Changes on Horizon Pose Challenges for 2012 Year-End Tax Planning

Now that the elections are over, the year is drawing to a close, and Congress is actively negotiating alternatives to avoid the so called “fiscal cliff,” we are confronted with many tax planning challenges.  This year is virtually unprecedented with the sheer number of tax law changes on the horizon.

Since the composition of the two houses of Congress and White House has not changed with the election, we cannot easily predict if any or all of the scheduled changes will actually occur in 2013.  Coupled with the very short time frame to act, this uncertainty requires tax practitioners to help their clients prepare alternative plans that allow different strategies to be executed, depending on the law enacted.

As the year-end draws closer and the landscape becomes clearer, we know that tax rates will rise on income for our wealthiest clients.  As the negotiations are finalized, we will be in a better position to advise our clients on which tax rates will increase, how much they will increase and what planning strategies they should implement.

What makes this planning especially challenging is not knowing how Congress will act in allowing several provisions to expire and how several new provisions will impact the strategies. We need to keep both possibilities in mind.

Some scheduled changes in 2013 include:

Expiring Provisions Related to Individuals

Individual income tax rates will increase to a maximum of 39.6 percent; long-term capital gains rates will increase to 20 percent; qualified dividend rate will cease to be taxed at 15 percent and will be subject to the maximum ordinary income tax rate of 39.6 percent.

Expiring Provisions Related to Businesses

Section 179 expense will decrease to $25,000; the 50 percent bonus depreciation provision will expire.

Expiring Provisions Related to Estates and Gifts

The estate and gift tax exemption will decrease from $5.12 million to $1 million; estates with assets greater than the   $1 million exemption will see   tax   rates increase.

New Provisions

A Medicare surtax of 3.8 percent on net investment income for certain taxpayers; an increase in employee Medicare tax of 0.9 percent.