On January 1st, Congress acted at the last minute and permanently preserved most of the George W Bush-era tax cuts (EGTRRA and JGTRRA) as well as extended other lapsed tax provisions.
The EGTRRA is the Economic Growth and Tax Relief Reconciliation Act of 2001
The JGTRRA is the Jobs and Growth Tax Relief Reconciliation Act of 2003
What does that mean for you and your business? Here is a brief summation:
No longer will Congress be faced with patching the alternative minimum tax (AMT)
Non tax features include one year extensions of emergency unemployment insurance, agricultural programs, and a postponement of automatic cuts in Medicare payments to physicians.
Employee portions of the Social Security payroll tax which was at 4.2% was not extended and has reverted back to 6.2%
Some of the features of the act include:
Individual tax rates will remain the same except for a new top rate of 39.6% which will be imposed on taxable income over $400,000 for single filers and $450,000 for married taxpayers filing jointly. ($225,000 for married spouses filing separately)
Itemized deductions and personal exemptions will be at a higher threshold of $250,00 for single taxpayers, $275,000 for heads of household and $300,000 for married taxpayers filing separately.
Capital gains and dividend at a 20% rates for individuals in top income brackets, 15% for middle income and zero rate for taxpayers in 10% and 15% brackets.
AMT is indexed for inflation permanently. 2012 will be $78,750 for married taxpayers filing jointly and $50,600 for single filers.
Estate and gift tax is retained at $5 million but will increase for top rate payers from 35% to 40% as of Jan 1, 2013.
Permanent extensions as part of EGTRRA include marriage penalty relief, child and dependent care credit rules, exclusion for National Health Care Services Corps and Armed Forces Health Professions Scholarships, exclusion for employer-provided educational assistance, rules for student loan deductions, contribution rate for Coverdell educational savings accounts, employer-provided child care credit, tax exempt bonds for educational facilities, repeal of collapsible corporation rules, rates for accumulated earnings tax, personal holding company tax and tax treatment for electing Alaska Native Settlement Trusts.
For a full list of other extensions and provisions please read:
The good news and the bad news for business owners:
The good news is that there will be greater certainty in taxes for most taxpayers, which has been a major concern for most people.
The bad news is that are still going to be tax increases, some of which are hidden.
The tax increase to 39.6% for upper income taxpayers will equal $396 billion over 10 years. Since small and medium size businesses are typically organized as LLC’s, S Corps or partnerships, the ordinary income rate will hit these business owners rather than the corporate rate.
The 20% increase in capital gains/dividends is in addition to the 3.8% add-on tax for capital gains and dividends included in the health bill.
The elimination of phase outs of personal exemptions and certain itemized deductions that were eliminated with Bush tax cuts are coming back. This will potentially add $152 billion dollars in tax hits over the current 2012 tax policy.
Small businesses will want to take advantage of the R & D tax credit and are encouraged to sit down with their accountants to focus on tax credits available.
It is also recommended that business owners take advantage of the IC-DISC which is a major tax benefit but as the IRS has recently ordered audits on this, it is imperative that this be done correctly. Again, a good reason to set up a consultation with your accountant.
For more information on The Fiscal Cliff Deal please read:
Click here: Congress passes fiscal cliff act
Kevin E. Thompson, CPA
1014 S. Pacific Coast Hwy. #105, Redondo Beach, CA 90277
310-792-0819 (Fax) 310-872-5647
2601 Ocean Park Blvd. #310, Santa Monica, CA 90405
310-450-4625 (Fax) 310-450-6787