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The American Taxpayer Relief Act of 2012

Well Congress and the President (or should I say Vice President) finally did something to prevent taxes from going up on most Americans as we came to the edge of the fiscal cliff. Today we are looking at what they did and what lasting impact this legislation will have on you, the business owner.

So bad news first...

The Tax Increases

Taxes are going up on the "wealthy". Not at the rate President Obama wanted, but none the less, they are going up. A new tax bracket has been created for individuals and married couples. The new bracket begins at $400,000 for individuals and $450,000 for married couples. The new rate will be 39.6%. Although this increase does not impact most tax payers, it will impact successful business owners who have more significant income than most and use pass through rules to pay their business tax at an individual tax basis.

Long Term Capital Gains Increase on the "Wealthy": Individuals with income over $400,000 and married filers with income over $450,000, have to pay a higher capital gains rate than everyone else. Your new rate is 20% while everyone else gets a rate of 15%. So if you are selling your business or a significant asset like a building, you may find yourself paying 20% of your gain.  Don't forget, you will have an additional 3.8% tax on your capital gain as a result of the health care act too. So your total tax rate will be 23.8% on capital gains. This impacts all small business owners who are moderately successful when they sell their businesses.

Estate Tax Rate Increases: The $5 million estate tax exemption stays in place, but the tax rate is increased to 40% effective January 1, 2013. The $5 million stays in place for gift tax purposes as well. This is a good news,and bad news situation. Most small business owners don't amass estates over $5

million, but those that do will have to do some fancy tax planning or their heirs will be paying 40% of your estate to the government. The government taxed you when you earned the money and they tax you when you pass it on to your heirs.

It is a double taxation and the law. But there are ways to minimize it, so call us please.

Phase Outs: The phase out of personal exemptions (PEPS) and the phase out of certain itemized deductions (Pease) is back. If your adjusted gross income for single filers is over $250,000 and for married filers over $300,000, your itemized deductions and personal exemptions will be phased out. This is a tax increase and don't let anyone tell you differently.

The Good News........The Tax Breaks:

Section 179 is increased: Section 179, which provides for the immediate expensing of qualifying assets, was scheduled to decrease from $125,000 in 2012 to $25,000 in 2013.  The fiscal cliff deal changed all of that, increasing the limit back to $500,000 for 2012 and 2013. Also, the amount of qualifying assets that can be placed in service before a reduction in the limitation is required has been increased from $500,000 in 2012 and $200,000 in 2013 to $2,000,000 in both years. This is a significant tax break for startup businesses and expanding businesses.

Bonus Depreciation is Back: Bonus depreciation was scheduled to come to an abrupt end in 2012, but it has been extended for one more year. The 50% bonus depreciation rule is back for one more year, then it may go away again. This is a tax benefit for businesses that are expanding their equipment and start up businesses.

Tax Rates Become Permanent: Now the Bush tax cuts are permanent with a new tax bracket added. This stabilizing of the tax code will be good for business because now we know the rules we will be playing by won't change every year like they have been. Now we can plan with some certainty although the Section 179 rule will continue to be subject to change every year.

Other Provisions of the Bill:

  • The 2009 expansion of tax breaks for low-income Americans: the Earned Income Tax Credit, the Child Tax Credit, and the American Opportunity Tax Credit will be extended for five years.
  • Scheduled cuts to doctors under Medicare would be avoided for a year through spending cuts that haven't been specified.
  • Federal unemployment insurance will be extended for another year, benefiting those unemployed for longer than 26 weeks.
  • Pay freeze on members of Congress, which Obama had lifted earlier this year, will be re-imposed.
  • Extension of deduction for certain expense of elementary and secondary school teachers.
  • Extension of mortgage insurance premiums treated as qualified residence interest.
  • Extension of deduction of state and local sales taxes.
  • Extension of tax free distributions from individual retirement plans for charitable purposes.
  • Continue tax break for those with cancellation of indebtedness income on their mortgage.
  • Method for increasing the Alternative Minimum Tax limitation amounts is made permanent so Congress does not have to vote on it each year.
  • Temporary Delay in Cuts in Government Spending referred to as "Sequester" has been postponed for two years.

My Take
Over all, the tax bill doesn't change much for the average business person. Some tax increases, some tax decreases. Over all government spending did not decrease significantly and taxes did not increase enough to reduce the deficit. It appears neither side wants to reduce government spending, so they postponed the sequester for two months. Another fight is brewing, and it will be a big one over the debt ceiling. The Republican controlled house wants spending cuts to justify an increase in the debt ceiling. The President and the Democratic controlled Senate want a tax increase for every dollar in spending that is eliminated. With the battle lines drawn, this will be another very public battle and it has the potential to go down to the last moment again.

IRS Changes Filing Deadlines for W-2 & 1099 Forms

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