“Fiscal Cliff” refers to anticipated tax increases and cuts in government spending that will occur at the beginning of 2013 when the terms of the “Budget Control Act of 2011” are scheduled to go into effect. Unless Congress acts, these changes in tax law will impact virtually everyone. Major components of this “cliff” are the expiration of the Bush-era tax cuts, as well as the expiration of the decrease in FICA withholding for employees. What does this mean to you?
Expiration of Bush Tax Cuts: Tax rates will increase for 2013 and beyond. The lowest rate will increase from a current 10 percent to 15 percent. From there, each rate will increase 3 percent from current 2012 rates with the top bracket increasing from 35 percent to 39.6 percent. This means an increase in tax for everyone, not just the wealthy. We will also see a jump in long term capital gains rates which currently are taxed at either 0 percent or 15 percent. These same long term gains will be taxed at either 10 percent or 20 percent in 2013. This jump will also apply to qualified dividends that are currently taxed at a max of 15 percent. In 2013, qualified dividends will be taxed as ordinary income ranging from 15 – 39.6 percent. These changes, along with several other tax policies set to expire or take effect in 2013, will have a significant impact on each of our tax liabilities in the future.
Payroll Tax Cuts: The reduced Social Security withholding rate of 4.2 percent for employees also expires in December 2012, returning to 6.2 percent.
Additional Medicare Surtax: An additional 3.8 percent Medicare surtax will be assessed on certain investment income (interest, dividends, royalties, rents, capital gains, etc.) for taxpayers whose income exceeds specific thresholds.
So, can anything be done to minimize the impact from these changes? YES – Planning. Tax planning can reduce your overall tax liability by helping you make informed decisions to protect yourself and/or your business. We can help. At Alerding CPA Group we specialize in helping businesses and individuals maximize their cash flow while reducing their overall tax liability. We will work with you to develop a plan that will address the “Fiscal Cliff” and give you the tools you need to land safely.
Please contact your Alerding CPA Group tax representative at 317-569-4181 for additional information. Visit our website: www.alerdingcpagroup.com.