brackets.||Across-the-board 20% reduction for all tax brackets. Tax “loopholes” would be closed for high-income taxpayers in order to fulfill the pledge that these taxpayers would retain their current tax burden level.|
|Long-term Capital Gains/Dividends||Same as 2012 except dividends would be taxed as ordinary income for those in the top 2 tax brackets. Long-term capital gains tax would be increased from 15% to 20% for those with income over $200k ($250k joint filers).||Same as 2012. In addition the 15% maximum tax rate would be made permanent. There also has been mention of exempting from tax all capital gains, dividends and interest for individuals making less than $200k a year.|
|Itemized Deductions||Reinstate the provision that reduces overall itemized deductions by 3% of adjusted gross income for those with income over $200k ($250k joint filers). The reduction would not exceed 80% of itemized deductions. But for those in the top 2 brackets, itemized deductions would further be capped to 28% of otherwise allowable deductions.||Limit overall itemized deductions to some dollar amount for all taxpayers. $17k, $25k or even higher has been suggested as the cap. Regarding specific deductions, it has been hinted that deductions for mortgage interest on second homes might be eliminated for “higher-income taxpayers” and charitable deductions could be limited.|
|Alternative Minimum Tax (AMT)||Possibly replace the AMT with the so-called Buffett Rule whereby those making $1 million or more annually would pay an effective tax rate of at least 30%.||Abolish the AMT.|
|Municipal Bond Interest||Limit the tax-exempt treatment for higher-income taxpayers.||Tax some portion of this otherwise tax-exempt interest based upon income level.|
|Child and Dependent Care Credit||Extend these credits, including the enhancements set to expire at the end of 2012.||Extend all Bush-era tax cuts, including the child and dependent care credit.|
|Estate and Gift Taxes||Set the maximum rate at 45% for decedents dying after 2012 (up from 35%), with a $3.5 million exemption amount (down from $5.12 million). Also, extend the current rules for portability of one’s exemption. The separate gift tax exclusion would be capped at $1 million.||Abolish federal estate and gift tax.|
|Corporate Income Tax Rates||Reduce the top rate beginning in 2014 to 28%, with an effective 25% rate for manufacturing. Unspecified tax preferences would be eliminated in exchange for the lower tax rates.||Reduce the top rate beginning in 2014 to 25%.|
|Research Tax Credit and Bonus Depreciation||Make the R&D credit permanent to eliminate the need to continuously extend the benefits as they expire. The alternative simplified R&D credit would be increased from 14% to 17%. Bonus depreciation allowing 100% write off for acquisitions of certain business assets would be extended through 2012, replacing the current 50% bonus deprecation rule.||Make the R&D credit permanent. Bonus depreciation would be extended but it is unclear if it would be 50% or 100%.|
|International Proposals||Impose minimum taxation on profits when earned by foreign subsidiaries rather than allowing a deferral of tax until the subsidiary remits the income back to the U.S.||Transition to a territorial tax system whereby only income earned within the U.S. borders is taxed.|
The comments above are summaries and are not all-inclusive; there are other proposals, suggestions and ideas that have been discussed during the campaign.
We will revisit year-end tax planning once the elections are decided. While there will be no definitive direction at that time on what tax regime we can expect for 2013, the election results will give us more information than we have today. In the meantime, we continue to work with our high net-worth clients to explore the suitability of taking advantage of the $5.12 million gift tax exemption set to expire at the end of this year. We also are answering a lot of questions on the impending 3.8% Medicare tax on investment income and the scheduled sunset of the so-called Bush tax cuts. These issues were addressed in previous tax briefings that can be found at the WBLCPA Newsroom.
Let us know if you would like more detailed information or if you have any questions on specific issues.