The Expiration of Bush-era Tax Cuts: Change in Tax Rates

The beginning of 2013 could bring significant tax law changes – and taxpayers are going to pay the price. Unless the Democrats and Republicans can close a large gap on whether to extend some or all of the Bush-era tax cuts, a number of changes will take place. In this series of blog posts called “The Expiration of Bush-era Tax Cuts,” we are going to take an in-depth look at these changes and the impact it will have on taxpayers.

Today, we will start by looking at the change in individual income tax rates. Under the current law, the reduced tax rates created by the Bush administration will expire and the tax rates will increase. Effective January 1, 2013, the lowest tax bracket of 10% will revert to 15%. The 25% tax rate would rise to 28%, the 28% rate would rise to 31%, and the 33% rate would rise to 36%. The top individual tax rate would increase from 35% to 39.6%.

All taxpayers – not just higher income individuals – will experience a tax hike. Individuals anticipating a higher income tax rate after 2012 should explore the idea of shifting the timing of income or deductions. Accelerating income into 2012 could lower overall tax liability. Acceleration techniques could include selling appreciated property, accelerating bonus payments, avoiding installment sales that defer gain, or billing customers earlier. Additionally, taxpayers could defer tax deductions into 2013 that could help offset income subject to a higher tax rate.

With the uncertainty of tax laws for 2013 and beyond, tax planning becomes more and more difficult. Anders CPAs and consultants are committed to assisting clients with their tax and accounting needs and will keep you updated throughout the Congressional process.