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Tax Changes are on the Horizon

A lot of speculation exists about the future of the country during an election year. The
speculation is amplified thanks to the fact that the news and updates are accessible anywhere at any time via smartphones, over the internet or from 24-hour television news. While the issues seem to change daily, one overriding theme in any campaign or presidential election is taxes. What should be done with the current laws? Some say taxes are too high, others say tax more. It is a divisive argument and one that will likely dominate the campaigns, but actual change will likely not take place until the end of 2012 at the earliest.

While the campaigning might stall progress, a few things are set to change as the Bush-Era tax cuts expire at the end of 2012. There are also certain provisions that were not necessarily related to the Bush-Era cuts, but provided opportunities to
accelerate depreciation which have already gone away or been significantly modified.

If the Bush-Era tax cuts are left to expire on December 31, 2012, the impact on each taxpayer could be substantial. Here are a few of the changes that are in store specifically related to the expiration of the Bush-Era cuts.

1. Long-term capital gains rates will increase from 15% to 20%. Therefore, stock sales and the sale of other capital investments, including a business will automatically cost the seller 5% more in 2013 than it will in 2012.

2. For 2012, Qualified Dividends are being taxed at 15%. That rate would increase to 39.6% in 2013. The press has made a huge deal of Mitt Romney’s personal income tax rate. He has enjoyed a lower rate because much of his income is from capital gains and qualified dividends. That might change dramatically with an increase in these rates.

3. All of the individual income tax rates are set to revert to the pre-Bush levels. The Bush tax cuts are officially called the Economic Growth and Tax relief Reconciliation Act of 2001 and Jobs Growth Reconciliation Act of 2003. These laws effectively created six tax brackets – 10%, 15%, 25%, 28%, 33% and 35%. Effective January 1, 2013, the 10% bracket goes away and becomes 15% and the others increase to
28%, 31%, 36% and 39.6%. The top rate actually increases to over 40% when certain phase-outs for personal exemptions and itemized deductions are considered.

4. There are also additional taxes that have been noted by President Obama under the new healthcare plan that would drive the tax rates for top earners up even higher.

Under each of these scenarios, everyone will be paying more in taxes simply because the government does nothing to the current laws before December 31, 2012.

A significant change that affect business owners and especially the owners of construction companies that have substantial heavy equipment are rules surrounding depreciation.

100% bonus depreciation was available for the purchase of new equipment during 2010 and 2011. That meant most acquisitions of new equipment could be depreciated or written off 100% in the year of acquisition. That certainly allowed several companies to take advantage of lower interest rates and put new equipment into production while generating a significant tax savings. Effective January 1, 2012, bonus depreciation for new equipment was still available, but only up to 50% of the purchase price. While this still provides an opportunity to accelerate depreciation, it is at a greatly reduced level.

The other component of depreciation that has changed is sec. 179 depreciation limits. While bonus depreciation was limited to new equipment, used assets qualified for sec. 179. The limits on sec. 179 were $500,000 in 2011 and that amount is reduced to $139,000 in 2012. 2011 also provided special rules for certain real estate improvements up to $250,000, which are no longer available.

The landscape is likely to change no matter who is in office after the November elections. However, a campaign year often stifles progress and creates uncertainty. There have been several suggestions from the candidates as to what should happen, but until someone takes office it remains to be seen what actually will happen.