Question: Is there going to be a massive change to the tax code?
Answer: Maybe yes, maybe no.
Probability: A group of people will pass a group of tax-law modifications about which they know very little and these mods will change taxes.
Certainty: Taxes will get more complex, as always. There are deep economic theories at play along with deep politics.
There are groups with political agendas shouting that taxes are going up and if you earn more than $250,000 per year you will be hit hard. There are others pressing mightily for dramatic tax cuts in the name of economic expansion. Either could happen, but has not yet happened across the board with any certainty. It is, unfortunately, in the control of the group of people discussed above.
Changes Likely in 2013
The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 was passed in December 2010 and extended the Bush tax cuts for two more years (2011 and 2012), thereby leaving the maximum individual tax rate at 35 percent through 2012.
The 15 percent capital gains tax rate stays in place for 2012. Unless Congress takes action, this will go up to 20 percent on Jan. 1, 2013. We hate to make decisions living in fear of what tax laws may or may not be, but if you are looking to sell property subject to capital gains (like your practice or a piece of real estate) and it makes sense to get it done in 2012, go for it!
Section 179, the tax law that enables practice owners the opportunity to deduct 100 percent of the cost of qualified equipment, was capped at a maximum of $500,000 for 2011. This drops to $125,000 for 2012 and $25,000 for 2013 under current law unless some other action is taken by the Powers that Be.
Bonus depreciation was available for 2011, which allowed for the write-off of 100 percent of the cost of investing in certain classes of assets purchased and placed in service during the year. This bonus depreciation ended in 2011.
More on the personal side: For 2011 itemized deductions, the threshold before itemized deductions start becoming limited is $169,550. Under the current provision, the overall limitation on itemized deductions will remain the same through 2012.
What does that mean?
To put it simply, for taxpayers who are higher wage earners, you will be limited on what you can deduct, assuming you are taking the itemized deduction vs. standard deduction starting in 2013.
For 2011, the amount deductible for each personal exception (taxpayer, taxpayer’s spouse and dependent) is $3,700. The amount is indexed annually for inflation, and for 2012 the personal exemption will be $3,800.
The child tax credit can be taken on each qualifying child under the age of 17. The credit for 2011 and 2012 is to remain at $1,000 per qualifying child. There is a provision where this credit begins to get phased out based on your specific adjusted gross income, or AGI. The credit is expected to go to $500 per qualifying child in 2013.
Unfortunately, these changes and updates become increasingly complicated to everyone, further complicated by the political implications of taxes.
It’s probably fair to say that some of these tax cuts don’t just help the “rich”—they help everybody who files income tax returns. Operating in a state of unknown on future taxation is not good for the economy, the nation or any of us. But politics rule on this one and it is most unlikely anything will happen before the November elections.
Thus, don’t hold your breath waiting for a resolution of this mess. The impact on the national economy of both a tax increase and a series of draconian cuts to business tax incentives is unthinkable.
The entire situation is exacerbated by a series of complex economic theories that boil down to the questions:
- Does government stimulus help or hurt us? Is it required or superfluous?
- Is the recession over, or stagnated?
- Will fighting the deficit now throw the country and the world into an economic abyss?
Michael Porrello is a business partner of Live Oak Bank. He is with Lachter McDonald and Co., CPAs, P.A., of Seminole, Fla.
This Education Series article was underwritten by Live Oak Bank, based in Wilmington, N.C.