We thought it might be a good idea to give you a CPA’s view of these upcoming “events” and some possible ways to approach your year-end tax planning.
The fiscal cliff that everyone is talking about is actually a combination of several tax and spending law changes that are scheduled to take effect on January 1, 2013. The spending cuts are a result of the Budget Control Act of 2011 and its’ required automatic budget sequestrations. The tax law changes that are contributing to what many are calling the “fiscal cliff” or “taxmageddon” are the result of expiring tax law provisions that gave taxpayers additional deductions, credits and lower tax rates in the current and prior years – many of which are scheduled to expire on January 1, 2013.
So what to do before then? First of all, keep an eye on what Congress and the President propose between now and December 31st. By looking at both the President’s proposal and any specific proposals that Congressional leaders may offer, we may be able to glean some direction.
Next, review the changes that are scheduled to take place if no action is taken by Congress before January 1st. Here’s a brief list of the major changes:
- Income tax rates increase for almost every tax bracket.
- Alternative minimum tax exclusion will decrease, resulting in more taxpayers paying this alternative tax.
- Long term capital gains will be taxed at higher rates – up to 20%, instead of the maximum 15% of pre-2013 years.
- Qualified dividends will be taxed at ordinary income rates, instead of the pre-2013 maximum rate of 15%.
- Estate and gift tax rates increase to a maximum rate of 55%, instead of the 35% pre-2013 maximum rate.
- The amount of tax-free transfers to other individuals by gift or through inheritance will be capped at $1 million, instead of the current cap of $5.12 million.
- The cap on the allowable write-off of business furniture, equipment and qualified leasehold improvements in the year of purchase, sometimes called Section 179 expensing, will decrease from $139,000 in 2012 to $25,000 in 2013.
- Bonus depreciation, another accelerated method of deducting the cost of business furniture, equipment and qualified leasehold improvements, will expire at the end of 2012.
Please contact us to discuss planning opportunities and estimate the effect the possible tax law changes will have on your income tax liabilities for the coming year. We don’t have a crystal ball to predict what will happen, but we will be able to prepare you for the possible changes.
Please visit our e-Newsletter page and check out the 2012 Year-End Planning Newsletter for further insight and details.
-Barb Franko, CPA