2013 Income Tax Update

Overview

This may be the final year that the so-called Bush tax cuts remain in effect, unless Congress acts to further extend them. The Bush tax cuts, enacted in 2001 and 2003, were originally scheduled to expire for tax years beginning in 2011. However, President Obama signed legislation in late 2010 that temporarily extended the Bush tax cuts through 2012.

Many commentators agree that Congress is unlikely to extend the Bush tax cuts prior to the November elections, but uncertainty remains as to whether Congress will take action following the elections. Provided that Congress fails to extend the Bush tax cuts, many significant rate changes and other substantive changes will take effect in 2013. This article summarizes the major federal income tax changes that are scheduled take effect in 2013 if Congress allows the Bush tax cuts to expire, certain other changes scheduled to take effect independent of the Bush tax cuts, and planning strategies to reduce the impact of these changes. If you or your company would like to discuss any of these scheduled changes or planning strategies, please contact any member of the Tax and Employee Benefits Team.

Individual Income Tax Rates

If Congress allows the Bush tax cuts to expire, ordinary income tax rates will increase for most individual taxpayers beginning in 2013. As discussed below, qualified dividend income that is currently taxed at long-term capital gain rates will be taxed at these higher ordinary income rates. The following table sets forth the scheduled rate increases, using 2012 dollar amounts which will be adjusted for inflation in 2013.

Tax Brackets (2012 Dollar Amounts)				Marginal Rate
Unmarried Filers		Married Joint Filers
Over	But Not Over	Over	But Not Over	2012	2013
$0	$8,700	$0	$17,400	10%	15%
8,700	35,350	17,400	70,700*	15%	15%
35,350	85,650	70,700*	142,700	25%	28%
85,650	178,650	142,700	217,450	28%	31%
178,650	388,350	217,450	388,350	33%	36%
388,350	...	388,350	...	35%	39.6%

* In 2013, this dollar amount will decrease to 167% of the amount for unmarried taxpayers in the same bracket (which is $58,900 in 2012), rather than 200% of the amount for unmarried taxpayers under current law. This change will have the effect of putting more middle-income joint filers in the 28% bracket and increasing the "marriage penalty" for many taxpayers.

Long-Term Capital Gain Rates

The maximum rate on long-term capital gain is scheduled to increase from 15 to 20 percent in 2013. Individual taxpayers in the 10 and 15 percent ordinary income tax brackets currently pay no tax on long-term capital gain. These taxpayers are scheduled to be subject to a 10 percent long-term capital gain rate in 2013. An 18 percent maximum rate will apply to capital assets purchased after 2000 and held for more than five years. Additionally, the 3.8 percent Medicare contribution tax discussed below will increase the effective rate of tax on long-term capital gains for certain higher-income taxpayers to as high as 23.8 percent. The following table sets forth the scheduled rate increases.

Maximum Rates	2012	2013	2013 (including Medicare contribution tax)
Long-Term Capital Gain	15%	20%	23.8%
Qualified 5-Year Capital Gain	15%	18%	21.8%

Planning Strategies. If Congress fails to take action as the year-end approaches, investors who were otherwise considering selling appreciated stocks or securities in early 2013 should give additional consideration to selling in 2012 to take advantage of the lower rate, assuming they will have held the asset for longer than one year. Additionally, business owners who are considering selling their business in the near future should consult with their tax adviser to discuss whether electing out of the installment method for an installment sale in 2012 would be more advantageous from a tax planning perspective.

Dividend Income Rates

The Bush tax cuts created the concept of "qualified dividend income," which currently allows dividends received from domestic corporations and certain foreign corporations to be taxed at the taxpayer's long-term capital gain rate. Additionally, qualified dividend income earned by mutual funds and exchange-traded funds may be distributed to shareholders and treated as qualified dividend income by the shareholder. Prior to the Bush tax cuts, all dividend income was taxed as ordinary income. If Congress fails to extend these provisions, the qualified dividend income provisions will expire, and all dividends will once again be taxed as ordinary income. Most notably, taxpayers in the highest marginal income tax bracket who currently enjoy the 15 percent rate on qualified dividend income will be taxed at 39.6 percent for dividends received from the same issuer in 2013. Additionally, the 3.8 percent Medicare contribution tax discussed below will increase the effective rate of tax on dividend income for certain higher-income taxpayers to as high as 43.4 percent. The following table sets forth the scheduled rate increases.

Maximum Rates	2012	2013	2013 (including Medicare contribution tax)
Qualified Dividend Income	15%	39.6%	43.4%
Ordinary Dividend Income	35%	39.6%	43.4%

Planning Strategies. Because of the impending increase to tax rates applicable to dividends, owners of closely held corporations should consider declaring and paying a larger-than-normal dividend this year if the corporation has sufficient earnings and profits. Owners should carefully plan any such distributions, as distributions in excess of the corporation's earnings and profits will reduce the shareholder's stock basis and subject the shareholder to increased long-term capital gain taxable at potentially higher rates when the shareholder subsequently disposes of the stock. Owners of closely held corporations should consult their tax adviser to discuss dividend planning and other strategies such as leveraged recapitalizations to take advantage of the low rate currently applicable to qualified dividend income.

New Medicare Contribution Tax

A new 3.8 percent Medicare contribution tax on certain unearned income of individuals, trusts, and estates is scheduled to take effect in 2013. This provision, which was enacted as part of the Patient Protection and Affordable Care Act (PPACA), is scheduled to take effect regardless of whether Congress extends the Bush tax cuts. For individuals, the 3.8 percent tax will be imposed on the lesser of the individual's net investment income or the amount by which the individual's modified adjusted gross income (AGI) exceeds certain thresholds ($250,000 for married individuals filing jointly or $200,000 for unmarried individuals). For purposes of this tax, investment income includes interest, dividends, income from trades or businesses that are passive activities or that trade in financial instruments and commodities, and net gains from the disposition of property held in a trade or business that is a passive activity or that trades in financial instruments and commodities. Investment income excludes distributions from qualified retirement plans and excludes any items that are taken into account for self-employment tax purposes.

Planning Strategies. Until the Department of Treasury issues clarifying regulations, uncertainty remains regarding which types of investment income will be subject to this new tax. Taxpayers whose modified AGI exceeds the thresholds described above should consult their tax adviser to plan for the imposition of this tax. Specifically, business owners should discuss with their tax adviser whether it would be more advantageous to become "active" in their business rather than "passive" for purposes of this tax. Owners of certain business entities such as partnerships and LLCs should also consider whether a potential change to "active" status in the business could trigger self-employment tax liability. Investors in pass-through entities such as partnerships, LLCs, and S corporations should also review the tax distribution language in the relevant entity agreement to ensure that future tax distributions will account for this new tax.

Additionally, individuals will have a greater incentive to maximize their retirement plan contributions since distributions from qualified retirement plans are not included in investment income for purposes of the tax. While distributions from traditional IRAs and 401(k) plans are not included in investment income for purposes of the tax, they do increase an individual's modified AGI and may push the individual above the modified AGI threshold, thus subjecting the individual's other investment income to the tax. Individuals may also consider converting their traditional retirement plan into a Roth IRA or Roth 401(k) this year since Roth distributions are not included in investment income and do not increase the individual's modified AGI. Although the Roth conversion would be taxable at ordinary rates, individuals should consider converting this year to avoid the higher ordinary rates scheduled to take effect in 2013.

Reduction in Itemized Deductions

Under current law, itemized deductions are not subject to any overall limitation. If the Bush tax cuts expire, an overall limitation on itemized deductions for higher-income taxpayers will once again apply. Most itemized deductions, except deductions for medical and dental expenses, investment interest, and casualty and theft losses, will be reduced by the lesser of 3 percent of AGI above an inflation-adjusted threshold or 80 percent of the amount of itemized deductions otherwise allowable. The inflation-adjusted threshold is projected to be approximately $174,450 in 2013 for all taxpayers except those married filing separately.

Planning Strategies. Because the overall limitation on itemized deductions will automatically apply to higher-income taxpayers, planning strategies are limited and highly individualized. Accelerating certain itemized deductions in 2012 to avoid the limitation may trigger alternative minimum tax (AMT) liability in 2012. Taxpayers should consult with their tax adviser to discuss the impact of this limitation and whether it may be advantageous to accelerate certain deductions, if possible, to 2012.

Reduction in Election to Expense Certain Depreciable Business Assets

Taxpayers may currently elect to expense certain depreciable business assets (Section 179 assets) in the year the assets are placed into service rather than capitalize and depreciate the cost over time. Section 179 assets include machinery, equipment, other tangible personal property, and computer software. Computer software falls out of this definition in 2013. The maximum allowable expense cannot exceed a specified amount, which is reduced dollar-for-dollar by the amount of Section 179 assets placed into service exceeding an investment ceiling. Both the maximum allowable expense and the investment ceiling will decrease next year, as shown in the table below.

	2012	2013
Maximum allowable expense	$139,000	$25,000
Investment ceiling	560,000	200,000

Planning Strategies. The change in law will both significantly decrease the dollar amount of Section 179 assets that may be expensed and cause the phaseout to be triggered at a lower threshold. Accordingly, business owners should consider placing Section 179 assets into service in 2012 to take advantage of the immediate tax benefit. Additionally, purchases of qualifying computer software should accelerated to 2012 if possible, as such purchases will no longer qualify for expensing in 2013.

AMT Preference for Gain Excluded on Sale of Qualified Small Business Stock

Taxpayers may exclude from their income all or part of the gain from selling stock of certain qualified C corporations that the taxpayer held for more than five years. The percentage of gain that may be excluded depends upon when the taxpayer acquired the stock (a 100 percent exclusion applies only to qualified stock acquired between September 28, 2010 and December 31, 2011). Under current law, 7 percent of the excluded gain is a preference item for AMT purposes. In 2013, this tax preference is scheduled to increase to 42 percent of the excluded gain (or 28 percent of the excluded gain for stock acquired after 2000). Gain excluded on stock for which the 100 percent exclusion applies will not be a tax preference for AMT purposes.

Planning Strategies. The increase in the percentage of excluded gain that will be treated as a tax preference for AMT purposes effectively eliminates the tax benefit of selling qualified small business stock. Those who are structuring a new business venture should reconsider forming a C corporation to take advantage of this provision, and should consult with their tax adviser to consider other entity choices. Owners of qualifying businesses who are considering selling their stock in the near future should also give additional consideration to a 2012 sale to take advantage of the current 7 percent AMT preference rate before the AMT preference rate increases in 2013.

Built-in Gains Tax Applicable to Certain S Corporations

Businesses that have converted from a C corporation to an S corporation are potentially subject to a corporate-level 35 percent built-in gains tax (BIG tax) on the disposition of their assets to the extent that the aggregate fair market value of the corporation's assets exceeded the aggregate basis of such assets on the conversion date. In the case of fiscal years beginning in 2011, the BIG tax does not apply if the five-year anniversary of the conversion date has occurred prior the beginning of the fiscal year. However, in the case of fiscal years beginning in 2012 or thereafter, the BIG tax will not apply only if the ten-year anniversary of the conversion date has occurred prior to the beginning of the fiscal year.

Planning Strategies. Owners of S corporations that are still in their 2011 fiscal year and that are considering selling corporate assets (or stock if a Section 338(h)(10) election will be made) within the near future should consider selling in the current fiscal year, if possible, to the extent their conversion to S corporation status occurred more than five, but less than ten years prior to the beginning of the fiscal year. For example, a C corporation that converted to an S corporation at the beginning of its fiscal year commencing October 1, 2005 would not be subject to the BIG tax on any of its built-in gain if it sold assets at any time prior to September 30, 2012, but would be subject to the tax if it sold assets on or after October 1, 2012.

Other Changes Affecting Individuals

• Additional employee portion of payroll tax. The employee portion of the hospital insurance payroll tax will increase by 0.9 percent (from 1.45 percent to 2.35 percent) on wages over $250,000 for married taxpayers filing jointly and $200,000 for other taxpayers. The employer portion of this tax remains 1.45 percent for all wages. This provision, which was enacted as part of the PPACA, is scheduled to take effect in 2013 regardless of whether Congress extends the Bush tax cuts.


• Phaseout of personal exemptions. A higher-income taxpayer's personal exemptions (currently $3,800 per exemption) will be phased out when AGI exceeds an inflation-indexed threshold. The inflation-adjusted threshold is projected to be $261,650 for married taxpayers filing jointly and $174,450 for unmarried taxpayers.


• Medical and Dental Expense Deduction. As part of the PPACA, the threshold for claiming the itemized medical and dental expense deduction is scheduled to increase from 7.5 to 10 percent of AGI. The 7.5 percent threshold will continue to apply through 2016 for taxpayers (or spouses) who are 65 and older.


• Decrease in standard deduction for married taxpayers filing jointly. The standard deduction for married taxpayers filing jointly will decrease to 167% (rather than the current 200%) of the standard deduction for unmarried taxpayers (currently $5,950). In 2012 dollars, this would lower the standard deduction for joint filers from $11,900 to $9,900.


• Above-the-line student loan interest deduction. This deduction will apply only to interest paid during the first 60 months in which interest payments are required, whereas no such time limitation applies under current law. The deduction will phase out over lower modified AGI amounts, which are projected to be $75,000 for joint returns and $50,000 for all other returns.


• Income exclusion for employer-provided educational assistance. This exclusion, which allows employees to exclude from income up to $5,250 of employer-provided educational assistance, is scheduled to expire.


• Home sale exclusion. Heirs, estates, and qualified revocable trusts (trusts that were treated as owned by the decedent immediately prior to death) will no longer be able to take advantage of the $250,000 exclusion of gain from the sale of the decedent's principal residence.


• Credit for household and dependent care expenses. Maximum creditable expenses will decrease from $3,000 to $2,400 (for one qualifying individual) and from $6,000 to $4,800 (for two or more individuals). The maximum credit will decrease from 35 percent to 30 percent of creditable expenses. The AGI-based reduction in the credit will begin at $10,000 rather than $15,000.


• Child credit. The maximum credit will decrease from $1,000 to $500 per child and cannot be used to offset AMT liability.


• Earned Income Tax Credit. The phaseout ranges for claiming the credit, which vary depending on the number of qualifying children, are scheduled to decrease for joint returns. Further, the credit will be reduced by the taxpayer's AMT liability.

Other Withholding Rate Changes
The following employer withholding rate changes will take effect in 2013:

	2012	2013
Employee portion of FICA payroll taxes	4.2%	6.2%
Backup withholding rate on reportable payments	28%	31%
Minimum witholding rate under flat rate method...
...on supplemental wages up to $1 million	25%	28%
...on supplemental wages in excess of $1 million	35%	39.6%
Voluntary withholding rate on unemployment benefits	10%	15%

Foreign Account Tax Compliance Act

Regardless of whether Congress extends the Bush tax cuts, beginning in 2014, a new 30 percent withholding tax will be imposed on certain withholdable payments paid to foreign financial institutions (FFIs) and non-financial foreign entities (NFFEs) unless they collect and disclose to the IRS information regarding their direct and indirect U.S. account holders. FFIs include foreign entities that accept deposits in the ordinary course of a banking or similar business, that hold financial assets for the account of others as a substantial part of their business, or that are engaged primarily in the business of investing or trading in securities, commodities, and partnership interests. Any foreign entity that is not an FFI is an NFFE.

Withholdable payments will include U.S.-source interest, dividends, fixed or determinable annual or periodical income, and U.S.-source gross proceeds from sales of property that produce interest and dividend income. While the withholding obligation on withholdable payments to FFIs and NFFEs does not begin until 2014, FFIs will need to enter into agreements with the IRS by June 30, 2013 to avoid being subject to the withholding tax. In general, under such agreements, FFIs must agree to provide the IRS with certain information including the name, address, taxpayer identification number and account balance of direct and indirect U.S. account holders, and must agree to comply with due diligence and other reporting procedures with respect to the identification of U.S. accounts.

Depreciation and Changes in Use of Real Property

 

Depreciation

For income tax purposes, taxpayers that own rental property with gross receipts from residential or nonresidential uses should heed the rules on accounting for depreciation. This item discusses the distinction between residential and nonresidential property, depreciation, and the application of the change-in-use regulations if a rental property changes from residential use to nonresidential or vice versa.

Dwelling-Unit and Gross-Receipts Tests

Sec. 168(e)(2) defines residential rental property as any building or structure from which 80% or more of the gross rental income for the tax year is from dwelling units. Nonresidential real property is Sec. 1250 property that is not residential rental property or that does not have a class life of less than 27.5 years.

In determining whether a property meets the 80%-gross-receipts test to qualify as residential rental property, taxpayers may include in gross rental income the rental value of any portion of the building that they occupy. For hotels, motels, and other establishments, the 80%-gross-receipts test is disregarded if more than 50% of the dwelling units are used on a “transient basis.”

For purposes of defining residential rental property, “dwelling unit” means a house or apartment used to provide living accommodations in a building or structure, but it does not include a unit in a hotel, motel, or other establishment in which more than 50% of the units are used on a transient basis. Former Regs. Secs. 1.167(k)-3(c)(1) and (2), which were removed in 1993, provided that a dwelling unit was used on a transient basis if, for more than one-half of the days in which the unit was occupied on a rental basis during the taxpayer’s tax year, it was occupied by a tenant or series of tenants, each of whom occupied the unit for less than 30 days. If a dwelling unit was occupied subject to a sublease, the taxpayer looked to the sublessee to determine whether the dwelling unit was used on a transient basis.

The definition of dwelling units indicates that, under the right circumstances, properties such as nursing homes, retirement homes, and college dormitories can qualify as residential rental property as long as they do not run afoul of the transient-basis requirement. This assumes the 1993 definition of “transient basis” still applies, as the term still appears in Sec. 168(e)(2)(A)(ii)(I), which defines “dwelling unit.” In CCM 201147025, the Office of Chief Counsel cited Regs. Secs. 1.167(k)-3(c)(1) and (2) in determining that a taxpayer’s assisted-living facilities qualified as residential real property. Assuming a vacation home is subject to the transient-basis rules, the vacation home is classified as a residential rental property if the gross rental income test is met and it is rented to each tenant more than 30 days for more than 50% of the days in a tax year it is rented; otherwise, the vacation home would be classified as nonresidential real property.

Depreciation Methods, Periods, and Conventions

Sec. 167(a) permits a depreciation deduction for the exhaustion and wear and tear of property used in a trade or business or held for the production of income. Sec. 168 sets forth the methods, periods, and conventions by which a taxpayer can depreciate tangible property as permitted by Sec. 167(a).

In the case of residential rental property and nonresidential real property, Sec. 168(b)(3) states that the applicable depreciation method is the straight-line method. Sec. 168(c) states that the applicable recovery period is 27.5 years for residential rental property and 39 years for nonresidential real property. The applicable convention to be used for both residential rental property and nonresidential real property per Sec. 168(d) is the midmonth convention.

Certain property identified by Sec. 168(g) (tangible property that during the tax year is used predominantly outside the United States and certain other property) is depreciated under the alternative depreciation system (ADS). Residential rental property and nonresidential real property subject to the ADS is depreciated using the straight-line method, a recovery period of 40 years, and the midmonth convention.

Changes in Use

Because the gross rental income test is “for the taxable year,” the 80% test needs to be calculated annually. The difference in depreciation rates for residential rental property vs. nonresidential real property can be considerable.

Example: In January 2010, taxpayer X placed in service a building in New York state that met the 80%-gross-receipts test and the dwelling-unit requirement and had no transient-basis tenants. Therefore, the property met the definition of residential rental property and was depreciated using the straight-line method at an annual rate of approximately 3.6364% (12 months ÷ [12 months × 27.5 years]). (The annual depreciation rate is different in the first and last year the property is placed in service because of the application of the midmonth convention.)

In 2011, the property failed to meet the 80%-gross-receipts test and, thus, no longer qualified as residential rental property. Therefore, since the property is now nonresidential real property, it is depreciated using the straight-line method at an annual rate of approximately 2.5641% (12 months ÷ [12 months × 39 years]). (The annual depreciation rate is different in the first and last year the property is placed in service because of the application of the midmonth convention.)

Residential rental property is depreciated approximately 30% (1 – [2.5641 ÷ 3.6364]) faster than nonresidential real property. The difference can amount to a significant return on an investment via tax savings, but it also can be a big issue upon audit.

Regs. Sec. 1.168(i)-4 provides the rules for determining the depreciation allowance for MACRS property when the use changes in the hands of the same taxpayer. Use changes include when property is converted from personal property to business or income-producing use and vice versa, and when the change in the use results in a different recovery period and/or depreciation method. The allowance for depreciation under this section constitutes the depreciation deductions permitted under Sec. 167(a).

A change in the use of MACRS property occurs when the primary use of the MACRS property in the tax year differs from that of the immediately preceding tax year. The primary use of MACRS property may be determined in any reasonable manner that is consistently applied. If the primary use of MACRS property changes, the depreciation allowance for the year of change is determined as though the use had changed on the first day of the year of change.

If a change in use results in a shorter recovery period and/or a depreciation method that is more accelerated than the method used before the change in use, the taxpayer has two options: (1) The taxpayer can compute the depreciation allowance using the shorter and/or more accelerated depreciation method in the year the change in use occurred, or (2) the taxpayer may elect to continue determining the depreciation allowance as though the change in use had not occurred. These options provide a planning opportunity to suit a taxpayer’s need for more or less accelerated depreciation deductions. For example, a taxpayer with excess net operating loss carryovers might not be able to use the maximum depreciation deductions permitted and may want to use the longer, less accelerated depreciation method.

If a change in use results in a longer recovery period and/or less accelerated depreciation method than before the change in use, the taxpayer must compute the depreciation allowance using the longer and/or less accelerated depreciation method in the year the change in use occurred.

A change in computing the depreciation allowance in the year of change for property subject to Regs. Sec. 1.168(i)-4 is not a change in method of accounting under Sec. 446(e). To make the election or to disregard the election, a taxpayer needs only to complete Form 4562, Depreciation and Amortization (Including Information on Listed Property), in the year of change. However, the regulations under Secs. 446(e) and 481 apply if the taxpayer does not account for the depreciation allowance in the manner set forth by Regs. Sec. 1.168(i)-4 or revokes the election to disregard the change in use. If Secs. 446(e) and 481 do apply, the taxpayer should file a Form 3115, Application for Change in Account Method, to request an automatic change.

Property affected by the change-in-use regulations is not eligible for special depreciation deductions in the year of change, as otherwise permitted in Sec. 168(k) (bonus depreciation), Sec. 179 (election to expense certain depreciable business assets (generally not applicable to residential and nonresidential property)), and Sec. 1400L (tax benefits for New York Liberty Zone property). Additionally, for purposes of determining whether the midquarter convention applies to other MACRS property placed in service during the year, the change-in-use property is not taken into account.

Regs. Sec. 1.168(i)-4 also discusses the applicability of and options to use depreciation tables in the calculation, the rules to compute the new depreciation allowance, and assets subject to ADS.

Cost Segregation

Under the former investment tax credit (ITC) rules in Regs. Sec. 1.48-1(c), as interpreted by the Tax Court in Hospital Corp. of America, 109 T.C. 21 (1997), items in a building that qualify as tangible personal property may be separately depreciated under MACRS as personal property. Furthermore, the court held that if a building component is not personal property under the former ITC rules, it is considered a structural component and may not be depreciated separately. Therefore, a cost-segregation study identifying the structural components of specific units in a building to maximize depreciation would not be helpful to the owner(s) of a building that has tenants that use separate and identifiable units for business purposes and other units as their non–transient-basis dwelling units.

Under the temporary regulations in T.D. 9564 that apply to tax years beginning on or after Jan. 1, 2012, a taxpayer may retire a structural component of a building and use any reasonable method to allocate a cost to the component disposed of with respect to the larger asset, i.e., the building.

Conclusion

Many tax practitioners’ clients own one or more rental properties to which the above rules apply. Tax practitioners need to communicate continually with those clients that own rental properties with both residential and nonresidential receipts and test whether the property has changed use and the effect of the change on the clients’ tax returns.

2013 Tax Planning: 5 Reasons to Start Now

1. The 2013 Tax Season Is Closer than You Think

 

Industry experts generally agree that proper tax planning takes an average of six months – the time it often takes experts to educate themselves on all available opportunities, determine the best approach, and implement the plan. When you consider that six months from today puts us in March 2013, suddenly next year’s tax season doesn't seem so far away. If you really want to get the best tax outcomes in 2013: the time to start planning is now.

2. Uncertainty Looms Over Next Year’s Tax Climate

 

Next year’s tax climate can be best characterized by its extreme uncertainty, which will be brought on by changes resulting from the Supreme Court upholding the Affordable Care Act, as well as by a number of provisions in the Bush tax cuts that are set to expire. This level of uncertainty will make early 2013 a chaotic time for tax planning, and it makes now an even more important time to get the planning process started.

3. You Could Still Benefit from Generous Tax Breaks that May Be Gone Next Year

 

With many provisions of the Bush tax cuts set to expire at year end, starting your 2013 tax planning now means you’ll still have a chance to take advantage of some breaks that may be history by year end. Rates are set to increase on federal income taxes (from 36 percent to 39.6 percent), long-term capital gains (from a maximum tax rate of 15 percent to 20 percent), and dividends (to be taxed as ordinary income). Waiting too long to plan for 2013 may cause you to miss out on some of these tax breaks for good.

4. The Estate Tax Is Set to Increase

 

Significant changes are also set to take place when it comes to the estate tax. This tax is set to increase from 35 percent this year to 45 percent next, and the lifetime exemption amount will go down from $5.12 million to $1 million – unless Congressional action is taken. These changes are likely to impact your plans for 2013, and they make it even more critical that you start the planning process immediately.

5. The Alternative Minimum Tax Will Greatly Expand its Reach

 

Another large tax provision certain to have an impact on many individuals is the higher Alternative Tax Exemption, or AMT patch. This exemption is set to drop from $74,450 this tax year to $45,000 next year. This means that not only will many more people have to pay the AMT patch, but the increase in taxable income will result in even more taxes that individuals pay next year. AMT may not have applied to you in the past, but this year, it may be one of many reasons for you to plan carefully for 2013.

“Regardless of what happens in Congress between now and the end of the year, people can still ensure economic stability for themselves and their future,” said Andrew Lattimer, a partner at BlumShapiro. “But the key is starting now by consulting your tax professionals while there is time to plan without being caught up in what is certain to be a chaotic early 2013."

 

Quarterly Tax Payments Information

For all the freelancers, small business owners and self-employed individuals out there, staying on top of when the estimated tax payments are due is important to help you stay within the IRS tax payment guideline and avoid penalty. Making estimated tax payments also helps you avoid financial shortfall when you file your tax returns. Here’s the full schedule for 2012 and 2013 tax year.

Quarter	Period	2012 Due Dates	2013 Due Dates
Q1	January 1 – March 31	April 17, 2012	April 15, 2013
Q2	April 1 – May 31	June 15, 2012	June 17, 2013
Q3	June 1 – August 31	September 17, 2012	September 16, 2013
Q4	September 1 – December 31	January 15, 2013	January 15, 2014

Remember you have to pay both the IRS and your State. Hopefully, you have been saving up for this and have money in a savings account to cover the tax payments.

Frequently Asked Questions

Shouldn’t the June date actually be July?

June the correct date. Q2 payment is due faster than the rest and you only have to pay taxes against 2 months’ worth of earnings (April and May). Subsequently, this means Q3 payment occurs in September and Q4 payment encompasses 4 months of income instead of three.

 

How can I lower my tax payments?

You can lower your tax liabilities by participating in a retirement plan designed for self-employed individuals and business owners.

Will the IRS send me the quarterly estimated tax forms in order for me to send in my estimated tax?

No, you have to calculate the amount for both the Federal and States taxes. For Federal, you have to complete Form 1040-ES and send it along with your payment. For State, you have to search online for the appropriate form, complete it and send it in with your payment.

Alternatively, you can submit your Federal payment electronically via EFTPS; and most States should have the online equivalent.

Where should I send the estimated tax payments?

For Federal payment, the answer depends on where you live. Check the instruction included in Form 1040-ES for the correct mailing address. Similarly, check with your State tax department for the correct mailing address for your State payment.

Do quarterly tax payments have to be received by the due date or just post marked by then?

The deadline is the postmarked date.

Can the quarterly payment amount change each quarter?

Yes, the amounts can be different for each quarter depending on your earnings.

Most Overlooked Tax Deductions

But think about it for a minute: Do you think that's the most common mistake . . . or simply the easiest to notice?

One thing we know for sure is that the opportunity to make mistakes is almost unlimited, and missed deductions can be the most costly. About 45 million of us itemize on our 1040s -- claiming more than $1 trillion worth of deductions. That's right: $1,000,000,000,000, a number rarely spoken out loud until Congress started tying itself up in knots trying to deal with the budget deficit and national debt.

Another 92 million taxpayers claim about $700 billion worth using standard deductions—and some of you who take the easy way out probably shortchange yourselves. (If you turned 65 in 2012, remember that you now deserve a bigger standard deduction than the younger folks.)

Yes, friends, tax time is a dangerous time. It's all too easy to miss a trick and pay too much. Years ago, the fellow who ran the IRS at the time told Kiplinger's Personal Finance magazine that he figured millions of taxpayers overpay their taxes every year by overlooking just one of the money-savers listed below.

 

State sales taxes

 

Although all taxpayers have a shot at this write-off, it makes sense primarily for those who live in states that do not impose an income tax. You must choose between deducting state and local income taxes or state and local sales taxes. For most citizens of income-tax states, the income tax is a bigger burden than the sales tax, so the income-tax deduction is a better deal.

The IRS has tables that show how much residents of various states can deduct, based on their income and state and local sales tax rates. But the tables aren't the last word. If you purchased a vehicle, boat or airplane, you get to add the sales tax you paid to the amount shown in the IRS table for your state.

The same goes for any homebuilding materials you purchased. These add-on items are easy to overlook, but big-ticket items could make the sales-tax deduction a better deal even if you live in a state with an income tax. The IRS has a calculator on its Web site to help you figure the deduction.

 

Reinvested dividends

 

This isn't really a tax deduction, but it is an important subtraction that can save you a bundle. And this is the break that former IRS commissioner Fred Goldberg told Kiplinger's that a lot of taxpayers miss.

If, like most investors, your mutual fund dividends are automatically used to buy extra shares, remember that each reinvestment increases your tax basis in the fund. That, in turn, reduces the taxable capital gain (or increases the tax-saving loss) when you redeem shares. Forgetting to include the reinvested dividends in your basis results in double taxation of the dividends -- once when they are paid out and immediately reinvested in more shares and later when they're included in the proceeds of the sale. Don't make that costly mistake. If you're not sure what your basis is, ask the fund for help.

 

 

Out-of-pocket charitable contributions

 

It's hard to overlook the big charitable gifts you made during the year, by check or payroll deduction (check your December pay stub).

But the little things add up, too, and you can write off out-of-pocket costs incurred while doing work for a charity. For example, ingredients for casseroles you prepare for a nonprofit organization's soup kitchen and stamps you buy for your school's fundraising mailing count as a charitable contribution. Keep your receipts and if your contribution totals more than $250, you'll need an acknowledgement from the charity documenting the services you provided. If you drove your car for charity in 2012, remember to deduct 14 cents per mile plus parking and tolls paid in your philanthropic journeys.

 

Student-loan interest paid by Mom and Dad

 

Generally, you can only deduct mortgage or student-loan interest if you are legally required to repay the debt. But if parents pay back a child's student loans, the IRS treats the money as if it was given to the child, who then paid the debt. So, a child who's not claimed as a dependent can qualify to deduct up to $2,500 of student-loan interest paid by Mom and Dad. And he or she doesn't have to itemize to use this money-saver. Mom and Dad can't claim the interest deduction even though they actually foot the bill since they are not liable for the debt.

 

Job-hunting costs

 

If you're among the millions of unemployed Americans who were looking for a job in 2012, we hope you kept track of your job-search expenses . . . or can reconstruct them. If you're looking for a position in the same line of work, you can deduct job-hunting costs as miscellaneous expenses if you itemize. Such expenses can be written off only to the extent that your total miscellaneous expenses exceed 2% of your adjusted gross income. Job-hunting expenses incurred while looking for your first job don't qualify. Deductible job-search costs include, but aren't limited to:
• Food, lodging and transportation if your search takes you away from home overnight
• Cab fares
• Employment agency fees
• Costs of printing resumes, business cards, postage, and advertising

 

The cost of moving for your first job

 

Although job-hunting expenses are not deductible when looking for your first job, moving expenses to get to that job are. And you get this write-off even if you don't itemize.

To qualify for the deduction, your first job must be at least 50 miles away from your old home. If you qualify, you can deduct the cost of getting yourself and your household goods to the new area. If you drove your own car, your mileage write-off depends on when during 2012 you moved. For moves from January 1 through the end of June, the standard mileage rate is 19 cents a mile; for moves during the second half of the year, a 23.5 cents a mile rate applies. In either case, boost your deduction by any amount you paid for parking and tolls.

 

 

Military reservists' travel expenses

 

Members of the National Guard or military reserve may tap a deduction for travel expenses to drills or meetings. To qualify, you must travel more than 100 miles from home and be away from home overnight. If you qualify, you can deduct the cost of lodging and half the cost of your meals, plus an allowance for driving your own car to get to and from drills. For qualifying trips during January through June, 2012, the standard mileage rate is 51 cents a mile; for driving during the second half of the year, the rate is 55.5 cents a mile. In any event, add parking fees and tolls. And, you don't have to itemize to get this deduction.

 

Deduction of Medicare premiums for the self-employed

 

Folks who continue to run their own businesses after qualifying for Medicare can deduct the premiums they pay for Medicare Part B and Medicare Part D and the cost of supplemental Medicare (medigap) policies. This deduction is available whether or not you itemize and is not subject the 7.5% of AGI test that applies to itemized medical expenses. One caveat: You can't claim this deduction if you are eligible to be covered under an employer-subsidized health plan offered by your employer (if you have a job as well as your business) or your spouse's employer.

 

Child-care credit

 

A credit is so much better than a deduction; it reduces your tax bill dollar for dollar. So missing one is even more painful than missing a deduction that simply reduces the amount of income that's subject to tax.

You can qualify for a tax credit worth between 20% and 35% of what you pay for child care while you work. But if your boss offers a child care reimbursement account – which allows you to pay for the child care with pre-tax dollars – that might be a better deal. If you qualify for a 20% credit but are in the 25% tax bracket, for example, the reimbursement plan is the way to go. (In any case, only expenses for the care of children under age 13 count.)

You can't double dip. Expenses paid through a plan can't also be used to generate the tax credit. But get this: Although only $5,000 in expenses can be paid through a tax-favored reimbursement account, up to $6,000 for the care of two or more children can qualify for the credit. So, if you run the maximum through a plan at work but spend even more for work-related child care, you can claim the credit on as much as $1,000 of additional expenses. That would cut your tax bill by at least $200.

 

Estate tax on income in respect of a decedent

 

This sounds complicated, but it can save you a lot of money if you inherited an IRA from someone whose estate was big enough to be subject to the federal estate tax.

Basically, you get an income-tax deduction for the amount of estate tax paid on the IRA assets you received. Let's say you inherited a $100,000 IRA, and the fact that the money was included in your benefactor's estate added $45,000 to the estate-tax bill. You get to deduct that $45,000 on your tax returns as you withdraw the money from the IRA. If you withdraw $50,000 in one year, for example, you get to claim a $22,500 itemized deduction on Schedule A. That would save you $6,300 in the 28% bracket.

 

 

State tax paid last spring

 

Did you owe tax when you filed your 2010 state income tax return in the spring of 2012? Then, for goodness' sake, remember to include that amount in your state-tax deduction on your 2012 federal return, along with state income taxes withheld from your paychecks or paid via quarterly estimated payments.

 

Refinancing points

 

When you buy a house, you get to deduct in one fell swoop the points paid to get your mortgage. When you refinance, though, you have to deduct the points on the new loan over the life of that loan. That means you can deduct 1/30th of the points a year if it's a 30-year mortgage. That's $33 a year for each $1,000 of points you paid -- not much, maybe, but don't throw it away.

Even more important, in the year you pay off the loan -- because you sell the house or refinance again -- you get to deduct all as-yet-undeducted points. There's one exception to this sweet rule: If you refinance a refinanced loan with the same lender, you add the points paid on the latest deal to the leftovers from the previous refinancing -- and deduct that amount gradually over the life of the new loan.

 

Jury pay turned over to your employer

 

Many employers continue to pay employees' full salary while they serve on jury duty, and some impose a quid pro quo: the employees have to turn over their jury pay to the company coffers. The only problem is that the IRS demands that you report those jury fees as taxable income. To even things out, you get to deduct the amount you give to your employer.

But how do you do it? There's no line on the Form 1040 labeled jury fees. Instead the write-off goes on line 36, which purports to be for simply totaling up deductions that get their own lines. Add your jury fees to the total of your other write-offs and write "jury pay" on the dotted line to the left.

 

American Opportunity Credit

 

This tax credit is available for up to $2,500 of college tuition and related expenses paid during the year. The full credit is available to individuals whose modified adjusted gross income is $80,000 or less ($160,000 or less for married couples filing a joint return). The credit is phased out for taxpayers with incomes above those levels. This credit is juicier than the old Hope credit – it has higher income limits and bigger tax breaks, and it covers all four years of college. And if the credit exceeds your tax liability, it can trigger a refund. (Most credits can reduce your tax to $0, but not get you a check from the IRS.)

 

 

Deduct those blasted baggage fees

 

In recent years airlines have been driving passengers batty with extra fees for baggage and for making changes in their travel plans. All together, such fees add up to billions of dollars each year. If you get burned, maybe Uncle Sam will help ease the pain. If you're self-employed and travelling on business, be sure to add those cost to your deductible travel expenses.

 

Credit for energy-saving home improvements

 

Although this credit has been scaled back, it still exists and might save you some money if you made energy-saving home improvements during 2012. The credit is worth 10% of the cost of qualifying energy savers including new windows and insulation. The maximum credit is $500 and, if you claimed this credit in the past, you're probably out of luck now. That $500 is the maximum credit allowed on all tax returns from 2006 to 2012.

There's also no dollar limit on the separate credit for homeowners who install qualified residential alternative energy equipment, such as solar hot water heaters, geothermal heat pumps and wind turbines. Your credit can be 30% of the total cost (including labor) of such systems installed through 2016.

 

Additional bonus depreciation

 

Business owners can write off 100% of the cost of qualified assets placed in service during 2012. This break applies only to new assets with recovery periods of 20 years or less, such as computers, machinery, equipment, land improvements and farm buildings. So don't miss out on this big tax benefit if you placed business assets in service during 2012.

 

Break on the sale of demutualized stock

 

Taxpayers won an important court battle with the IRS over the issue of demutualized stock. That's stock that a life insurance policyholder receives when the insurer switches from being a mutual company owned by policyholders to a stock company owned by stockholders. The IRS's longstanding position was that such stock had no tax basis, so that when the shares were sold, the taxpayer owed tax on 100% of the proceeds of the sale. But after a long legal struggle, a federal court ruled in 2009 that the IRS was wrong. The court didn't say what the basis of the stock should be, but many experts think it's whatever the shares were worth when they were distributed to policyholders. If you sold stock in 2012 that you received in a demutualization, be sure to claim a basis to hold down your tax bill.

2013 Federal Income Tax Updates

This may be the final year that the so-called Bush tax cuts remain in effect, unless Congress acts to further extend them. The Bush tax cuts, enacted in 2001 and 2003, were originally scheduled to expire for tax years beginning in 2011. However, President Obama signed legislation in late 2010 that temporarily extended the Bush tax cuts through 2012.

Many commentators agree that Congress is unlikely to extend the Bush tax cuts prior to the November elections, but uncertainty remains as to whether Congress will take action following the elections. Provided that Congress fails to extend the Bush tax cuts, many significant rate changes and other substantive changes will take effect in 2013. This article summarizes the major federal income tax changes that are scheduled take effect in 2013 if Congress allows the Bush tax cuts to expire, certain other changes scheduled to take effect independent of the Bush tax cuts, and planning strategies to reduce the impact of these changes. If you or your company would like to discuss any of these scheduled changes or planning strategies, please contact any member of the Tax and Employee Benefits Team.

Individual Income Tax Rates

If Congress allows the Bush tax cuts to expire, ordinary income tax rates will increase for most individual taxpayers beginning in 2013. As discussed below, qualified dividend income that is currently taxed at long-term capital gain rates will be taxed at these higher ordinary income rates. The following table sets forth the scheduled rate increases, using 2012 dollar amounts which will be adjusted for inflation in 2013.

Tax Brackets (2012 Dollar Amounts)				Marginal Rate
Unmarried Filers		Married Joint Filers
Over	But Not Over	Over	But Not Over	2012	2013
$0	$8,700	$0	$17,400	10%	15%
8,700	35,350	17,400	70,700*	15%	15%
35,350	85,650	70,700*	142,700	25%	28%
85,650	178,650	142,700	217,450	28%	31%
178,650	388,350	217,450	388,350	33%	36%
388,350	...	388,350	...	35%	39.6%

* In 2013, this dollar amount will decrease to 167% of the amount for unmarried taxpayers in the same bracket (which is $58,900 in 2012), rather than 200% of the amount for unmarried taxpayers under current law. This change will have the effect of putting more middle-income joint filers in the 28% bracket and increasing the "marriage penalty" for many taxpayers.

Long-Term Capital Gain Rates

The maximum rate on long-term capital gain is scheduled to increase from 15 to 20 percent in 2013. Individual taxpayers in the 10 and 15 percent ordinary income tax brackets currently pay no tax on long-term capital gain. These taxpayers are scheduled to be subject to a 10 percent long-term capital gain rate in 2013. An 18 percent maximum rate will apply to capital assets purchased after 2000 and held for more than five years. Additionally, the 3.8 percent Medicare contribution tax discussed below will increase the effective rate of tax on long-term capital gains for certain higher-income taxpayers to as high as 23.8 percent. The following table sets forth the scheduled rate increases.

Maximum Rates	2012	2013	2013 (including Medicare contribution tax)
Long-Term Capital Gain	15%	20%	23.8%
Qualified 5-Year Capital Gain	15%	18%	21.8%

Planning Strategies. If Congress fails to take action as the year-end approaches, investors who were otherwise considering selling appreciated stocks or securities in early 2013 should give additional consideration to selling in 2012 to take advantage of the lower rate, assuming they will have held the asset for longer than one year. Additionally, business owners who are considering selling their business in the near future should consult with their tax adviser to discuss whether electing out of the installment method for an installment sale in 2012 would be more advantageous from a tax planning perspective.

Dividend Income Rates

The Bush tax cuts created the concept of "qualified dividend income," which currently allows dividends received from domestic corporations and certain foreign corporations to be taxed at the taxpayer's long-term capital gain rate. Additionally, qualified dividend income earned by mutual funds and exchange-traded funds may be distributed to shareholders and treated as qualified dividend income by the shareholder. Prior to the Bush tax cuts, all dividend income was taxed as ordinary income. If Congress fails to extend these provisions, the qualified dividend income provisions will expire, and all dividends will once again be taxed as ordinary income. Most notably, taxpayers in the highest marginal income tax bracket who currently enjoy the 15 percent rate on qualified dividend income will be taxed at 39.6 percent for dividends received from the same issuer in 2013. Additionally, the 3.8 percent Medicare contribution tax discussed below will increase the effective rate of tax on dividend income for certain higher-income taxpayers to as high as 43.4 percent. The following table sets forth the scheduled rate increases.

Maximum Rates	2012	2013	2013 (including Medicare contribution tax)
Qualified Dividend Income	15%	39.6%	43.4%
Ordinary Dividend Income	35%	39.6%	43.4%

Planning Strategies. Because of the impending increase to tax rates applicable to dividends, owners of closely held corporations should consider declaring and paying a larger-than-normal dividend this year if the corporation has sufficient earnings and profits. Owners should carefully plan any such distributions, as distributions in excess of the corporation's earnings and profits will reduce the shareholder's stock basis and subject the shareholder to increased long-term capital gain taxable at potentially higher rates when the shareholder subsequently disposes of the stock. Owners of closely held corporations should consult their tax adviser to discuss dividend planning and other strategies such as leveraged recapitalizations to take advantage of the low rate currently applicable to qualified dividend income.

New Medicare Contribution Tax

A new 3.8 percent Medicare contribution tax on certain unearned income of individuals, trusts, and estates is scheduled to take effect in 2013. This provision, which was enacted as part of the Patient Protection and Affordable Care Act (PPACA), is scheduled to take effect regardless of whether Congress extends the Bush tax cuts. For individuals, the 3.8 percent tax will be imposed on the lesser of the individual's net investment income or the amount by which the individual's modified adjusted gross income (AGI) exceeds certain thresholds ($250,000 for married individuals filing jointly or $200,000 for unmarried individuals). For purposes of this tax, investment income includes interest, dividends, income from trades or businesses that are passive activities or that trade in financial instruments and commodities, and net gains from the disposition of property held in a trade or business that is a passive activity or that trades in financial instruments and commodities. Investment income excludes distributions from qualified retirement plans and excludes any items that are taken into account for self-employment tax purposes.

Planning Strategies. Until the Department of Treasury issues clarifying regulations, uncertainty remains regarding which types of investment income will be subject to this new tax. Taxpayers whose modified AGI exceeds the thresholds described above should consult their tax adviser to plan for the imposition of this tax. Specifically, business owners should discuss with their tax adviser whether it would be more advantageous to become "active" in their business rather than "passive" for purposes of this tax. Owners of certain business entities such as partnerships and LLCs should also consider whether a potential change to "active" status in the business could trigger self-employment tax liability. Investors in pass-through entities such as partnerships, LLCs, and S corporations should also review the tax distribution language in the relevant entity agreement to ensure that future tax distributions will account for this new tax.

Additionally, individuals will have a greater incentive to maximize their retirement plan contributions since distributions from qualified retirement plans are not included in investment income for purposes of the tax. While distributions from traditional IRAs and 401(k) plans are not included in investment income for purposes of the tax, they do increase an individual's modified AGI and may push the individual above the modified AGI threshold, thus subjecting the individual's other investment income to the tax. Individuals may also consider converting their traditional retirement plan into a Roth IRA or Roth 401(k) this year since Roth distributions are not included in investment income and do not increase the individual's modified AGI. Although the Roth conversion would be taxable at ordinary rates, individuals should consider converting this year to avoid the higher ordinary rates scheduled to take effect in 2013.

Reduction in Itemized Deductions

Under current law, itemized deductions are not subject to any overall limitation. If the Bush tax cuts expire, an overall limitation on itemized deductions for higher-income taxpayers will once again apply. Most itemized deductions, except deductions for medical and dental expenses, investment interest, and casualty and theft losses, will be reduced by the lesser of 3 percent of AGI above an inflation-adjusted threshold or 80 percent of the amount of itemized deductions otherwise allowable. The inflation-adjusted threshold is projected to be approximately $174,450 in 2013 for all taxpayers except those married filing separately.

Planning Strategies. Because the overall limitation on itemized deductions will automatically apply to higher-income taxpayers, planning strategies are limited and highly individualized. Accelerating certain itemized deductions in 2012 to avoid the limitation may trigger alternative minimum tax (AMT) liability in 2012. Taxpayers should consult with their tax adviser to discuss the impact of this limitation and whether it may be advantageous to accelerate certain deductions, if possible, to 2012.

Reduction in Election to Expense Certain Depreciable Business Assets

Taxpayers may currently elect to expense certain depreciable business assets (Section 179 assets) in the year the assets are placed into service rather than capitalize and depreciate the cost over time. Section 179 assets include machinery, equipment, other tangible personal property, and computer software. Computer software falls out of this definition in 2013. The maximum allowable expense cannot exceed a specified amount, which is reduced dollar-for-dollar by the amount of Section 179 assets placed into service exceeding an investment ceiling. Both the maximum allowable expense and the investment ceiling will decrease next year, as shown in the table below.

	2012	2013
Maximum allowable expense	$139,000	$25,000
Investment ceiling	560,000	200,000

Planning Strategies. The change in law will both significantly decrease the dollar amount of Section 179 assets that may be expensed and cause the phaseout to be triggered at a lower threshold. Accordingly, business owners should consider placing Section 179 assets into service in 2012 to take advantage of the immediate tax benefit. Additionally, purchases of qualifying computer software should accelerated to 2012 if possible, as such purchases will no longer qualify for expensing in 2013.

AMT Preference for Gain Excluded on Sale of Qualified Small Business Stock

Taxpayers may exclude from their income all or part of the gain from selling stock of certain qualified C corporations that the taxpayer held for more than five years. The percentage of gain that may be excluded depends upon when the taxpayer acquired the stock (a 100 percent exclusion applies only to qualified stock acquired between September 28, 2010 and December 31, 2011). Under current law, 7 percent of the excluded gain is a preference item for AMT purposes. In 2013, this tax preference is scheduled to increase to 42 percent of the excluded gain (or 28 percent of the excluded gain for stock acquired after 2000). Gain excluded on stock for which the 100 percent exclusion applies will not be a tax preference for AMT purposes.

Planning Strategies. The increase in the percentage of excluded gain that will be treated as a tax preference for AMT purposes effectively eliminates the tax benefit of selling qualified small business stock. Those who are structuring a new business venture should reconsider forming a C corporation to take advantage of this provision, and should consult with their tax adviser to consider other entity choices. Owners of qualifying businesses who are considering selling their stock in the near future should also give additional consideration to a 2012 sale to take advantage of the current 7 percent AMT preference rate before the AMT preference rate increases in 2013.

Built-in Gains Tax Applicable to Certain S Corporations

Businesses that have converted from a C corporation to an S corporation are potentially subject to a corporate-level 35 percent built-in gains tax (BIG tax) on the disposition of their assets to the extent that the aggregate fair market value of the corporation's assets exceeded the aggregate basis of such assets on the conversion date. In the case of fiscal years beginning in 2011, the BIG tax does not apply if the five-year anniversary of the conversion date has occurred prior the beginning of the fiscal year. However, in the case of fiscal years beginning in 2012 or thereafter, the BIG tax will not apply only if the ten-year anniversary of the conversion date has occurred prior to the beginning of the fiscal year.

Planning Strategies. Owners of S corporations that are still in their 2011 fiscal year and that are considering selling corporate assets (or stock if a Section 338(h)(10) election will be made) within the near future should consider selling in the current fiscal year, if possible, to the extent their conversion to S corporation status occurred more than five, but less than ten years prior to the beginning of the fiscal year. For example, a C corporation that converted to an S corporation at the beginning of its fiscal year commencing October 1, 2005 would not be subject to the BIG tax on any of its built-in gain if it sold assets at any time prior to September 30, 2012, but would be subject to the tax if it sold assets on or after October 1, 2012.

Other Changes Affecting Individuals

• Additional employee portion of payroll tax. The employee portion of the hospital insurance payroll tax will increase by 0.9 percent (from 1.45 percent to 2.35 percent) on wages over $250,000 for married taxpayers filing jointly and $200,000 for other taxpayers. The employer portion of this tax remains 1.45 percent for all wages. This provision, which was enacted as part of the PPACA, is scheduled to take effect in 2013 regardless of whether Congress extends the Bush tax cuts.


• Phaseout of personal exemptions. A higher-income taxpayer's personal exemptions (currently $3,800 per exemption) will be phased out when AGI exceeds an inflation-indexed threshold. The inflation-adjusted threshold is projected to be $261,650 for married taxpayers filing jointly and $174,450 for unmarried taxpayers.


• Medical and Dental Expense Deduction. As part of the PPACA, the threshold for claiming the itemized medical and dental expense deduction is scheduled to increase from 7.5 to 10 percent of AGI. The 7.5 percent threshold will continue to apply through 2016 for taxpayers (or spouses) who are 65 and older.


• Decrease in standard deduction for married taxpayers filing jointly. The standard deduction for married taxpayers filing jointly will decrease to 167% (rather than the current 200%) of the standard deduction for unmarried taxpayers (currently $5,950). In 2012 dollars, this would lower the standard deduction for joint filers from $11,900 to $9,900.


• Above-the-line student loan interest deduction. This deduction will apply only to interest paid during the first 60 months in which interest payments are required, whereas no such time limitation applies under current law. The deduction will phase out over lower modified AGI amounts, which are projected to be $75,000 for joint returns and $50,000 for all other returns.


• Income exclusion for employer-provided educational assistance. This exclusion, which allows employees to exclude from income up to $5,250 of employer-provided educational assistance, is scheduled to expire.


• Home sale exclusion. Heirs, estates, and qualified revocable trusts (trusts that were treated as owned by the decedent immediately prior to death) will no longer be able to take advantage of the $250,000 exclusion of gain from the sale of the decedent's principal residence.


• Credit for household and dependent care expenses. Maximum creditable expenses will decrease from $3,000 to $2,400 (for one qualifying individual) and from $6,000 to $4,800 (for two or more individuals). The maximum credit will decrease from 35 percent to 30 percent of creditable expenses. The AGI-based reduction in the credit will begin at $10,000 rather than $15,000.


• Child credit. The maximum credit will decrease from $1,000 to $500 per child and cannot be used to offset AMT liability.


• Earned Income Tax Credit. The phaseout ranges for claiming the credit, which vary depending on the number of qualifying children, are scheduled to decrease for joint returns. Further, the credit will be reduced by the taxpayer's AMT liability.

Other Withholding Rate Changes
The following employer withholding rate changes will take effect in 2013:

	2012	2013
Employee portion of FICA payroll taxes	4.2%	6.2%
Backup withholding rate on reportable payments	28%	31%
Minimum witholding rate under flat rate method...
...on supplemental wages up to $1 million	25%	28%
...on supplemental wages in excess of $1 million	35%	39.6%
Voluntary withholding rate on unemployment benefits	10%	15%

Foreign Account Tax Compliance Act

Regardless of whether Congress extends the Bush tax cuts, beginning in 2014, a new 30 percent withholding tax will be imposed on certain withholdable payments paid to foreign financial institutions (FFIs) and non-financial foreign entities (NFFEs) unless they collect and disclose to the IRS information regarding their direct and indirect U.S. account holders. FFIs include foreign entities that accept deposits in the ordinary course of a banking or similar business, that hold financial assets for the account of others as a substantial part of their business, or that are engaged primarily in the business of investing or trading in securities, commodities, and partnership interests. Any foreign entity that is not an FFI is an NFFE.

Withholdable payments will include U.S.-source interest, dividends, fixed or determinable annual or periodical income, and U.S.-source gross proceeds from sales of property that produce interest and dividend income. While the withholding obligation on withholdable payments to FFIs and NFFEs does not begin until 2014, FFIs will need to enter into agreements with the IRS by June 30, 2013 to avoid being subject to the withholding tax. In general, under such agreements, FFIs must agree to provide the IRS with certain information including the name, address, taxpayer identification number and account balance of direct and indirect U.S. account holders, and must agree to comply with due diligence and other reporting procedures with respect to the identification of U.S. accounts.

Should you be worried about 2013?

Here's a look at the laws that could wage a multipronged attack on your wallet and what you can do to prepare.

Over the last few years, Americans have observed a series of tense Capitol Hill confrontations over what to do about expiring tax code provisions. While each was significant, their scale is dwarfed by what looms at the end of this year: Without action by Congress, Americans face a half-trillion-dollar tax hike in 2013, according to the Tax Foundation — a scenario so ominous that pundits have nicknamed it "taxmageddon."

While the outcome is anyone's guess, it's important to know what hangs in the balance and what it could mean for your bottom line.

What's at Stake	What Will Happen Jan. 1 Without Federal Action
Income Tax Brackets	Rates would rise for all Americans, with the lowest bracket rising from 10% to 15% and the highest from 35% to 39.6%.
Dividends	Would be taxed at the same rate as ordinary income — instead of today's 15% maximum rate.
Capital Gains	Maximum rate would rise to 20% from the current 15%.
Personal Exemptions and Itemized Deductions	Would be reduced for high-income taxpayers.
Alternative Minimum Tax	Without extension of temporary exemptions, more taxpayers will be snared by this parallel tax system.
Payroll Taxes	Individuals' share of Social Security taxes would return from the temporary 4.2% to the normal 6.2%; the self-employment tax rate would rise from 10.4% to 12.4%.
Estate Taxes	Maximum estate tax rate would rise to 55% from the current 35%; estates valued at more than $1 million would face the tax (versus the current $5 million).
Education Savings	The annual contribution limit for Coverdell Education Savings Accounts would fall from $2,000 to $500 and qualified withdrawals would no longer be permitted for K-12 expenses.
Child Tax Credit	Falls from $1,000 to $500.
Married Couples Filing Joint Returns	The expiration of features meant to address a so-called "marriage penalty" would reduce standard deductions and push many couples into higher tax brackets.
Adoption Credits Joint Returns	Maximum credit would fall from $13,360 to $6,000 and would only be available for special needs children.
Other Popular Tax Breaks Joint Returns	Deductions for state and local sales taxes, higher education and teachers' classroom supplies all would vanish.

An Uncertain Outcome

Adding to the pressure, members of Congress will grapple with these broad-reaching tax expirations while facing national elections and a related showdown over what they should do when the nation again reaches its debt ceiling. That is the amount of debt the federal government is authorized to have.

 

 

Don't expect a clear outcome anytime soon. "Frankly, it's unlikely that it will be resolved before the November 6 election," says Dan Brouillette, USAA senior vice president for government and industry relations.

A bipartisan group of senators has begun working in hope of having a package ready shortly after the election, Brouillette says. "However, their final product could depend on the election results."

As with many recent tax issues, the nation may get a short-term extension that preserves our current tax rules for a few months or a year or two. On the other hand, the resolution could come in the form of sweeping tax reform that stretches to other tax provisions that aren't set to expire.

Personal Tax Moves: Watch and Wait

Given all the uncertainty, what should USAA members do? J.J. Montanaro, a CERTIFIED FINANCIAL PLANNER™ professional at USAA, offers three pointers:

• Don't make big bets. "Since the outcome is unpredictable, I wouldn't make any big financial decisions based on an assumption that the tax debate will end one way or another," Montanaro says.


• Tighten your budget. "If your taxes do increase, you'll be better prepared. If they don't, you'll have a windfall to dedicate to other goals," he says.


• Stay alert. "Once the outcome is known, you may find it will be to your advantage to make some financial moves this year — under the current tax law," Montanaro says. For example, if you face higher capital-gains rates in 2013, it may be better to sell some of your investments sooner rather than later.

If recent experience is any guide, Congress may not act until late December. That means you may have limited time for those late-year decisions. Until then, keep monitoring for timely updates.

Obama Poised for New Fight With G.O.P. Over Tax Cuts

With a torpid job market and a fragile economy threatening his re-election chances, President Obama is changing the subject to tax fairness, calling for a one-year extension of the Bush-era tax cuts for people making less than $250,000.

Mr. Obama plans to make his announcement at the White House on Monday, senior administration officials said. The ceremony comes as Congress returns from its Independence Day recess, and as both parties and their presidential candidates head into the rest of the summer trying to seize the upper hand in a campaign that has been closely matched and stubbornly static.

House Republicans plan to vote this month to extend for a year all of the Bush tax cuts, for middle- and upper-income people.

The president’s proposal could also put him at odds with Democratic leaders like Representative Nancy Pelosi of California and Senator Charles E. Schumer of New York, who have advocated extending the cuts for everyone who earns up to $1 million. And it will most likely do little to break the deadlock in Washington over how to deal with fiscal deficits, an impasse that has only hardened as Republicans sense a chance to make gains in Congress this fall.

But by calling for an extension for just a year, Mr. Obama hopes to make Republicans look obstructionist and unreasonable. Trying to bounce back from another weak jobs report on Friday, he also hopes to deepen the contrast with his challenger, Mitt Romney. On Friday, the president said Mr. Romney would “give $5 trillion of new tax cuts on top of the Bush tax cuts, most of them going to the wealthiest Americans.”

From their stronghold in the House, Republicans plan to vote this week to repeal Mr. Obama’s health care law, hoping to energize their base even though they know that the campaign to abolish the law, which the Supreme Court upheld, stands no chance in the Democratic-led Senate. Republicans also renewed their call for an overhaul of the tax code.

“You know, what we ought to be doing is extend the current tax rates for another year with a hard requirement to get through comprehensive tax reform one more time,” the Senate minority leader, Mitch McConnell of Kentucky, said on Sunday on the CNN program “State of the Union.”

The struggle to frame the tax debate comes as the campaign moves into a period, only four months before the election, when the perceptions of voters begin to harden. Polls show a persistently tight race, with Mr. Romney closing in on Mr. Obama in certain swing states but with neither candidate able to break out decisively. Control of Congress is also up for grabs, with Mr. McConnell saying on Sunday that he believed the Republicans had a 50-50 chance to regain control of the Senate.

To find a compromise with Republicans on which Bush tax cuts to extend, Ms. Pelosi, the House minority leader, and Mr. Schumer, a member of the Senate Finance Committee, favor making $1 million the cutoff. Above that level, Mr. Schumer has said, people are not likely to spend the savings from lower taxes and help the economy.

Administration officials said they did not believe that the difference between the White House and these Democratic leaders was a big obstacle. They said that whether to use $250,000 or $1 million as a cutoff was more a matter of strategy than a “religious debate,” in the words of one official, who added that many other Democrats favored $250,000.

The White House hopes to squeeze maximum political mileage out of the White House event, surrounding Mr. Obama with families and workers who would benefit from the extension. On Tuesday, he will take his message to Iowa, the battleground state that turned him into a serious presidential contender in 2008.

In Cedar Rapids, Mr. Obama plans to visit the home of Jason and Ali McLaughlin, a high school principal and an account manager at a document-scanning company, a campaign official said. The McLaughlin family, with a combined income of $82,000, would face an extra $2,000 burden next year if the tax cuts on the middle class expired as scheduled, the campaign said.

White House officials insisted that Monday’s move was more than politics. They said it would ease anxiety over the “fiscal cliff” — the combination of tax increases and automatic spending cuts that are scheduled to kick in at the end of this year. That one-two punch, economists say, could deal a heavy blow to an already tender economy unless the White House and Congress work out some kind of compromise.

Proposing a one-year extension, a senior official said, recognizes that Mr. Obama and the Republicans are not likely to resolve the larger debate over whether to extend the Bush tax cuts for everyone or, as Mr. Obama has long advocated, just for the middle class. That debate is likely to be decided at the ballot box, where a victory by Mr. Romney would almost certainly enshrine all the tax cuts.

“To the degree that there is concern about the economy, we’re saying, ‘Let’s extend the middle class tax cuts for a year,’ ” said Gene B. Sperling, director of the White House’s National Economic Council. “Economically, extending tax cuts to those workers will have the most effect on them and the strongest impact on the economy.”

A one-year extension for people making under $250,000 would cost the government $150 billion in revenue, the administration estimates, an amount that would be added to the deficit. In a point of comparison, economists estimate that letting the cuts expire for people above that threshold would generate $850 billion over 10 years.

While Mr. Obama returns to the tax issue this week, House Republican leaders will press forward Wednesday with a vote to fully repeal his health care law, testing their faith that they can make the law part of their attack on Democratic economic policies against evidence that swing voters want to move past the fight.

Just as Mr. Obama needs to worry about divisions on the tax bill, some Republicans are in disagreement over the wisdom of relitigating the health care law. Some Republicans, facing re-election in swing districts, are openly suggesting that some measures should remain. Representative David B. McKinley, a Republican freshman from West Virginia, said prohibitions on lifetime coverage caps and on discrimination against people with pre-existing medical conditions should “absolutely” stay in force, even if health care costs would have to rise.

“If it means increasing my premiums, so be it,” he said. “That’s what insurance is about.”

Mr. Romney’s supporters on the Sunday talk shows hammered away at the idea that Mr. Obama is at fault for the poor economy. Representative Tom Price, Republican of Georgia, said Mr. Romney supported preserving all of the Bush-era cuts for another year because he believes “that will stimulate the economy and provide certainty out there in the job market.”

For Mr. Obama, the biggest advantage of the tax proposal may be simply to move the political discussion off the job market. On his bus tour through Ohio and Pennsylvania last week, the president took pains to present himself as a guardian of the middle class, whose most cherished childhood memories included raiding the ice machine at a Howard Johnson while on a Greyhound tour of the United States.

On Friday, however, when the latest poor jobs number was reported, Mr. Obama was back to talking about the long road to recovery.

Tax Myths

In written form, the tax code could make an encyclopedia set blush. With so many codes occupying so much shelf space, no wonder we are confused at times trying to determine what is a fact and what is a myth.

With that in mind, here are some commonly held tax beliefs that have no authenticity. Watch out for these; even the IRS does not want you to pay more taxes than what you legally owe.

Myth - I can stop filing once I reach a certain age

While it may be true that a person retiring on Social Security as their sole income likely will not have a filing requirement, there is no age at which one can legally stop filing. Return filing is based on income, not age. Even a person on Social Security may have to file and pay tax if they have other income sources, like a taxable pension, IRA distributions, or investment income. If so, a portion of your Social Security may be taxable as well.

Myth - I'm a student; I don't have to pay taxes

Students are not exempt from filing and taxation, assuming they have earned income. Many students will take up summer jobs and claim "exempt" (from tax withholding) on their W4. This is fine, assuming the amount earned will be under the threshold for taxation.

For example, a single individual under age 65 was required to file a 2011 tax return if their earned income was over $9,500. Even if the amount earned was under that, a return should be filed to claim any tax withheld as a refund.

Myth - My child is over 19; I can't claim him as a dependent

As long as your son or daughter is a full-time student as defined by the IRS, you can still claim them. Your child must be under age 24 and enrolled, in some part, during at least five calendar months, in the number of courses and or hours that the college considers "full-time." If so, they can be claimed as your dependent as long as they meet the other requirements.

Myth - I can't deduct state sales tax

Yes it's a myth. The IRS allows you deduct actual sales tax you paid on food, clothing, medicine and most other purchases. Even the tax on a large purchase, like a vehicle, can be deducted as long as the rate is the same. The one stipulation? You must be able to itemize your deductions to make it worthwhile.

In lieu of sales tax, you can deduct state income tax. Use the amount that will yield a higher deduction. If deducting sales tax in combination with your other Schedule A itemized deductions is higher than your standard deduction, then this is the way to go.

Myth - Now that I'm married, I have to file with my spouse

The IRS doesn't want to get involved in your marriage, so they have left this one up to you. You can choose to file together, or you can opt to use the filing status Married Filing Separate.

The advantage to filing separate? Perhaps you want to make a clear distinction and be responsible only for your tax. This may be true if your spouse has previous tax debts or owes other federal or state agencies. The IRS does have programs however (Injured Spouse and Innocent Spouse) to shield the non-liable party.

At times, a separate filing may also result in less tax owed as a whole. For example, if you plan on itemizing your deductions because you both have deductions to claim on your Schedule A, then those collective deductions are subject to percentage limitations. But if you were to file separately, you likely would be able to get more of those deductions accounted for and overall pay less combined tax.

Another filing status that may be available even if you are married? Head of Household. If your spouse did not live with you during the last six months of the calendar year, and if you kept up a home for yourself and at least one other person for whom you can take an exemption for, then you can file Head of Household and receive a greater Standard Deduction.

2013 Tax Changes

2012 not only marks the end of the Mayan calendar, but also the tax cuts of 2001 and 2003 under George W. Bush. With the aspect of likely higher taxes looming in 2013 some Congressional aides have termed the upcoming expiration of the Bush tax cuts as “Taxmageddon”. Are the expiration of the tax cuts in 2013 really going to be that painful for most people? If your income is below $200,000 to $250,000 probably not.  Let’s take a look at some of the expiring provisions and the tax proposals that President Obama has included with his 2013 budget.

For the last couple of years ever since the “Bush” tax cuts of 2001 were extended through 2012, there has been much consternation as to what is going to happen to tax rates in 2013 when the extensions expire.  A couple of weeks ago we got a peek at what President Obama’s proposed changes to taxes will be if he gets his way when he unveiled his 2013 budget. Of course, the budget and tax provisions will have to be approved by Congress, and there is a good chance that debate on tax law changes will drag out through much of 2012. It is very likely the proposals discussed below will be changed. We will likely not know for sure exactly what tax rates are going to be in 2013 and beyond until the end of 2012. However, we can look at the provisions that the President has included in his fiscal year 2013 budget and get an idea of the starting point of where tax rates may be in 2013 and beyond and if you need to worry much. Below is a look at some of the provisions that may affect the largest number of people:

Allow Top Two Income Tax Rates to Rise After 2012

The president is not really proposing an increase for the top income tax bracket in 2013, but simply allowing the current law to expire and reverting to the pre-2001 levels.  This means that all taxpayers in the current 35% bracket would increase to 39.6%, this means you, if your taxable income is greater than $390,050, regardless if you are single, married or head of household.

The changes come in the 2^nd highest brackets which are currently paying 33%, getting increased to 36%. But, this is only going to apply to joint taxpayers with Adjusted Gross Income (AGI) over $250,000 ($200,000 for single filers). The values are in 2009 dollars and would be indexed for inflation in future years. These taxpayers will be referred to as “upper income taxpayers”. The projected tax table is shown below along with current rates. For joint filers, with taxable income below the $250,000 threshold, but above the 28% tax bracket, their rates would stay at 33%, which would actually be a tax cut under the pre-2001 tax rates that the tax laws are reverting to.

For those taxpayers currently in the10%, 15%, 25% and 28% tax brackets there are not any proposed changes. Those people currently in the 33% bracket would only be affected if they are considered an upper income taxpayer.



 

Chart courtesy of taxpolicycenter.org

Tax Long Term Capital Gains at 20%

Ever since 2003 long term capital gains tax for assets held longer than 1 year has been 15% for those in the 15% bracket and higher, and 10% for those in the 10% bracket. (Since 2008 taxpayers in the 10% and 15% bracket actually paid no tax on long term capital gains).  Under current tax laws, rates are set to revert in 2013 to their pre-2003 levels. This means for all taxpayers in the 15% bracket and below, long term gains would be taxed at 10%. For single taxpayers with taxable income below  $200,000, head of households below $225,000 and joint couples below $250,000 your long term rate would remain at 15%. Only filers above these amounts would have a have a 20% long term capital gain rate.

Tax on Dividends

Another highly watched area of the proposed budget has been what the tax rate will be on qualified dividends. Before 2003, dividends were taxed at your ordinary income tax rate. Since 2003, though, the maximum qualified dividend tax rate has been 15%. (Since 2008, taxpayers in the 15% bracket or below pay no tax on qualified dividends.)  When the current law expires in 2013, dividends would revert back to being taxed at your ordinary income tax rate.

President Obama’s budget proposal would keep the current dividend rate of 15% for everyone not considered an upper income taxpayer (single taxpayers with taxable income below $200,000, head of households below $225,000 and joint couples below $250,000). For the upper income taxpayers above these amounts, dividends would be taxed at your ordinary income tax rate of either 36% or 39.6%.

Limit Value of Itemized Deductions to the 28% Bracket

Itemized deductions allow one to reduce taxable income be deducting amounts greater than the standard deduction. This includes things such as charitable deductions, mortgage interest, state income taxes, medical expenses, etc.  Itemized deductions are generally more valuable to upper income taxpayers  because the effect on tax liability is greater when you are in a higher tax bracket.  For example, itemized deductions of $10,000 reduce taxes for someone in the 15% bracket by 15% (15% of $10,000). But for someone in the 35% bracket, the $10,000 of deductions results in $3,500 of tax savings (35% of $10,000).

With the president’s 2013 budget proposal, the value of itemized deductions for those upper income taxpayers ($200,000 & $250,000), would be capped at 28%, so someone in the 35% that currently receives $3,500 of benefit for those $10,000 of itemized deductions, would only receive $2,800 of tax savings because of the 28% cap.

The possible effects of this likely have many charitable organizations concerned, as higher income donors are many charities biggest sources of revenues and if these people are not going to get as much “bang for their buck” with their charitable gifts, they may possibly give less in the future. You could also argue that investment in housing could be affected as well, since mortgage interest wouldn’t get the full benefit of the upper income taxpayer.

One other thing to consider, the limitation on itemized deductions (known as Pease after the congressman that helped create it) is scheduled to return in 2013. This limit reduces most itemized deductions by 3% of the amount by which AGI exceeds a specified threshold, up to a maximum deduction of 80% of itemized deductions. It was eliminated for 2010, 2011 & 2012, but unless the tax laws are changed will be back in 2013. It is likely it will affect only the upper income taxpayers ($200,000/$250,000) as well, but this combined with the 28% maximum itemized deduction limit could really reduce deductions for higher income taxpayers substantially.

Alternative Minimum Tax (AMT)

The Alternative Minimum Tax (AMT) was enacted in 1969 to impose tax on a small group of ultra- wealthy individuals that were paying little or no income tax because of excessive write-offs and deductions. AMT is a separate tax imposed on nearly a flat rate on an amount of income over a certain threshold (exemption). In computing taxable income, your regular federal tax is compared to the amount calculated under AMT and you are responsible for the greater of the two amounts. No deductions are allowed for things such as state income taxes or miscellaneous itemized deductions. The reason AMT has become such an issue the last few years and affecting more and more people at lower incomes, is because the exemption amount has never been indexed for inflation, so it is at a very low rate. The last several years, Congress has enacted a late December patch to inflation adjust the exemption. Due to the infinite wisdom of our elected officials, they have never added an automatic inflation increase to the AMT exemption, and we don’t know until late in the year if we will be paying several thousand dollars more in tax or not.

President Obama’s proposed budget has provisions that use the 2011 exemption amounts and permanently index the amount for inflation going forward, which would eliminate the last minute fixes by Congress.

Estate and Gift Taxes

In 2001, Congress voted to phase out the estate tax gradually and repeal it entirely in 2010. The 2010 tax act reinstated the tax with an effective $5 million exemption and a 35 percent tax rate. The act also for the first time allowed portability of the exemption between spouses: any of the $5 million exemption not used when one spouse dies may be added to the exemption available for the second spouse (if he or she has not remarried). However, unless Congress acts, the estate provisions in effect prior to 2001 would be reinstated starting in 2013, Under these provisions, estates valued at $1 million or more would again be subject to tax at progressive rates as high as 60 percent, and portability would disappear.

The Obama budget proposes permanently setting the estate tax at its 2009 level beginning in 2013: estates worth more than $3.5 million would pay 45 percent of taxable value over that threshold. It would also make portability permanent, allowing couples to share a combined exemption of $7 million. Relative to current law, the proposal would cost $271 billion in forgone revenues through 2021. (-From Tax policy Center website)

There are several more provisions for individuals and businesses in the proposed budget, but we wanted to focus on the areas that will likely have the impact on the largest amount of our clients and friends. Again, these are just the first proposals, there will be a lot of negotiations between the Republicans and Democrats before the final tax provisions are settled upon. From the looks of things right now, if your taxable income isn’t greater than $200,000 for individuals or $250,000 for joint filers, you probably would not see a lot of changes in your tax bill if the proposed changes make it to law.

Finally, Doug Short of Advisor Perspectives (always has great charts) has a neat chart showing the Federal Debt, including the effects of President Obama’s 2013 budget on top with the historical income tax brackets shown on the bottom half. When you step back and look at the long term, even with the proposed increases in income taxes for the upper income taxpayers, overall tax rates are a lot lower than they were in the middle of the 20^th century. Of course, there were a lot more available tax deductions back then, so it may not really be all that different after all. But, I am just trying to cheer you up.