Tax Update: What the Fiscal Cliff Deal Means for Business in 2013
If you believe the gossip, law-makers at the 112th Congress’ farewell/New Years party took their questionable choices very seriously, going so far as to wear lampshades on their heads to better block out inconvenient distractions like economic reality and the homeless victims of Hurricane Sandy.
I know, I know: How is this any different from any other Congressional party?
Apparently, alcohol had nothing to do with it.
On a more sobering note, I am — like many of you — still trying to determine what the 2013 tax law changes mean for my business. I offer you an brief synopsis, courtesy of my accountant friends. You will find more extensive analysis elsewhere, but here’s a summary of the new taxes that will affect the business sector.
Individual Income Tax Rates
Income tax rates are made permanent. From 2013 forward, the top individual income tax bracket will increase from 35% to 39.6% for those with taxable income of $400,000 or more ($450,000 or more for Married Filing Jointly). Taxpayers below the thresholds see no increase in income taxes.
Capital Gain Rates
For 2013 going forward, the maximum capital gains tax will increase from 15% to 20% for taxpayers with taxable income of $400,000 or more ($450,000 or more for Married Filing Jointly).
Payroll Tax Holiday
The 2% reduction in Social Security tax for employees and self-employed individuals expired at the end of 2012 and WILL NOT BE EXTENDED FOR 2013. The employee’s social security portion of FICA increases from 4.2% to 6.2% with a corresponding increase in self-employment tax.
The taxes contained in the new legislation are in addition to the 0.9% increase in Medicare tax on earned income and the 3.8% increase in Medicare tax for unearned income (interest, dividends, rental income, capital gains, etc.) for taxpayers with total income in excess of $250,000 (Married Filing Jointly), $125,000 (Married Filing Single), and $200,000 (any other filing status) that were included as part of the Affordable Care Act of 2010.
Alternative Minimum Tax (AMT)
The AMT “patch” is applied retroactively to January 1, 2012, and made permanent. For 2012, the AMT exemption amounts will be $50,600 for individuals and $78,750 for married couples. The bill also allows nonrefundable personal credits to offset AMT.
Beginning in 2013, the estate tax rate will increase from 35% to 40% for estates that exceed $5 million in value. Why does this matter? Because the estate tax affects your business but there are ways to mitigate that effect.
What These Changes Mean
Businesses will have to adapt because, among other things, they will either have to pay more to keep employees at the same “take-home” spot or employees will have to make less in their pay checks. Neither is pleasant.
Estate planning remains essentially unchanged in that the exclusion was slightly reduced and portability seems to remain intact for couples. Anybody giving more than $5 million away in their estate will now lose 40 percent to the federal government rather than 35 percent, but that’s a considerable improvement over what would have happened without a fiscal cliff deal.
Still, I am not sure this issue is settled.
The debt ceiling discussion comes up in a few weeks and the decision on sequestration (the cutting of federal spending) is delayed only a short while.
We will continue to watch, observe and, like all good journalists, lob pot-shots from the cheap seats when the opportunity presents itself.
Until then, as always, Happy New Year, good luck and good hunting!
The Fisher Law Office is renowned for its experience in estate planning, probate administration, asset protection, and business development. Annapolis attorney Randall D. Fisher has practiced for over 20 years, maintains the highest peer review rating for ethics (AV Preeminent) by Martindale-Hubbell, and is a sucker for long walks on the fairways.