Sunsetting of Bush-Era Tax Cuts
More election year uncertainty: 2012 began with the fate of the “Bush-era tax cuts” unsettled, and no resolution appears in sight. Rather than just waiting for Congress to act, you should consider implementing certain protective tax strategies now. To maximize benefits, advance planning that considers a number of “what ifs” should be undertaken soon. With budget pressures looming, the likelihood that EGTRRA and JGTRRA expiring provisions will be rolled over for one or two more years into 2013 and 2014 is highly unlikely. Therefore, a strategy that accelerates into 2012 whatever tax benefits are currently available deserves careful consideration.
The impact of the looming expiration of the Bush-era tax cuts on individuals has received the most attention because its effect is so great. If the Bush-era tax cuts expire as scheduled, the individual income tax rates will increase across-the-board. All taxpayers - and not just higher income individuals - will effectively experience a tax hike after
2012. Even those taxpayers who remain in the 15 percent bracket will pay more by not realizing the advantage of having their first dollars of income subject to the 10 percent rate bracket.
Due to the expected tax rate increase for 2013, the traditional year-end planning strategy of deferring income into next year may not be effective in 2012. You are more likely to benefit by accelerating 2013 income into 2012 and deferring losses to 2013 and later years to escape higher rates.
How Our CPA Firm Can Help You Plan
If you want to take advantage of the lower tax rates available this year, you may want to:
- Accelerate income, including bonuses if possible, into 2012
- Defer selling capital assets at a loss until 2013 and later years
- Move some assets into tax-free instruments, like municipal bonds, that are not subject to federal tax
- Take capital gains in 2012 while the top rate is still 15 percent
- Accelerate billings and/or provide incentives for clients or customers to make payments in 2012 (for self-employed cash-basis taxpayers)
- Take taxable retirement plan distributions before 2013 (for taxpayers over age 59-1/2)
Generally, it is advantageous to bunch itemized or business deductions into the 2013 tax year. However, if you anticipate being in a lower tax bracket in 2013 as compared to 2012, you may want to take advantage of the complete elimination of phase-outs for personal exemptions and itemized deductions that is available for the 2012 tax year. If you have been affected by these limitations in the past, you may be able to take advantage of this opportunity, but you should carefully review all of your options beforehand.
If you are married, you should consider adjusting your withheld income tax for 2013 (or your estimated tax payments) in order to avoid an adverse impact from the potential elimination of marriage penalty relief. The same strategy may soften the financial hit from reduced child-driven tax credits and education benefits if you have dependent children.
Effects For Individuals
- Marginal tax rates. The 10-percent bracket disappears and the marginal rates become 15, 18, 31, 36 and 39.6 percent (as opposed to 10, 15, 25, 28, 33, and 35 percent in 2010)
- Capital gain rates. The zero- and 15-percent capital gain rates become 10 and 20 percent. The special eight- and 18-percent rates for assets held more than five years is reinstated.
- Dividend rates. Instead of being taxed at capital gain rates, dividends are taxed at ordinary income rates.
- Marriage penalty. The marriage penalty is restored for purposes of the standard deduction, the 15-percent tax bracket, and some of the phase-out ranges for the earned income credit.
- Exemptions and itemized deductions. The phase-out of exemptions and itemized deductions is restored.
- Education provisions. The Coverdell IRA contribution limits revert to $500 (from $2,000), and tax-free distributions are not allowed for elementary and secondary education expenses. The exclusion for employer-provided educational assistance lapses. The deduction for student loan interest reverts to its former phase-out range, and the 60-month limitation returns.
- Earned income credit (EIC). The EIC is reduced by AMT liability, and EIC phase-outs are based on modified AGI and reflect a larger marriage penalty. Earned income is not limited to amounts included in gross income, and the IRS is not able to deny the EIC based on information from the federal child support database.
- Child tax credit. The maximum per child tax credit reverts to $500, and the credit phases out more quickly.
- Child and dependent care credit. The maximum percentage for the child and dependent care credit reverts to 30 percent, and the maximum amount of the credit reverts to $720 for one qualifying individual, and $1,440 for two or more qualifying individuals.
- Adoption credit and benefits. The maximum adoption credit and exclusion for employer-provided adoption benefits reverts to $5,000 ($6,000 for a child with special needs).
Other provisions, including some that were new with EGTRRA, already expired after 2011, with the rest set to expire after 2012:
- AMT exemption amounts for individuals;
- nonrefundable tax credit offset of your entire regular and AMT tax liability;
- payroll tax cut;
- itemized deduction for state and local general sales taxes in lieu of state and local income taxes;
- above-the-line deduction for certain out-of-pocket classroom expenses;
- above-the-line higher education tuition deduction;
- tax-free IRA distributions to charity;
- mortgage insurance premium deduction; and
- exclusion from income for cancellation of mortgage indebtedness on your personal residence.
Give Us a Call
With so much uncertainty in planning for 2013 and beyond, now is an ideal time to review your tax situation and evaluate strategies that may help minimize your overall tax bill. Hopefully, this letter provides some alternatives that you would like to discuss in greater detail. Please contact our office at your earliest convenience to arrange an appointment.