How the 2013 Tax Law Change Impacts You and Your Business

With the signing of the American Taxpayer Relief Act of 2012 in January 2013, we avoided a trip over the Fiscal Cliff – Right?  I mean this only impacts the wealthiest 2% of Americans – Right?

Well not entirely, especially for those of us that own a business.  Actually, almost every American’s tax bill will go up in some degree.  In reality, this was a fairly large piece of legislation with hundreds of provisions that will no doubt have an impact on every business owner – especially those business owners that have not been and are currently not proactive with their strategic tax planning.  These tax law changes coupled with the additional taxes, complexities, and costs associated with Obamacare, make 2013 a critical time for business owners to take their tax planning seriously.  You can’t afford not to!  The Tax Act will impact your personal income, your ability to build wealth, retirement planning, and the planning, timing, and tax impact of your exit from the business.

The following is a breakdown of the main provisions of the 2012 Tax Act and a brief explanation of how they will impact you and your business:

  1. The Payroll Tax Holiday is over – Anyone with earned income will see their payroll taxes increase by 2%.  This tax will be felt immediately by almost everyone.
  2. Additional Medicare Tax Under Obamacare – This additional .09% tax kicks in for individuals with wages or self-employment income of $200,000 or $250,000 combined income for married couples.
  3. Tax Rates Increase for High Income Earners – Tax rates will permanently increase for individuals making more than $400,000 or families earning more than $450,000.  For these tax payers we have a return to the Clinton-era top rate of 39.6%.  It’s important to remember that this increase will hit business owners with pass though business PROFITS exceeding the threshold regardless if they pay themselves less.
  4. Obamacare Affordable Care Act Surcharge – This new 3.8% net investment income tax on individuals or families earning more than $200,000 or $250,000 respectively. [NOTE: Items 1 through 4 illustrate why a comprehensive tax plan that diversifies various income streams specifically designed to reduce the potential impact of these tax rate increases is critical.]
  5. Capital Gains / Dividends Tax Increase – Taxpayers with income of more than $400,000 individually, or $450,000 for a family will pay 20% tax on capital gains.  For taxpayer with income under the threshold, the 0% and 15% capital gain rates still apply.
  6. Estate Tax Exemption is now Permanent – As in 2011 and 2012, estates valued at less than $5.0 million will be exempt from estate taxes.  The current Tax Act makes permanent the $5.0 million gift, estate, and Generational Skipping Tax Exemption.  In 2013 the exemption for couples will be $10.0 million.  It’s important to note the actually amount will be higher because the $5.0 million and $10.0 million figure will be adjusted up annually for inflation.
  7. Estate Tax Exemption is now “Portable” for Couples – Again, similar to 2011 and 2012, the Act now makes permanent the “portability” concept whereby the unused estate tax exemption amount of the first spouse to die can be passed to the surviving spouse for future use either during their life or at death.  For example, if the first spouse dies in 2013 with $2.0 million of assets, that deceased first spouse will have a $3.0 million (again adjusted for inflation) unused estate tax exemption, which can be passed to the surviving spouse.  This would give surviving spouse a total of $8.0 million gift and estate tax exemption going forward.  Additional analysis would be necessary if surviving spouse remarries.
  8. Tax Exemption Limitations – The Tax Act phases out both itemized deductions and personal exemptions for higher income taxpayers.  Itemized deductions and exemptions are reduced for individuals when income reaches – $300,000 for couples or $250,000 for individuals.
  9. Temporary Business Tax Breaks for 2013 – If applicable, these should be incorporated into your planning before they expire at the end  of 2013:
  • $500,000 limit on the Section 179 depreciation deduction on equipment
  • 50% bonus depreciation deduction on certain acquisitions
  • Research and Development Credit
  • 100% tax-free capital gains on the sale of small business stock
  • 15 year depreciation schedule for certain leasehold improvements
  • Work Opportunity tax credits

Call us for help or with questions!

The Business Wealth Preservation Group is a professional services firm dedicated to providing superior individualized and custom service to individuals and their businesses in the areas of asset protection, tax planning, exit strategies, and wealth building. Simply put – we want to educate you on all relevant opportunities to put more dollars into your pocket, your business and your future.

We focus on leading edge, sophisticated, and safe business strategies that will help business owners structure, operate and maintain their business to take advantage of business and tax laws rather than being encumbered by them. We partner with the business, the accountant, and the attorney to ensure the business owners are capturing all available benefits that align with their business and personal goals.
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