March 20, 2013
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We started 2012 with much uncertainty in the tax laws. The “Bush-era cuts” that were extended by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 were scheduled to expire December 31, 2012.
Considering the uncertainty regarding post-2012 federal tax policies and tax provisions for individuals and businesses, effective tax planning in 2012 was particularly challenging. The May 2012 U.S. Congressional Budget Office report stated that the economy would shrink by 1.3% in the first half of 2013 as a result of impending tax rate increases and more than $100 billion in automatic spending cuts occurring in the Pentagon and other U.S. government agency budgets. As a result, consumers will have less disposable funds to spend, and the defense and domestic spending cuts would decrease U.S. production and manufacturing. These two economic conditions comprise what was referred to by the government and the media as the “fiscal cliff.” Under both conditions, U.S. GDP after 2012 was predicted to be negatively impacted. Further, there was a lack of guidance regarding long-term Congressional action on the U.S. budget and debt limits, another matter that will impact long-term tax planning. The ability to effectively utilize future tax provisions post-2012 was very uncertain.
The political rhetoric included many proposals relating to the structure of the federal income tax and the tax rates to be applied to various types of income. Certain proposals called for increases in current federal tax rates, while others sought a reduction in those rates. Although almost everyone seemed to be in agreement that the Internal Revenue Code is too complex and contains so-called loopholes unfairly favoring wealthy individuals and certain sectors of our economy, there was no agreement on a replacement structure or significant changes in the existing structure. The gridlocked situation continued after the November election. The outcome of the election resulted in the status-quo: The Republicans still control the House, the Democrats still control the Senate and President Obama returned to the White House for another four years. While there was impetus to address the impending fiscal cliff before the end of the year, there was concern that nothing would occur. And, in fact, we lived with this uncertainty throughout 2012 and planned around it. Like a Hollywood movie, we learned the ending to part of this cliff hanger at the eleventh hour on January 2, 2013 when President Obama signed into law the American Taxpayer Relief Act of 2012 (“2012 Tax Act”). The Bush-era tax cuts were allowed to sunset after 2012 for individuals with taxable income over $400,000 and families over $450,000. The top long-term capital gains rate is now at 20% and the top ordinary income rate is now 39.6%. The 2012 Tax Act permanently patches the alternative minimum tax (AMT) and extends many tax credits, including the American Opportunity Tax Credit and the research credit. The 2012 Tax Act also provides a top estate and gift tax rate of 40%, and a $5 million gift, estate, and GST tax exclusion. In addition, the 2012 Tax Act provides several tax incentives for businesses.
While we now have some certainty with respect to the tax laws, we still have much uncertainty on the fate of the spending cuts scheduled to occur in 2013. In addition, House Republican leaders plan on moving forward with a three-month debt limit extension that does not include an equal amount of spending cuts. The measure would require both Chambers of Congress to adopt a budget, something that the Senate has not done since 2009. This shift in GOP strategy should allow Congress to focus on spending restraints for several months without the imminent threat of a government default. Because the debt limit would not be reached until May 19 at the earliest, Congress should be able to focus on the spending sequestration, continued funding of the government and budget adoption, all due in the spring. We may therefore see additional tax law changes in the future as a means to raise revenues to deal with this issue.
Increase in Payroll Taxes
In addition, the 2% employee-side FICA payroll tax cut, as enacted under the Middle Class Tax Relief and Job Creation Act of 2012, expired after 2012. This will impact all workers in 2013 on the first $113,700 of their earned income (which is the Social Security wage base for 2013).
Health Care Reform
Health care reform has also increased many individuals’ income taxes effective January 1, 2013. The Patient Protection and Affordable Care Act imposes a 0.9% Health Insurance Tax on earned income for higher income individuals and 3.8% Medicare Contribution Tax on unearned income. Specifically, the tax is imposed at a 3.8% rate on the lesser of (a) net investment income, such as interest income, dividends, and capital gains and (b) the excess of modified adjusted gross income over a specified dollar amount ($250,000 for joint filers or a surviving spouse, $125,000 for married filing separately and $200,000 for other taxpayers). These taxes are to be imposed in addition to all other anticipated tax increases, and do not impact the regular or alternative minimum tax computation.
With all the law changes, it is essential that you pay attention to your financial position so you can achieve your financial goals, such as retirement planning, cash flow needs, college savings for your children and transfer of assets to future generations.
We have written this guide to provide you with a tool to identify opportunities to save taxes, accomplish your financial goals, and preserve your family’s wealth. This guide includes all major tax law changes through January 2, 2013. The best way to use this guide is to identify areas that may be geared to your situation and then discuss the matter with your tax advisor. As always, our tax professionals will be pleased to discuss any of the ideas in this guide or any other tax planning approaches that might apply to your personal financial situation.
Marie Arrigo, CPA, MBA
Tax Partner & Co-Leader
Family Office Services
Jeff Chazen, Jerry Cohen, Carolyn Dolci, Richard Lichtig, Richard Dauman, Tom Hall
June Albert, Peter Alwardt, Stephen Bercovitch, Gary Bingel, Aninda Dhar, Denise DeLisser, Carolyn Dolci, Sally Farber, Christine Faris, Susan Fludgate, John Genz, Ira Gerlin, Mary Ho, Jean Jiang, Bo Kearney, Cindy Lai, Brent Lipschultz, Jack Meola, Jason Michaels, Peter Michaelson, Craig Schmidt, Joel Steinberg, Sandy Stolar, Barbara Taibi, Stephen Valentine, Kenneth Weissenberg, Cristina Wolff, Jon Zefi
This tax guide highlights tax planning ideas that may help you minimize your tax liability. This guide does not constitute accounting, tax or legal advice, nor is it intended to convey a thorough treatment of the subject matter. The best way to use this guide is to identify those issues which could impact you, your family, or your business and then discuss them with your tax advisor.
The discussion in this guide is based on the Internal Revenue Code as amended through January 2, 2013. Future legislation, administrative interpretations, and judicial decisions may change the advisability of any course of action. Because of periodic legislation changes, you should always check with your tax advisor before implementing any tax planning ideas.
Any information contained in this guide is not intended or written to be used, and cannot be used, for the purpose of (a) avoiding or reducing penalties that may be imposed by the Internal Revenue Service or any other government authority, or (b) promoting, marketing or recommending to another party any transaction or matter addressed herein.
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