At the beginning of January, the House and Senate passed a
bill ending some of the fiscal cliff uncertainty around taxes.
Now, accountants are busy figuring out how the new law will
affect your income taxes. Here are some changes that may impact your
* Income tax rates — Individual income tax rates were
maintained for 2013 and beyond. There’s a new top rate bracket of 39.6 percent
for taxpayers making more than $400,000 for single filers and $450,000 for
married taxpayers, filing jointly.
The lower rate brackets – 10 percent, 15 percent, 25
percent, 28 percent, 33 percent and 35 percent — still are in effect. Taxpayers
in the 39.6-percent bracket will only pay the highest rate on ordinary income
over the taxable income thresholds;
* Capital gains rates — The top rate for capital gains and
qualified dividends increased to 20 percent for taxpayers above the tax brackets
of $400,000 single and $450,000 married. The 15-percent capital gains rate still
is in effect for taxpayers under that bracket, as well as the zero capital gains
rate for taxpayers in the 10-percent income tax bracket.
Short-term capital gains will still be treated as ordinary
income. Long-term capital gains on the sale of assets held for more than one
year will benefit from the reduced rate.
Certain dividends do not qualify for the reduced tax rates —
such as dividends paid by farmers’ coops, credit unions and mutual insurance
companies. They are taxed as ordinary income.
Because of the new healthcare act, taxpayers earning over
$200,000 single and $250,000 jointly now pay a 3.8-percent surtax on “net
investment income,” including both long-term and short-term capital gains.
The increase in capital gains tax, along with this tax on
net investment income, means that people with substantial investment income will
be paying higher taxes;
* Estate tax changes — The new bill permanently maintains
the $5-million-per-person exemption level — and will adjust that amount for
inflation each year.
Since the exemption is given per person, a farm owned by a
husband and wife has a $10 million total exemption. The estate tax rate for
anything above the exemption has increased from 35 percent to 40 percent.
These new laws are better than what many expected. Many
thought the exemption level could dramatically drop — to $2 or $3 million.
It would have fallen to $1 million if Congress had done
nothing. The increase in the tax rate for the amount of the estate over $5
million is a setback for farmers;
* Depreciation — Section 179 and 50 percent bonus. What can
you write off for your business? The IRS retroactively increased the Section 179
expensing limit to $500,000 for 2012. It’s also in effect for 2013.
This means you could write off up to $500,000 of the value
of a new tractor or any combination of eligible capital equipment or livestock
in that first year. The 50-percent bonus depreciation deduction also was
extended for 2012 and 2013.
Section 179 and the 50-percent bonus can reduce your tax
bill for a given year. However, you need to look at your overall income and
profitability to determine how your farm can benefit most from these deductions.
Think about your working capital and your balance sheet in a
long-term way. It doesn’t make sense to overburden your farm with debt or spend
too much of your working capital just to save on taxes; and
* Payroll taxes — The employee portion of Social Security
tax is 6.2 percent as of Jan. 1, 2013. That’s because the temporary 2-percent
payroll tax cut that was in effect for 2011 and 2012 has ended.
This rate applies to both wages and self-employment income.
It just goes back to the previous rates.
For taxpayers earning over $200,000 single or $250,000
jointly, wages or self-employment income will be charged an extra 0.9-percent
Medicare hospital insurance tax under the healthcare act.
These are the key pieces of the tax change that tend to
impact farmers. You should contact your tax preparer for additional information
or with any questions.
Be aware that even the “permanent” tax provisions may not
stay in force if Congress includes tax changes in the debt ceiling negotiations
or does tax reform in late 2013 or early 2014.
We are required by the IRS to include this disclosure: The
tax advice contained in this communication was not intended or written to be
used and it cannot be used by any taxpayer for the purpose of avoiding penalties
that may be imposed.