Starting in 2010, tax planning has been exceedingly difficult. The Bush tax cuts were extended till 1/1/2013 – 2011 & 2012 tax years. After 2012, tax rules revert to pre Bush tax cut days.
Here is a list of tax cuts expiring:
- Top marginal income tax rate will increase from 35% to 39.6%, a 4.6% increase. This tax bracket hits taxpayers the following way: Single, Married Joint, Head of Household brackets – Over $388,350; Married Separate – Over $194,175
- Capital gains rate for long term investments (held over 1 year) will increase from 15% to 20%
- No preferential capital gains rate for dividends. So dividends taxed as ordinary income rates
- A new 3.8% Medicare surtax on investment income including interest, dividends, royalties, rents, passive activities, commodities, and net capital gains for incomes over $200,000 single, $250,000 married joint. Does not include tax exempt income, sale of active business, distributions from IRA or other retirement plans, self employed income, sale of principal residence
- Child tax credit for dependents will reduce from $1,000 to $500 per child
- American Opportunity Tax Credit for college education will be expired
- Cancellation of Mortgage Debt will be taxable for non recourse debt on principal residence
- No exclusion of IRA distributions for charitable contributions so they will be subject to normal IRA distribution rules
- Alternative Minimum Tax patch has expired and will be using the older exemption amounts
- 10% AGI threshold to deduct medical expenses from 7.5%
- Section 179 2012 Deduction Limit = $139,000; 2012 Limit on equipment purchases = $560,000. This is the maximum amount that can be spent on equipment before the Section 179 Deduction available to your company begins to be reduced. This is good on new and used equipment, as well as off-the-shelf software.
- Bonus Depreciation = 50% in 2012. Bonus Depreciation can also be taken by businesses that will have net operating losses in 2012.
If you are planning on selling a business, the 5% increase in capital gains taxes (selling in 2012 vs 2013) is a nice carrot to act now versus later. A comprehensive analysis should be done to develop the various scenarios for the proposed sale.
Consider moving more investment to tax exempt income if you plan to pay the additional 3.8% Medicare surtax
Consider further investment in equipment and other depreciable assets in 2012 as Section 179 expensing limits are still high $139,00 and bonus depreciation without limits at 50%. In 2013, Section 179 goes down to $25,000 and bonus depreciation is eliminated.