With a slim margin, President Obama has won re-election to a second term. Although the slim vote margin and divided Congress prevent the President from perhaps pushing too strong of a tax agenda, many of his tax policies for the next four years are already in place to be implemented starting next year and beyond.
The big question mark is what will happen to the Bush tax rates on January 1st. This question has not been resolved. However, we feel that an election resulting in a status quo for party control in Washington may help get the process moving before the end of the year. In other words, the final session of Congress before the end of the year may not be a lame duck session because there will be no power shift in January.
Here is what we expect for 2013:
- The Affordable Care Act will not be repealed. This means that in 2013 we will see the 3.8% surtax on investment income and .9% Medicare tax increase for those making $200,000, $250,000 for joint filers.
- Also contained in the Affordable Care Act for 2013 are provisions that will affect people of all income levels. The AGI floor for deductible medical expenses will increase from 7.5% to 10% for those who itemize. Basically this means that if you have medical expenses, they will have to exceed 10% of your adjusted gross income before you can deduct them. FSAs will also be limited to $2,500. Click Here for more details on the Affordable Care Act.
- We expect the AMT will be patched again before the end of the year. Don’t expect any long term solution to the AMT problem at this point. Democrats would like to replace the AMT with a minimum 30% tax rate on people with incomes over $1 million, or the Buffett rule.
- The Estate Tax is set to return to maximum rate of 55% with a $1 million exemption. There has been talk of a compromise on a 45% rate or lower and a larger exemption, but if gridlock persists and no compromise can be reached, we believe there is likely not enough pressure on policy makers to eliminate the Estate Tax.
- Both parties realize that an across the board expiration of the Bush tax rates will hurt the poor and middle class. The sticking point is whether or not to keep the current tax rates for higher income families. It is impossible to predict how this will play out, but my best guess is that extensions of rates for all but the top two brackets will be passed as a separate bill. The marriage penalty would also likely come back for the top two tax brackets.
- Capital gains rates may go up beyond the 3.8% in the Affordable Care Act. Currently, long term capital gains rates are set to rise to 23.8% next year if no action is taken. The 15% tax rate on capital gains and qualified dividends was actually one of the main points in the election and has come to be seen as a sort of loophole to allow wealthier clients to pay lower rates. This could result in less pressure to keep the current 15% rate from expiring.
- There are some tax provisions expiring this year that have yet to even appear on the political radar, and may not at all now that the election is over. These include extension of the American Opportunity Credit, extension of the current child tax credit, extension of the 2% reduction in Social Security taxes, and extension of the current adoption credit. Although no one can make any assumptions, our best guess is the first two will be extended, while the 2% Social Security tax reduction will go away and the adoption credit could fall back to a $5000-$6000 nonrefundable credit. Click Here for more on tax uncertainty in 2013.
It will be interesting to see how things go with the coming session of Congress. Fortunately, we will be here with our finger on the pulse to bring you the latest tax updates. Contact us for a year end consultation on your tax situation and how these changes will affect you.