Possible Tax Pitfalls and Uncertainties We’re Facing Heading Into 2013

There are major uncertainties that we are facing in regards to the 2012 tax year and subsequent years. A combination of events – including possible expiration of some or all of the Bush era tax cuts after 2012, the imposition of new so-called Medicare taxes on investments and wages, doubts about renewal of many tax extenders, and threat of massive across-the-board federal spending cuts.

Tax Laws and Proposals Effecting Individual Tax Returns

1. Income Tax Rates – The current rate structures could be replaced by higher pre-Bush era tax rates.
2. Capital Gains Dividends – These rates are also set to go higher.
3. 3.8% Medicare Contribution Tax – A tax on net investment income for taxpayers over certain income level. This would take effect on January 1, 2013. (This is a result of the healthcare law).
4. Additional 0.9% Medicare Tax – This additional tax on high wage earners would also take effect on January 1, 2013 and is separate from the Medicare investment tax. This tax is imposed on the combined wages of both spouses. (This is also a result of the healthcare law).
5. End of Payroll Tax Holiday – The lower payroll tax withholdings have been in effect in 2011 and 2012 and are set to expire at the end of 2012. This has been a 2% reduction on the amount of social security taxes withheld from wages for the employee portion.
6. Alternative Minimum Tax – many deductions that are allowed for regular income tax are disallowed for the AMT. The additional exemptions that have been allowed (“patches”) expired in 2011 and will not be available in 2012 or beyond unless extended by Congress.
7. Exemptions and Itemized Deduction Phase-Outs, Education Deductions and Credits, and Certain Itemized Deductions etc. have also expired for 2012 or will be expiring in 2013 unless extended by Congress.
8. Estate and Gift Taxes – $5.2 million exemption and 35% maximum bracket is set to expire at the end of 2012. It is set to revert to $1 million exemption and 55% maximum bracket.

Tax Laws and Proposals Effecting Businesses

1. Bonus Depreciation – Additional special allowances set to expire at the end of 2012.
2. Code Section 179 Expensing – Section 179 is set to go down to a maximum of $25,000 for 2013.
3. Business Credits and Deductions – Many have expired in 2012.
4. Health Care – Many rules and requirements will be going into effect.

Over the next few weeks, especially after the election, we hope to have a clearer of how things will sort and we plan on giving more detailed updates as to how these new laws and regulations may effect you.

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