Obama and a lame duck Congress fail to act before January 1, 2013, a huge,
totally unprecedented tax increase will hit all taxpayers. Federal Reserve chairman Ben Bernanke called
it a “massive fiscal cliff.” More and
more economists are agreeing that Taxmageddon will lead to a recession in 2013.
The $494 billion
in tax increases can be summarized as follows (figures in millions):
Sources: U.S. Office of Management & Budget, Budget
of the U.S.
Government for 2013; Joint Committee on Taxation, “Estimated Budget Effects of
the ‘Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of
In total, there are 78 different tax
increases that will affect every taxpayer in the United States!
The following is
a list of the major items that will take effect January 1, 2013:
income tax rates will rise. The top income tax rate will rise from 35
percent to 39.6 percent. Most small
businesses are S Corps and pay their business taxes at this higher rate. This will lead to layoffs, delayed employee
raises, and higher prices to customers.
The lowest tax rate will rise from 10 percent to 15 percent. Of course, all brackets in between will also
rise. Itemized deductions and personal
exemptions will again phase out, which has the same mathematical effect as
higher marginal tax rates.
penalty returns. The “marriage penalty” (narrower tax brackets
for married couples) will return from the first dollar of taxable income. The standard deduction will no longer be
doubled for married couples relative to the single level.
The child tax
credit reduced. The credit will be cut in half from $1,000 to
$500 per child.
death tax returns. The death tax is currently 35 percent with an
exemption of $5 million ($10 million for married couples). A person leaving behind two homes and a
retirement account could easily pass along a death tax bill to their loved
rates on savers and investors. The capital gains tax rate will rise from 15
percent to 23.8 percent in 2013. This is
because of the scheduled rate hikes plus the ObamaCare investment surtax.
device tax begins. Medical device manufacturers employ 409,000
people in 12,000 plants across the country.
This law imposes a new 2.3 percent excise tax on gross sales—even if the
company loses money that year. It does
exempt items retailing for under $100.
Medicare payroll tax hike takes effect. The Medicare payroll tax is
currently 2.9 percent on all wages and self-employment profits. Starting in 2013, wages and profits exceeding
$200,000 ($250,000 in case of married couples) will face a 3.8 percent rate.
decreases medical expense deduction. Current law allows a medical
deduction for those who itemize. The
amount of the medical deduction is currently reduced by 7.5 percent of the
taxpayers Adjusted Gross Income (AGI).
Starting in 2013, ObamaCare increases the amount of the medical
deduction to that amount above 10 percent of AGI.
relief expires. The alternative minimum tax (AMT) is
estimated to apply to 31 million families in 2013, up from 4 million families
that had to pay the tax in 2012. If the
AMT applies, the taxpayer calculates their tax twice, and pays at the higher
expensing of equipment disappears. In 2011, businesses can
expense half of their purchases of equipment.
Starting in 2013, all of it will have to be depreciated and deducted
over many years.
Not to mention
another 69 tax deductions or credits that will disappear.
There are literally tons of items that have the result of increasing the
tax liability of small businesses and their owners. Next month we will go over these in more
So what does the
business owner do? Tomorrow I will
discuss what steps a business owner should do in order to minimize the effect
Until next time, thank you
for your continued support and let’s make this year our most profitable year
Like any good CPA, I need to add a
disclaimer. Unfortunately, it is
impossible to offer comprehensive tax info over the Internet, no matter how
well-researched or written. And
remember, I love my readers, but having me bookmarked on your computer doesn’t
make you a client. Before relying on
any information given on this site, contact a tax professional to discuss your