September 24, 2012|
No one is sure exactly what the upcoming national election will bring, but tax reforms are likely to be on the table. In the meantime, several key tax breaks are scheduled to expire after 2012 unless a new Congress extends or modifies them. Here is a roundup of eight provisions for individuals and small-business owners that are in jeopardy. 1. Capital gains and dividends: Currently, the maximum tax rate for long-term capital gains and qualified dividends is 15% (0% for certain low-income investors). Beginning in 2013, the maximum rate for long-term capital gain will increase to 20% (10% for low-income investors), while dividends will be taxed at ordinary income rates. 2. Tax rates: Higher tax rates are coming in 2013. In addition to other adjustments, the two top tax rates of 33% and 35% will be replaced by 36% and 39.6%, respectively. 3. Children tax breaks: Favorable tax provisions relating to the child tax credit, the dependent care credit (also known as the "child care credit") and the adoption credit will be scaled back in 2013. Generally, the provisions will revert to limits established prior to the Tax Relief Act of 2010. 4. American Opportunity Tax Credit: The American Opportunity Tax Credit (AOTC), formerly known as the Hope Scholarship credit, is available to parents who send their children to college, with certain restrictions. The maximum $2,500 credit in 2012 will revert to the Hope Scholarship credit maximum of $1,800 in 2013. 5. Payroll tax holiday: The 2% payroll tax holiday for employees, initially established to be effective only for 2011, was extended through 2012. Barring another extension, in 2013 employees will have to pay the full 6.2% tax on wages up to the Social Security wage base. 6. Section 179 deductions: For 2012, a small business can write off a maximum of $139,000 of qualified property (inflation-indexed from $125,000), subject to a phaseout threshold of $560,000 (inflation-indexed from $500,000). The maximum is set to revert to $25,000 in 2013 with a $200,000 phaseout threshold. 7. Bonus depreciation: A business may also qualify for 50% bonus depreciation on qualified property placed in service in 2012 (down from 100% in 2011). Absent any new legislation, bonus depreciation will be wiped off the books in 2013. 8. Estate- and gift-tax breaks: A number of related estate- and gift-tax provisions will "sunset" after 2012 unless Congress takes action. This includes the generous $5 million estate-tax exemption (inflation-indexed to $5.12 million in 2012), a lower top estate-tax rate, portability of exemptions between the estates of spouses and corresponding benefits for gift and generation-skipping taxes. Generally, the law will revert to the way it was prior to the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001. These tax breaks, among others, may not be available after 2012. Meet with you Faw Casson advisor soon to devise flexible strategies.