Breaking News – Administration Tax Increase and Reform Proposals

Published:

by Jim Wagoner, CPA | Partner, Director of Tax Services Group

On Monday, February 13, the President unveiled his budget for fiscal year 2013, which included many tax proposals. While it would be unusual for all presidential recommendations to become law, many of the proposed changes have a good chance of being enacted. We want to highlight several of the proposals so that you are aware of them, and can take them into consideration in connection with 2012 tax planning. Most of these changes would become effective in 2013 unless otherwise noted.

INDIVIDUALS
The “Buffett” rule would be enacted such that any household making over $1 million would pay at least 30% in taxes. The Administration stated that it will work to ensure that individuals who make large charitable contributions are not disadvantaged. This rule would replace the AMT (alternative minimum tax).The old higher tax rates of 36% and 39.6% for those with income over $250,000 would be reinstated. Several other individual tax changes are proposed:

  • Reinstate the limitation on itemized deductions of upper-income taxpayers
  • Reinstate the personal exemption phase out for upper-income taxpayers
  • Tax all dividend income at ordinary income tax rates for upper-income taxpayers
  • Tax capital gains at 20% for upper-income taxpayers
  • Cap the value of itemized deductions by limiting the tax rate with which high income taxpayers can reduce their tax liability to a maximum of 28%

ESTATE TAXATION CHANGES
The current estate tax exemption of $5.12 million and top rate of 35% expires at the end of 2012. The administration is proposing that the exemption amount become $3.5 million and the top tax rate be 45%. If something is not enacted, on January 1, 2013, the exemption amount becomes $1 million with a top rate of 55%!
Those married taxpayers with estates greater than $7 million need to seriously consider what their estate plan goals are, and if minimizing estate tax is one of them, working with their tax advisors to make significant gifts before the end of 2012.
Related proposed changes involve modifying the rules on valuation discounts and requiring a minimum of a 10 year term for GRATS (grantor retained annuity trusts).

SIGNIFICANT CHANGES FOR BUSINESSES
Under the President’s proposal, the LIFO method for valuing inventory would not be available after 2013. This would have a significant cash flow impact for a number of our small and family owned businesses, even if the adjustment were spread over 10 years. This proposal surfaces frequently, but since LIFO is not considered an acceptable accounting method under the new proposed International Financial Reporting rules, we think there is a good chance this could pass this year.
The proposal also would extend a number of expired or expiring provisions through 2013. The 100% bonus depreciation deduction would continue for one additional year, and the Research & Experimentation credit would be expanded and made permanent.

SUMMARY
There are many other changes proposed, and we will continue to watch and report on the direction that changes may be heading. With the likelihood of higher individual tax rates in 2013, consideration should be given to accelerating income where possible into 2012, and deferring deductions until after 2012-for example-consider not electing bonus and Sec 179 depreciation so that depreciation can be pushed out into higher tax rate years.