A client recently asked CPA Stuart Lyons whether accelerating income into 2012 would be beneficial. The client knows that tax rates are set to rise in 2013 unless Washington intervenes before the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) sunsets on December 31. The combination of higher taxes-plus new Medicare taxes-starting on January 1, 2013 means top earners in 2013 might pay as much as 43.4% on the margin on ordinary income versus this year's 35% top ordinary rate. And the return of personal exemption phase-outs and the limitation on certain itemized deductions would ratchet the effective rate higher still.
But the political climate is so uncertain that even though conventional wisdom calls for advancing income into the current year before tax rates are set to rise, Lyons couldn't definitively give his client an answer.
Any talk about the demise of the Bush tax cuts may be premature. They came within a fortnight of expiring in 2010 before the Tax Relief Act provided a two-year extension.
The 2010 law also did something else: It shocked planners by including higher exemptions from estate and gift taxes. A last-minute deal this year laden with out-of-the-blue provisions could negate the benefit of acting today.
Then there's that little contest on November 6. Depending on the outcome of the presidential and Congressional races, the rules for 2013 could be different from today's picture of tomorrow.
The firm at which Lyons is tax principal, Baker Newman Noyes, in Portland, Maine, won't be skeleton-staffed this holiday season. "As a firm we are planning to be very busy right after the election, once we have a sense of where things may go, so that in December we'll be ready to roll during the lame-duck session" when new legislation could be enacted, Lyons says.
Accelerate Capital Gains
CPA Blake Christian has two clients currently negotiating business sales. "We're trying to close those deals by year end, if at all possible," says Christian, a tax partner at HCVT LLP in Long Beach, Calif.
For 2012 a 15% long-term capital gains rate applies to joint filers with taxable incomes (including their gains) above $70,700, or above $35,350 for singles. At lower incomes, there is no gains tax this year.
Figure 1 reveals 2013 rates to be quite a bit higher. At the top end investment profits get slapped with an additional 3.8% Medicare tax. This surtax is new next year and it applies to the net investment income, including most capital gains, of joint filers earning above $250,000 and singles earning over $200,000.
In the case of Christian's clients, they could pay up to 23.8% in 2013 versus 15% in 2012. Hence, his urgency.