What is the Tax Component of the Fiscal Cliff? Anticipated Year End Tax Changes Amanda Wilson & Joe Zitzka Orlando, Florida www.Lowndes-Law.com
November 27, 2012
Orlando, Florida | www.Lowndes-Law.com
Ordinary Income Tax Rates Bush Era
2013
10%
Gone
15%
15%
25%
28%
28%
31%
33%
36%
35%
39.6%
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Capital Gain Tax Rates Bush Era
2013
0% [10% &15% brackets]
10%
15%
20% [8% or 18% for certain property held more than 5 years]
Orlando, Florida | www.Lowndes-Law.com
Dividends • Qualified dividends are treated as capital gains, taxable at 15%, as a result of Bush tax cuts.
• This treatment expires at the end of the year, and dividends will return to ordinary income treatment (up to 39.6%). • Also subject to new 3.8% tax.
Orlando, Florida | www.Lowndes-Law.com
AMT Provisions Expiring • The 0% and 15% capital gains rate for AMT • Child tax credit offset • AMT preference for excluded gain on disposition of qualified small business stock. • Result is more exposure to AMT.
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Expensing Limitations • Expensing limitation for depreciable property will be reduced from $139,000 (with phaseout threshold of $560,000) to $25,000 (with phaseout threshold is $200,000). • 50% first-year additional bonus depreciation expires this year.
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Payroll Tax Increases • Reduced 4.2% payroll tax rate for employee’s portion of the Social Security payroll tax expires this year.
• New rate will be 6.2%. • In addition, the Medicare tax rate will increase by .9 percent (from 1.45 percent to 2.35 percent) on wages for certain employees (i.e., those with wages over $200,000 for single filers, wages over $250,000 for joint filers, and wages over $125,000 for persons who are married but filing separately).
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3.8% Tax on Net Investment Income • Applies to most joint filers with adjusted gross income above $250,000 and single filers with adjusted gross income above $200,000. • The tax is essentially a flat tax at a 3.8% rate on investment income above the $250,000/$200,000 threshold. • The tax applies to: dividends; rents; royalties; interest, except municipal-bond interest; short and long-term capital gains; the taxable portion of annuity payments; income from the sale of a principal home above the $250,000/$500,000 exclusion; a net gain from the sale of a second home; and passive income from real estate and investments in which a taxpayer does not materially participate.
Orlando, Florida | www.Lowndes-Law.com
Estate and Gift Tax Exemption • Estate, gift, and generation-skipping transfer tax rate is 35% and taxpayers have an exemption amount of $5.12 million.
• Individuals can make a tax-free transfer of a maximum of $5.12 million to reduce their estates. Additionally, if an election is made, the unused estate tax exemption for the first spouse to die can be transferred to the surviving spouse (i.e., the surviving spouse’s exemption amount is increased by the deceased spouse’s unused exemption amount). • Unless Congress acts, 2000 rates and rules will return. Under these rules, the maximum exemption amount will be reduced to $1 million on January 1, 2013. Additionally, the maximum estate tax rate will increase to 55%.
Orlando, Florida | www.Lowndes-Law.com
Circular 230 •
To the extent that this communication and the attachment(s) hereto, if any, may contain written advice concerning or relating to a Federal (U.S.) tax issue, United States Treasury Department Regulations (Circular 230) require that we (and we do hereby) advise and disclose to you that, unless we expressly state otherwise in writing, such tax advice is not written or intended to be used, and cannot be used by you (the addressee), or other person(s), for purposes of (1) avoiding penalties imposed under the United States Internal Revenue Code or (2) promoting, marketing or recommending to any other person(s) the (or any of the) transaction(s) or matter(s) addressed, discussed or referenced herein. Each taxpayer should seek advice from an independent tax advisor with respect to any Federal tax issue(s), transaction(s) or matter(s) addressed, discussed or referenced herein based upon his, her or its particular circumstances.
