The impending fiscal cliff could affect your taxes in 2013. The Bush-era tax cuts enacted in 2001 and 2003 are set to expire next year and new Medicare taxes take effect, according to Grant Thornton LLP. Without Congressional action, tax rates will rise to as high as 39.6 percent on ordinary income and 23.8 percent on capital gains.
"Taxpayers should be paying special attention to their year-end tax planning in 2012," said Mel Schwarz, partner in Grant Thornton's Washington National Tax Office. "This year, flexibility is the name of the game. Until Congress acts, both businesses and individuals are facing a slew of tax increases in 2013 that will turn traditional tax planning on its head. This year, successful tax planning means preparing to react to the last minute success or failure of Congress to avoid these tax increases."
Many businesses and individuals are wondering whether this is the year to reverse their tax strategy and accelerate income and defer deductions so they can pay tax before rates go up.
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Grant Thornton's Year End Tax Guide for 2012 discusses what taxpayers should be thinking about right now. The company recommends that taxpayers understand new reporting requirements. This year, for the first time, employers will be required to provide the IRS and employees with the total cost of 2012 group health coverage.
The rules for deducting investments in your business have changed. Last year, companies could fully deduct the cost of eligible equipment placed in service. Property placed in service in 2012 is only eligible for 50 percent bonus depreciation—meaning you can deduct half the cost of eligible equipment placed in service this year, while the other half will be depreciated using normal rules. Property placed in service in 2013 will not be eligible for bonus depreciation at all. To qualify for bonus depreciation, the property you place in service must be new and generally have a useful life of 20 years or less under the modified accelerated cost recovery system.
Grant Thornton warned that 2013 could bring possible tax increases, if Congress doesn't act to prevent it. Pass-through businesses whose profits are taxed at the individual level may want to consider reversing normal tax strategy and accelerating income into 2012 and deferring deductions into 2013 to avoid the rate increases. There are strategies for deferring deductions and recognizing income, but the key is to be flexible. It may not make sense to accelerate tax. We don't know what will happen legislatively yet. You want to prepare your strategies but delay executing them until the situation in Congress becomes clearer.
Corporate employers can help their employees prepare for possible tax increases by facilitating flexibility with respect to the payment of bonuses and deferred compensation. For example, many accrual basis corporations declare bonuses before year end but pay them shortly after the New Year. The corporation deducts the bonus in the year paid, but the employee does not have to include the bonus in income until the year it is paid. If it appears Congress will not act and rates will increase in 2013, it may benefit the employee to pay the bonus at the end of December, allowing it to be taxed under the current rates. But, make sure this will not force the employee into a higher bracket, and do not give the employee the option of when to receive the bonus. The IRS will treat this as constructive receipt and require the employee to include the bonus in 2012 income, whether the option is accepted or not.
Grant Thornton LLP is the U.S. member firm of Grant Thornton International Ltd.
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