Finance & Enjoyment Blog

 

As of this writing, the tax cuts signed into law back in 2001 and 2003 are set to expire at the end of 2012. As there is not enough room in a blog to go through all of these expiring cuts in detail, we will highlight those that will have the biggest impact on our clients in 2013.
 
Income tax brackets will change.   Currently there are six tax brackets, with the lowest at 10% and the highest at 35%. In 2013, there will be five brackets, with the lowest at 15% and the highest at 39.6%. For a couple with $50,000 of taxable income, their taxes are expected to increase by $870. For a couple with $350,000 of taxable income, their tax liability is expected to go up by $10,661. These increases are 13.1% and 11.5%, respectively, of their tax liability under the 2012 rates.
 
The marriage penalty is scheduled to come back next year. The tax cuts had also increased the size of the married filing joint 10% and 15% brackets to double those of a single taxpayer. The new 15% bracket will only by 167% of the single bracket.
 
Taxes on investment income will be changing also. Capital gains are currently taxed at 15% for most taxpayers. For those individuals in lower tax brackets, they could be paying no tax on capital gains in 2012. In 2013, this will be at least 10. For others, the rate goes from 15% to 20%. Certain high income tax payers will even have a higher rate than that, but that will be covered in another blog. Qualifying dividends have enjoyed a 15% tax rate for the last few years. That special tax rate goes away and dividends will be considered ordinary income and be taxed the same as wages and other ordinary income. This means the 15% rate could go up to 28%, 31%, 36% or even 39.6%. 
 
In addition to higher rates, itemized deductions and personal exemptions are also being changed and not for the better. In 2013, the 3% reduction of itemized deductions for higher income taxpayers is set to return. The personal exemption phase-out also returns. Taxpayers with income above a certain level will lose their personal exemptions. 
 
There are also some changes with respect to the Dependent Care Credit and the Child Tax Credit. The Dependent Care Credit will go from $3,000 per child and $6,000 limit for more than one child, to $2,400 and $4,800. Phase-out of this amount will begin at lower levels. The Child Tax Credit will go from $1,000 per child to $500 per child. 
 
Given these pending changes (stay tuned for any tax law changes passed by a lame-duck session of Congress), there are some opportunities for tax planning. For small business owners who typically own pass-through entities, you may want to bring revenue forward into 2012 to pay tax at a lower rate. Keep in mind that it might not be that simple. Increased income can mean the loss of medical expenses as an itemized deduction as the floor for deducting those will increase. There could also be alternative minimum tax implications to this as well. Also, if you own a c-corporation, should a dividend be declared in 2012 to take advantage of the lower dividend rate of 15%?
 
As our tax code gets ever more complicated, KKB is staying on top of the changes and ensuring our clients are well informed as to the law changes and well advised as to the changes they can make. Please contact us with any questions you may have.
 


Posted in Your Financial House » Retirement and Exit Strategies » Rules and Regulations »



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