Business owners and individuals across the country are watching (perhaps anxiously) to see if Congressional lawmakers are able to get down to business and prevent going head first over the “fiscal cliff”, the potential effect of the expiration of many tax provisions and required spending cuts to begin in 2013. Here are some of the more important changes that will go into effect this coming January if Congress does nothing.
New Taxes and Changes in Rates
Many individuals, estates, and trusts will pay an additional 3.8% tax on net investment income. Net investment income includes dividends, interest (except from municipal bonds), net capital gains, rents, royalties, and investment annuities. The additional tax kicks in for most joint filers with modified adjusted gross income of $250,000 or more. Dividends will be taxed at ordinary rates (versus 15% currently) and the capital gains rate will increase to 20% (from 15% currently). The potential additional tax should be considered when you are managing 2012 gains and losses.
Estate Taxes and Exemptions
The current $5 million exemption from gift taxes expires at the end of the year. It might be a good opportunity to consider additional gifts this year if you have not utilized the full $5 million exemption as the tax impact of gifts could be more expensive beginning next year. Absent Congressional action, the top rate will go to 55% after only a $1 million exemption. The current House approved bill extends the current 35% rate and $5 million exemption while the Obama budget proposes a top rate of 45% and only a $3.5 million exemption.
Repair and Maintenance Expense Changes
Last February we described the new depreciation regulations involving tangible property. Recognizing the complexity of the new rules, the IRS has issued Notice 2012-73 alerting taxpayers that changes will be made to the regulations to revise the de minimis provision, the treatment of dispositions, and safe harbor rule for routine maintenance. The final regulations for these topics will be effective for years beginning after December 31, 2013. The other provisions of the new regulations can be applied to tax years beginning after December 31, 2011. The changes will allow taxpayers to consider which portions of the new regulations (originally enacted or the subsequent changes) are most favorable to each taxpayer. Moreover, it will allow for additional time to evaluate the impact of the new regulations so that everyone can develop an implementation plan.
Reimbursable Expense Plans
IRS Revenue Ruling 2012-25 clarified the tax treatment for employers and employees of expense reimbursement programs by considering four fact patterns. The first three illustrate how an employer incorrectly characterizes wages as nontaxable reimbursements when the employer pays the same amount regardless of whether the employee actually incurs or submits documentation of expenses related to the employer’s business. The fourth fact pattern supports the treatment as a reimbursement only when an employee provides proper substantiation for deductible mileage and other expenses that were actually incurred by the employee.
The reimbursement rate for standard mileage for 2013 is increased to 56.6 cents per mile for business travel.
The IRS is contacting more taxpayers for field or correspondence audits. Between the 2010 and 2011 fiscal year the number of IRS examinations increased 12.3% for Partnership and S corporation returns. That trend is expected to continue.
For several years the IRS has been matching more information on individual returns to the amounts on information returns (Forms 1099, 1098, W-2 and Schedule K-1). Beginning in 2013, the IRS will begin the same sort of matching program for partnerships and corporations. With similar increases in matching programs at the state level, everyone can expect the correspondence notices to increase substantially in the coming years.
As always, if you have questions please call your BKM Sowan Horan tax professionals. Due to the uncertainty of what Congress might actually do, we encourage you to contact us soon in order to discuss the possibilities regarding your specific situation.