There is potential gridlock on taxes at year-end. Congress must decide on a number of tax provisions that are set to expire after 2012. What will the result be? Who knows, but an informed taxpayer should be aware of some of the major current expiring provisions, and the new 2013 provisions.
Tax cuts to expire unless extended:
- Maximum personal tax rates increasing from 35% to 39.6%.
- Expiration of the 15% maximum tax rate for long-term capital gains.
- Expiration of the 15% maximum tax rate for qualified dividends. Dividends will be taxed at ordinary rates.
- Personal exemption and itemized deduction phaseouts will apply again.
- Two-percent reduction in the employee share of Social Security tax.
Provisions already expired as of the end of 2011 unless Congress acts:
- Higher Alternative Minimum Tax (AMT) exemptions resulting in more filers in 2012 being affected to the AMT tax
- Direct IRA payouts to charity
- Expiration of the Research & Development credit.
- Write-offs for state sales taxes.
- College tuition deductions.
- $250 deduction of teacher supplies.
Estate and Gift tax provisions expiring:
- Pre 2001 tax rates for estates verses a maximum 35% tax rate.
- Estate tax exemption reverting to $1,000,000 from $5,000,000
- Gift tax exemption reverting to $1,000,000 from $5,000,000 that was available in 2011 and 2012.
New surtax for 2013:
- There is a new 3.8% Medicare surtax on investment income for singles with adjusted gross income (AGI) exceeding $200,000 and joint filers with AGI exceeding $250,000.
- The tax will be levied on taxable interest, dividends, capital gains, annuity income, and passive activities (rents, royalties, partnerships where the taxpayer is not active in the trade or business).
- The Medicare tax increases .9% on earnings for single filers earning over $200,000, and joint filers earning over $250,000.
Tax planning for 2012:
- Consider accelerating income to 2012.
- Consider accelerating itemized deductions to 2012 as of now itemized deductions may be limited in 2013 due to phaseouts.
- Consider taking long-term capital gains in 2012.
- Consider whether investment portfolios should be rebalanced going into 2013 considering the change in tax rates.
- Consider making gifts to take advantage of the $5,000,000 gift exemption that reverts to $1,000,000 in 2013.
You should consult your tax advisor for complete explanations of the tax law changes, how they may