Expiring Tax provisions – Individual

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Today we’ll discuss individual tax provisions which will expire on December 31, 2012. First rates for all taxpayers including the lowliest are going up. The 10% rate will become 15% for low income individuals. They will also lose the earned income credit and their withholding taxes will go up from 4.2% to 7.125%. And if the rent their apartment and don’t own a home, their standard deduction will be lowered as well.

The middle class gets a tax increase as well. The 25% rate goes to 28%, 28% to 31%. They also get an increase in payroll taxes. The marriage penalty will be back. And they will suddenly be subject to the alternative minimum tax. They lose the Child tax credit, the higher education deduction, the dependent care credit, the energy efficient homes credit, and the adoption credit.

But what about the rich? Well their rates go up from 33% to 36% and 35% to 39.5%. However for dividends, their rates will go up from 15% to a maximum rate of 39.5% (plus the new Obamacare tax of 3.8%). The capital gains rates will go up from 15% to 20% (plus the new Obamacare tax of 3.8%). The phase out of itemized deductions and standard deductions will come back again. The marriage penalty will hit them as well. All in all everyone suffers when we go over the fiscal cliff.

Estate Taxes (Death Taxes). The exemption from estate taxes goes down from $5 Million per person/ $10 Million per couple down to $1 Million per person and $2 Million per couple. That means that if a person owns a small business or farm, has socked away a few hundred thousand in the 401(k), owns his own home, and has some money in the bank, he’s going to owe death taxes.

Some estimates are that if these changes are implemented the Government revenues will go up $482 Billion. That averages $1,333 per American. The 50% who don’t pay taxes, will in many cases now start to pay taxes. That figure is misleading since anyone who earns $100 pays payroll taxes. So, even those who “pay no taxes” will have a tax increase due to expiring laws.

PLANNING TIPS:
If you have illiquid assets the rest of 2012 may be a good time to sell them or give them to family members in order to take advantage of lower capital gains rates and higher gift tax exclusion for 2012. Additionally if income can be recognized in 2012 instead of 2013, it might be a good year to do that. I would say, plan deductions for 2013 since rates are higher, but with the possibility of the phase out of itemized deductions and the resurrection of the alternative minimum tax, that might not be advisable and you should have someone run the numbers for you.

Fiscal Cliff, Tax Reform and Lame Ducks

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The ballots have been cast. The election is over and now the work of legislation begins. The question in Washington is this. Can the Democrats let the Fiscal Cliff hit and blame it on the Republican Congress? If they do, its the “old” Congress that technically won’t be in office next year.
Scenario 1
So, here’s what the lame duck could look like. The House will pass yet another budget. The Senate will sniff at it, pooh, pooh it and say its too extreme and they won’t deal and by the way, won’t propose one of their own. They let the Bush Tax cuts expire and the Government falls off the Cliff, the Bush era tax cuts expire, the markets tumble, real estate values plummet near military bases and government establishments and general mayhem erupts. Both sides blame each other.

Scenario #2
The House passes a budget with a few nuggets for the democrats, the Senate gets it, sniffs at it and passes one of their own which is DOA in the house. It goes to Committee and the House send in a Turk Committee of Ryan and Cantor, the Senate sends Schumer and Kerry. After a week of non-productive meetings, the President comes back from vacation and asks to meet with the Committee. He calls Ryan and Cantor every name in the book, things break down and we fall off the cliff.

Scenario #3
Senators Begich, Landreau, Franken, and Udall (CO) and Kay Hagen meet with Collins, Hutchinson, Brown and Lugar and agree to vote cloture on any filibuster of the budget bill, a new Gang of 8 with three lame ducks and several at risk in 2014 in possibly red mid term states. And something gets passed which neither the democrats nor the Republcans like.

All we can say is the end of 2012 will be interesting and scarry. Don’t forget the Winter Solstice Mayan Prediction. The world ends on December 21. Of course that should be right about the time Congress adjourns for the year.

We’re back

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After a lot of summer activities, we’re back at it. Congress is trying to get in and out of town as fast as humanly possible. It is therefore clear that there will be no tax legislation except for perhaps small ad-ons that lobbyists get into the law. So, be prepared for a year-end panic as Congress and the President “negotiate” the next tax law.

2013 and the new tax from the health care law.

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Starting in 2013, unearned income will bear an extra 3.8% surtax. This includes capital gains. This means that one should probably consider taking capital gains in 2012 to avoid this law. This also means that perhaps sales to family members using self cancelling installment notes, might be advisable in 2012 and recognizing the gain in 2012 even though you don’t yet have the cash. With the real estate market still recovering slowly at best, its a good year for intrafamily sales since fair market values are low.

Exceptions to Individual Mandate

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There are at least six exemptions from paying the Individual Mandate:
1. Religious Exception. If you are a Christian Scientist who does not believe in health care, you do not have to pay the mandate.
2. Native Americans. If you are a member of a Tribe, you will be covered under Tribal Health Plans and not have to file.
3. Illegal Aliens. Yes, you guessed it, if you’re not supposed to be here, you don’t have to pay the Individual Mandate even though the Emergency Care Act says that the Hospital has to treat you without insurance. Gotta love this one.
4. Prisoners. You get health care of some sort in prison. Free dental work as well.
5. You can’t afford health insurance. This provision will likely generate at least 100 pages of regulations concerning affordability. Presumably, it will be based upon standards of living already contained in the Internal Revenue Manual for collections. These vary from locale to locale.
6. Below the filing Threshold. If you’re single under sixty-five and earned under $9500, you’re exempt. If you’re over 65 and earned under $10,950, you’re exempt. If you’re married filing jointly that is $19,000 under 65 and $20,150 over 65.
7. Under 18, your tax liability is divided by two for no apparent reason.
So, not everyone is subject to the tax. Soon, we’ll discuss who pays for this.