Post-Election Tax Policy for Individuals

Dec. 6, 2012 - PRLog -- The re-election of President Barack Obama for a second term sets in motion negotiations between Democrats and Republicans over Bush-era tax cuts and expiring tax extenders. At this time both sides may have to settle for a temporary extension of some of the expiring provisions, including some income tax rates, and leave the “grand bargain” that permanently resolves the fate of the Bush-era tax cuts and more to the Congress which will meet in January 2013.  

DEADLINES
At this point, effective January 1, 2013:
· the Bush-era tax cuts, extended by the Tax Relief and Job Creation Act of 2010, expire
· across-the-board spending cuts take effect under the Budget Control Act of 2011
· the employee-side payroll tax holiday ends
· more individual and business tax extenders expire

INDIVIDUALS
Any extension of the Bush-era tax rates will most likely be accompanied by deficit reduction measures, the extent of which is unclear at this time. Some of the likely revenue raisers are increased marginal tax and elimination of certain tax preferences for higher-income individuals.  As a result, higher-income individuals must decide whether to wait or take advantage of current rates now through accelerating income, postponing deductions, triggering capital gains or completing sales/acquisitions, and having closely-held corporations declare dividends before the end of 2012. Lower and moderate income individuals are expected to benefit from the continuing lower tax rates, but there could be changes in the income thresholds that trigger higher rates.  

Here are the proposed tax brackets under President Obama’s plan for 2012 taxable income:

Tax Rate…..Married Filing Jointly..…Single

10%............$0-$17,850……….….$0-$8,925
15%............$17,850-$72,500….…$8,925-$36,250
25%............$72,500-$146,400…...$36,250-$87,850
28%.…..….$146,400-$223,050…..$87,850-$183,250
33%............$223,050-$266,400.…$183,250-$213,200
36%….…...$266,400-$398,350.…$213,200-$398,350
39.6%.........$398,350+….…….…. $398,350+

As part of the sunset of Bush-era tax benefits, after 2012 higher-income taxpayers also would be subject to personal exemption phase-out and the limitation on itemized deductions. President Obama has instead proposed to limit the value of otherwise allowable deductions to 28% of adjusted gross income for those in his proposed 36% and 39.6% tax brackets.  

Furthermore, the President’s proposal includes increasing the tax rate on qualified capital gains to 20% for single individuals with incomes over $200,000 and married taxpayers filing jointly with incomes over $250,000. Regarding dividends, single individuals with incomes over $200,000 and joint filers with incomes over $250,000 would pay tax on dividends as ordinary income. The current zero and 15% capital gains and dividend tax rates would be extended after 2012 for single individuals with incomes below $200,000 and joint filers with incomes below $250,000.  

As a result, higher-income individuals can consider such strategies as accelerating long-term capital gain, which has the certainty of being taxed at 15% maximum in 2012 or increase carryover losses into potentially higher rates in years after 2012. For those in control of C corporations, declaring special dividends to be distributed before 2012 may prove to be wise if top rates on dividends rise from 15% to 43.4% (39.6% plus 3.8% Medicare surtax).  

With respect to Alternative Minimum Tax (AMT), the rates of 26% and 28% on the excess of alternative minimum taxable income over applicable exemption amount are not scheduled to change in 2013. However, the exposure to AMT may change as the result of the scheduled sunsets to the regular tax. Since a determination of AMT liability requires a comparison between regular and AMT computations, having regular taxes higher may lower exposure to AMT. No single factor automatically triggers AMT liability, but some common factors are itemized deductions for state and local income tax, miscellaneous expenditures and home equity loan interest, and changes in income from installment sales.

For the past two years, the employee share of Old Age, Survivors and Disability Insurance (OASDI) taxes has been reduced from 6.2% to 4.2% (with comparable relief for self-employed individuals). Under the current law, that reduction is scheduled to expire at the end of 2012. It is unclear at this time if President Obama will push for an extension of the payroll tax cut, or an equivalent substitute, as part of a year-end tax package. As a possible strategy, accelerating any bonuses and employee recognition payments into 2012 for employees below the wages base of $110,100 will allow them to save 2%. Self-employed individuals in a similar position should try to accelerate self-employment income into 2012.  

When it comes to individual tax extenders, the following have a strong likelihood of renewal:

· Higher education tuition deduction
· State and local sales tax deduction
· Teachers’ classroom expense deduction
· Qualified charitable distributions from IRAs

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Jo Ann Koontz is an attorney and CPA practicing in the areas of real estate, business law and taxation. She can be reached at (941) 225-2615 or joann@koontzassociates.com.