At the end of this year, a number of federal tax changes will lead to a much greater tax burden for American taxpayers and businesses.
Tax reductions and credits adopted under President George W. Bush are expiring in December. Other new taxes created under the Affordable Care Act take effect in January.
How the federal government responds to this crisis depends on the outcome of the November elections. If President Obama is re-elected, look to see congressional action during the lame duck session of Congress before January, as the number of Senate Democrats is expected to decline in the new Congress. If Governor Romney prevails, expect congressional Republicans to enact tax relief early in 2013.
Absent federal action, the major upcoming tax changes include:
INDIVIDUAL INCOME TAX Though all tax brackets will see increases, the top rate for those earning at least $200,000 or married couples earning at least $250,000 will increase to 40.5 percent from 35 percent. Many businesses are organized as pass-through entities, meaning the tax liability is passed onto individual shareholders rather than the corporation. In other words, if a shareholder of a company earns more than $200,000 from the company, the shareholder is responsible for paying the 40.5 percent tax rate.
ESTATE TAX (DEATH TAX) Currently, only estates worth more than $5 million are subject to a 35 percent tax. After January 1, estates valued at $1 million or more will be subject to the tax with the rate increasing to 55 percent. The tax disproportionately affects family businesses that pass ownership through the generations.
INVESTMENT INCOME TAXES Taxes on capital gains and dividends will increase from the current 15 percent top rate to 23.8 percent and 43.3 percent, respectively. These taxes are assessed on income that has already been subject to the income tax. The negative implications for investors, including retirees, are significant.
BUSINESS TAX INCENTIVES Provisions like the Section 179 expense deduction, which benefits small business, and bonus depreciation will end. The research and development tax credit already expired in 2011. Many Wisconsin firms benefit from these provisions which will no longer be available.
ALTERNATIVE MINIMUM TAX The AMT was established to prevent wealthy taxpayers from avoiding taxation under the normal tax structure. The original “Buffet Rule,” if you will, determines tax liability under a second tax system; the taxpayer pays the higher of the two amounts. Not adjusted for inflation, the AMT is routinely limited by Congress to prevent the tax from applying to a broader group of taxpayers. Without retroactive action by Congress, more than 30 million taxpayers will be affected by this provision for the 2012 tax year.
CORPORATE INCOME TAX The current federal rate is 35 percent. Since Japan lowered its rate in April, the United States now has the highest corporate income tax rate in the industrialized world. Some businesses subject to this tax have moved operations abroad to take advantage of lower rates. The collective impact of these and other tax increases will be around $500 billion for 2013 alone. The economy will struggle much more if Congress and the President fail to take action. Our national leaders have the difficult task of maintaining a reasonable tax structure that encourages growth while addressing the trillion-dollar annual budget deficits at the federal level. You can see that our federal policymakers have their work cut out for them.
By Jason Culotta, WMC Director of Tax & Transportation Policy
Follow Jason on Twitter @JGCulotta
