Post-Election Tax Situations: Change in Tax Rates

With the Presidential election behind us, it is time to start focusing on what changes to expect beginning January 1, 2013. 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. While no one knows what exactly will happen, certain situations seem to be more likely than others from a political and economic standpoint.

A major issue at stake is the pending 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 for all taxpayers. This, however, seems to be unlikely. If Congress approves President Obama’s proposal, the individual income tax rates would be: 10, 15, 25, 28, 33, 36, and 39.6 percent for 2013 and subsequent years. Another possibility that seems more likely than a full sunset of the Bush-era tax cuts is an extension of all the tax rates through 2013.

With higher income individuals, if not all taxpayers, on the verge of a tax hike, tax planning becomes a higher priority. Individuals anticipating a higher income tax rate after 2012 should explore the idea of shifting the timing of income and 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 is committed to assisting clients with their tax and accounting needs and will keep you updated throughout the Congressional process.

Please contact an Anders advisor with any questions. Check back tomorrow to see our post on the increase in capital gains and dividends tax rates.