Well, Congress and the President finally got their act together to avoid the fiscal cliff, right? And since they did, this should not have any effect on working class Dakotans, right? If you believe that, I can show you some wonderful oceanfront property in Bismarck! You should understand how the new tax law changes will impact your business, farm clients, and yourself.
Payroll Tax will increase. Last February, the payroll tax cut was extended through December 31, 2012. Payroll taxes include Social Security payments that were cut to 4.2% instead of 6.2% for several years. The new law reverts taxes back to the pre-recession levels of 6.2%. The impact here is a reduction of every paycheck of 2%.
Capital Gains/Carried Interest rates will increase to 20% for individuals with adjusted gross incomes more than $400,000 and married couples with AGI more than $450,000. Individuals/couples below the AGI thresholds will still pay 15%. The effect here is a renewed emphasis on the IRS Section 1031 Exchange for higher income individuals to defer gains on property sales.
Alternative Minimum Tax rates are finally adjusted for inflation. The AMT will be less burdensome on lower-income level s with more exemptions for credits and tax deductions; whereas, higher-income levels will receive fewer exemptions.
Estate and Gift Taxes will be taxed at or above the $5 million per person level and the tax rate will increase from 35 to 40 percent in 2013. This will cause the need for more estate tax planning in order to pass on family farms and businesses without a substantial tax penalty. Vehicles such as life insurance and gifting become more important to shield more hard earned assets from Uncle Sam. A checkup with a trusted financial advisor knowledgeable in tax and estate planning is necessary for higher wealth clients.
Depreciation bonus of up to 50% for property and equipment (not including real estate) is available for businesses during the 2013 tax year.
Leasehold Improvements are now on a 15-year straight-line cost recovery for qualified leasehold improvements on commercial properties in 2013 and is retroactive for 2012.
Income Tax Rates are going up for individuals with AGI over $400,000 and married couples with AGI over $450,000 at a new tax rate of 39.6%. For other income levels, the Bush-era tax rates are permanent. This is something to continue to watch as some Democrats in Congress have suggested going to the pre-Reagan tax rates on high income earners of 70% should be looked at!
In spite of the vast majority of Americans seeing their tax rates increase with this new law, virtually no discipline in Federal spending was put in place. Perhaps that may come with the debt ceiling negotiations that will occur in the next few months. These changes do require your customers to review their strategies to keep their tax liability at the lowest legal level possible.