October 9, 2012
In the accounting industry we are always on the edge of our seats wondering how the future tax environment will change. This year’s election, in addition to the scheduled expiration of many incentives and reduced tax rates, makes tax planning that much more important. As the end of 2012 gets closer, it is imperative that taxpayers take advantage of the current opportunities while they are still available.
At Baker Milligan, we want our clients to be cognizant of the possible changes so that they don’t miss out on the opportunities available in 2012. Since every business and individual’s tax situation is unique, please call us to discuss how these changes will affect you. We are ready to discuss the best plan of action to take advantage of the current available opportunities. Below, we’ve compiled into brief summaries some of the more significant tax changes and opportunities.
Currently, the highest marginal federal tax rate for ordinary income earned by individual taxpayers is 35 percent. On January 1, 2013, that rate will increase to 39.6 percent. The next highest marginal rate for ordinary income will increase from 33 percent to 36 percent. Taxpayers may benefit from recognition of ordinary income in 2012 and pushing deductions and expenses into 2012 when possible to take advantage of expiring rates. This means planning to maximize the recognition of taxable income this year, as opposed to 2013.
A temporary opportunity for tax advantaged wealth transfer is set to expire at the end of the year. The Tax Relief Act of 2010 increased the estate and gift tax lifetime exemptions to $5 million for individuals and $10 million for married couples, while the estate and gift tax rate remained at 35 percent.
But, these tax advantaged conditions will only last until the end of this year. Unless Congress takes additional action, the lifetime exemption will drop to $1 million in 2013, and the gift tax rate will increase to 55 percent. What does this all mean? It means an individual transferring $5 million in assets in 2012 might pay no gift tax, while that same transfer in 2013 could generate a $2.2 million tax liability. That’s a huge penalty to pay for not taking the time to plan effectively.
Don’t wait any longer to take advantage of this opportunity. Planning for significant gifts, especially those involving obtaining appraisals or valuations, requires significant time to execute correctly.
Currently, the highest marginal federal tax rate for gains on the sale of capital assets is 15 percent. That rate is scheduled to increase to 20 percent in 2013. Stocks, mutual funds, real estate and other assets may be subject to capital gains tax. The Affordable Care Act of 2010 also included a 3.8 percent tax on “net investment income” to the extent that “net investment income” (gains from the sale of property other than property held in a trade or business) plus adjusted gross income exceeds $250,000. The combined effect of the increased capital gains rate and the new net investment income tax means that for some taxpayers, gains from sales of capital assets in 2013 and beyond could be taxed at a federal rate of 23.8 percent, rather than the 15 percent rate in place through the end of this year.
Taxpayers who are contemplating the sale of an appreciated capital asset should consider the benefits of selling the asset prior to the end of this year. The tax liability generated by the sale of the asset is likely to be considerably higher after the end of 2012.
Section 179 of the Internal Revenue Code allows a business taxpayer to treat the cost of certain property as an expense during the year in which the property is placed in service instead of capitalizing the cost and then depreciating it over a number of years. For 2012, the maximum Section 179 expense is set at $125,000. The “phase out”, where the allowable expense begins to be reduced dollar for dollar of the benefit, begins at $500,000. For 2013, the maximum Section 179 expense amount is scheduled to decrease to $25,000 and the “phase out” begins at $200,000. So a qualifying $300,000 purchase in 2012 could produce a $125,000 179 deduction, while that same purchase in 2013 would produce no 179 deduction.
In addition to Section 179, through the end of 2012, certain types of property may also qualify for 50 percent bonus depreciation. Bonus depreciation allows a depreciation deduction on qualified property, in addition to benefits from Section 179.
Current Section 179 limits and 50 percent bonus depreciation provide substantial incentives to make qualifying capital purchases in 2012. Businesses might consider making anticipated capital business expenditures in 2012 to take advantage of the more favorable expensing opportunities.
If you have any questions about the available opportunities, please feel free to contact us. We can take a look together at how these changes and opportunities may affect you.
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