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What the "fiscal cliff" means for the small business owner

There are a number of tax law changes that take effect January 1, 2013. I believe most small business owners are hoping for and expecting that some action will be taken by Congress before year end to extend the current tax laws for a while longer. It certainly seems to be a foregone conclusion that nothing will happen until the presidential election is over.

Here are a few of the more significant tax changes that are scheduled to hit January 1.

  • The limit on Section 179 deductions will drop from $139,000 to $25,000
  • 50% bonus depreciation will be gone
  • The tax rate at the lowest bracket will increase from 10% to 15%
  • The tax rate for the highest bracket will increase from 35% to 39.6%
  • Phaseout of itemized deductions will return which could drive that top tax rate higher
  • The lowest capital gain tax rate will go from zero to 15%
  • The highest capital gain tax rate will go from 15% to 23.8%
  • The 2 point reduction in self employment tax will end pushing SE tax rates back to 15.3%
  • The exemption level for Alternative Minimum Tax will drop from $74,450 to $45,000
  • A number of deductions and credits will go away including R&D credit, Work Opportunity Credit, sales tax deduction, educator expense deduction and mortgage insurance premium deduction.
  • There is a new 0.9% tax on high income individuals
  • There is a new medicare tax of 3.8% on certain investment income
  • Finally it could cost your heirs more if you die next year when the estate tax goes from 35% tax on estates over $5 million to 55% tax on estates over $1 million

While we may yet see some last minute extension of some or all of the current income tax provision, it may be a good time to talk to your tax professional about some year end tax planning, just in case.


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