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“Taxmageddon” – The Impact Of Expiring Tax Cuts

October 2, 2012

On January 1, 2013, many of the tax cuts enacted by Congress and signed by the President in 2001 and 2003 will expire. This will result in dramatic tax increases for many Americans – Perhaps sarcastically named “Taxmageddon.” Congress and the President have discussed some modification or elimination of many of these changes, however, without further legislation, look for the following changes in tax law to affect millions of Americans.

This is not intended to scare you or to be a political commentary, but to serve as information on how changes may affect your tax bill in 2013 and in years to come.

Personal income tax rates will return to pre-2001 levels

The 10% bracket increases to 15%

The 25% bracket increases to 28%

The 28% bracket increases to 31%

The 33% bracket increases to 36%

The 35% bracket increases to 39.6%

The estate tax, currently at 35% will increase to a top rate of 55% for taxpayers dying after December 31, 2012. Additionally, and in many cases of even greater consequence, is the decrease in the amount exempt from estate tax drops from the current amount of $5,000,000 to $1,000,000. This effectively exposes any of a deceased taxpayer’s net estate valued at over $1,000,000 back into taxable status. Any net estate valued at over $1,000,000 will be required to file and pay estate tax. Obviously, numerous proposals have been discussed, but until law is enacted, these new rates and limits will become law. ANYONE with estates valued near or over $1,000,000 should consult with us regarding your individual estate plan.

The top tax rates for capital gains will increase from 15% to 28%, and the top tax rates for qualified dividends will increase from 15% to 39.6%. While these rates represent the most dramatic and for the most part apply for high income taxpayers, most other taxpayers will also experience tax increases in these types of income.

Deductions for tuition payments to qualified institutions are being eliminated, and tax credits for education will be limited, as well as the classroom expenses previously allowed to teachers.

The number of tax payers subject to Alternative Minimum Tax (“AMT”) will increase dramatically. This is due to the fact that the tax rates have not been indexed.

The provisions that allowed small business to depreciate assets quickly will be repealed, meaning these businesses will receive depreciation deductions over a greater number of years than currently allowed.

And finally, certain provisions of the “Affordable Care Act” that provided for increases in payroll taxes, an increase in the exclusion of medical expenses, and several other taxes and tax changes come into effect on, you guessed it, January 1, 2013.

Is there any good news? Well yes and no. Congress and the President are actively discussing many of these issues and there may be some revisions to the laws set to take effect. We just don’t know what they are just yet.

Please stay aware of the news that will report on these issues, and as always, feel free to contact us to discuss how your personal situation will be effected.

John L. Sadd, Jr., CPA
Senior Partner

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Glendale, CA 91203

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