As we enter the final months of 2012, it’s smart to note any tax law changes expiring at the end of the year. While some of the following opportunities may change, depending on the outcome of the November elections, they are important for small business owners to note looking forward to 2013.
Right now, everything is in a state of flux depending on both the presidential and congressional elections. If Republicans prevail in both, it is doubtful all of the changes for 2013 will come to fruition. That’s not a political statement, just a reflection of what the candidates have said.
Regardless of the election results, planning for year-end 2012 means looking into 2013. The following opportunities to manage your tax bill should not be affected:
• You should shift income to the more advantageous year. The 2 percent payroll tax (FICA) reduction is due to expire in 2012. If your income is below the $110,100 threshold, it would be best to shift income into 2012 to avoid this increase.
• The same advice goes for those who may be affected by the 0.9 percent Medicare tax increase on wages above $250,000 ($250,000 for married couples who file jointly), plus the new 3.8 percent Medicare tax on investment income for individuals with a modified gross income above $200,000. These have already been enacted under the health care reform law. These tax hits will affect mainly business owners, and many people are not aware of them for next year.
• The same advice goes for deductions. Generally, if you believe that ordinary tax rates will increase next year, it is generally best to push deductions into next year. But if you do not believe rates will rise, generally it is best to take them in the current year. Higher-income taxpayers may have their deductions curtailed next year if the repeal of the deduction limit is allowed to expire. Generally, this would mean that married joint filers with incomes above $166,800 could have their itemized deductions reduced by up to 80 percent. This would affect major items such as the mortgage interest deduction, charitable contributions, real estate taxes, etc. and more. This is a distinct reality, since both presidential candidates have floated the idea of limiting deductions at some income level. Without action, this repeal will take place and the deductions will be limited for higher-income taxpayers.
• The medical expense deduction threshold is scheduled to increase to 10 percent of adjusted gross income due to the healthcare reform act. Currently, you can deduct medical expenses only to the extent they exceed 7.5 percent of AGI. Again, without specific action, this is scheduled to happen.
• Capital gains rates are scheduled to increase from the current 15/0 percent levels to 20/10 percent in 2013. If you believe you know which candidate will win, you may be better off selling appreciated stocks, bonds and other assets in 2012 to minimize the tax. Most advisors recommend not making decisions based solely on the tax consequences.
Bob Patterson is a licensed certified public accountant and owner of Patterson & Company CPA in Louisville, Kentucky. With over 20 years experience as president and partner for Consumers Choice Coffee, Patterson uses his business expertise to empower small business and restaurant clients with the information and skills needed to manage their business and financial affairs with confidence. For more information, visit pattersoncpa.com, call (502) 276-0956 or email [email protected].