Congress has passed the American Taxpayer Relief Act. What does this mean for you and your small business?
Through our legislative contacts and lobbyists, PPAI has access to up-to-the-minute information, insight and analysis that you won’t see published anywhere else. The information in this month’s special Washington Report will help you understand how what happens in D.C. – and now under the American Taxpayer Relief Act – can affect your business and employees. It is timely information that will help you become more aware and better prepared to advocate for your business, profession and industry.
I hope you find this information beneficial to your business.
THE AMERICAN TAXPAYER RELIEF ACT
Congress has passed the American Taxpayer Relief Act. For some taxpayers, taxes will go up but on balance, for businesses, it provides certainty. In particular, one long-time PPAI priority has finally been resolved. Estate tax relief has been made permanent. On the downside, the payroll tax holiday expires and some new payroll taxes have taken effect. As a result, notwithstanding the income tax changes, employees’ paychecks will shrink compared to the last couple of years.
Let’s start with the good news.
INCOME TAX RATES
Most of us will not see a change in our income tax burden. The new law continues the 10, 15, 25, 33 and 35 percent brackets put into place in 2001. The new laws adds a new 39.6 rate for individual incomes over $400,000 and over $450,000 for married couples.
ALTERNATIVE MINIMUM TAX
After making the tax brackets permanent, fixing the Alternative Minimum Tax (AMT) may be the biggest item of relief for PPAI members. The AMT applies if taxpayers have income over certain levels. The income levels were not inflation indexed. Over the years, Congress applied “patches” to the income levels, adjusting them for inflation. The last patch actually expired at the end of 2011. As a result, the lower income levels were scheduled to apply to 2012 income.
The new law applied a permanent patch with inflation indexing. The levels that apply to your 2012 income are $78,750 for married couples filing jointly and $50,600 for individuals.
ESTATE TAX RELIEF
The new law makes the revisions temporarily enacted by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRUIRJCA), permanent. The estate exemption for an individual is $5 million inflation adjusted. (It was $5.12 million for 2012). “Spousal portability” of the exemption amount is continued. (Under prior law, couples had to do complicated estate planning to claim their entire exemption. Since TRUIRJCA, the executor of a deceased spouse’s estate has been allowed to transfer any unused exemption to the surviving spouse without such planning.) The top marginal estate tax rate is now 40 percent.
If you have been postponing new equipment purchases because of the cliff uncertainty, the good news is that tax incentives have been retained and actually enhanced. Internal Revenue Code Section 179 allows business to write off small amount of annual investment in capital assets such as machinery in the year of purchase in lieu of depreciating the investment over a number of years. The allowance is reduced and eliminated completely the more capital assets a business buys during the year. The provision was scheduled to drop to pre-2001 levels of $25,000 as the amount that can be written off and $200,000 as the purchase amount “cap.”
Under the new law, for 2012 and 2013, the amounts are actually increased back to their 2011 levels of $500,000, as the amount that can be written off in a year and a taxpayer cannot use the provision if more than $2,000,000 of equipment and machinery is purchased in the year. Neither amount is inflation indexed. (This in effect is a retroactive increase for 2012 for which lower amounts were in place so if you did make some equipment purchases and exceeded the cap you might have a small tax windfall.)
The amounts drop to their pre-2001 levels in 2014.
If the direct expensing allowance is not enough, the 50 percent depreciation bonus, which was set to expire at the end of 2012, is extended for another year through 2013.
CAPITAL GAINS RATES
The capital gains maximum tax rate for an individual has been 15 percent. Any adjusted net capital gains, which otherwise would be taxed at a 10- or 15-percent rate, has been taxed at a zero rate.
For taxable years beginning January 1, 2013, the maximum rate of taxation on the adjusted net capital gains of an individual is 20 percent for individual taxpayers with taxable income over $400,000 ($450,000 for married couples). It will remain at 15 percent for incomes below that level except any adjusted net capital gains, which otherwise would be taxed at a 10- or 15-percent rate, is taxed at a zero rate.
As a result of 2003 changes, an individual’s qualified dividend income has been taxed at the same rates that apply to net capital gains. The new law continues the rates link to capital gains rates, so for taxable years beginning January 1, 2013, an individual’s qualified dividend income is taxed at rates of zero, 15 percent, or 20 percent, depending on the individual’s income level.
THE BIGGEST BAD NEWS
The payroll tax holiday is over. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 reduced the Old Age, Survivors, and Disability Insurance (OASDI) rate by two percentage points to 4.2 percent for the employee portion of the FICA tax. Similarly, for taxable years beginning in 2011, the OASDI rate for a self-employed individual was reduced by two percentage points to 10.4 percent. The Temporary Payroll Tax Cut Continuation Act of 2011 extended that two-percentage point reduction through the end of February 2012. In 2012, the Middle Class Tax Relief and Job Creation Act of 2012 (MCTRJCA) extended the temporary two-percentage point payroll tax “holiday” for employees (and to the same extent, to the self-employed) through the end of 2012.
Effective January 1, 2013, the OASDI tax rate for employees returns to 6.2 percent (and comparable return in the self-employment tax).
NEW HI TAX INCREASE
A new tax, put in place by the health care reform law, is effective January 1, 2013. The Hospital Insurance (HI) trust portion) of the payroll tax increases to 2.35 percent from 1.45 percent (i.e. a 0.9 increase) on the wages or self-employment income over $200,000 for an individual return and $250,000 for a joint return. There is no limit on the amount of wages or self-employment income that is subject to the tax (unlike the social security portion of the FICA tax, which has a wage cap). This is an increase in the employee’s share only. The employer will continue to pay its 1.45 percent rate share on the employee’s wages. In the case of the self-employed, they will pay “only” the additional 0.9 percent on the income above the $200,000/$250,000 threshold.
A second new tax included in the health care reform law is also effective January 1, 2013.
The health care reform law established a new “Unearned Income Medicare Contribution” (UIMC) tax. The IRS is calling it the “Net Investment Income Tax” or the “NIIT.” This tax applies to “net investment income” which is interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than property held in a trade or business). The rate is 3.8 percent. The NIIT on net investment income will not apply if modified adjusted gross income is less than $250,000 in the case of a joint return, or $200,000 in the case of a single return.
The tax is paid when you file your tax return for the year. Since the tax is effective on January 1, 2013, the first time most taxpayers will include the tax will be in 2014 when they file their returns for tax year 2013. However, if you pay estimated taxes during the year the IRS observes, taxpayers “should adjust their income tax withholding or estimated payments to account for the tax increase in order to avoid underpayment penalties.” The IRS has information at
The action in Washington was not limited to Congress and the President. Just before the year ended, the Department of Treasury and the Internal Revenue Service (IRS) released an important proposed rule for “large employers” under the health care reform law known as the Patient Protection and Affordable Care Act (PPACA).
The short hand definition of “large employer” for the purposes of the law is 50 or more full time employees. In reality, the process for arriving at that number is quite complicated. The proposed rules cover the process “from soup to nuts.”
The proposed regulations also cover the processes for determining whether a large employer might be liable for the two potential penalties for: 1) not offering adequate coverage to all full time employees (and their dependents), or 2) offering coverage and having an employee obtain coverage from an exchange anyway.
While these are proposed rules, they state that employers may rely upon them until final guidance is issued. A copy of the proposed rules can be found at http://www.irs.gov/pub/newsroom/reg-138006-12.pdf and there are some Q&As at http://www.irs.gov/uac/Newsroom/Questions-and-Answers-on-Employer-Shared-Responsibility-Provisions-Under-the-Affordable-Care-Act