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What’s the tax outlook in 2013?

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in Small Business Tax,Small Business Tax Deduction Strategies

Now that the dust has settled after President Obama’s re-election, what can we expect on the tax front for 2013? In particular, will a slew of tax increases sched­­­­uled to take effect this year be repealed, modified or allowed to stand?

Strategy: Plan for the worst and hope for the best. Until new legislation is enacted, if ever, tax planning should reflect the current laws of the land. But try to remain flexible so you can react quickly to any changes.

Keeping that in mind, here’s a bird’s-eye view of what you might see in 2013.

Individual taxes: Tax rates are being ratcheted up in 2013. Al­­­though the president has proposed extensions of the lower tax bracket rates for one year, he would allow the two higher tax rates of 36% and 39.6% for joint filers earning more than $250,000 per year and single filers earning more than $200,000 per year to take effect. Furthermore, investors will be slammed by an increase in the maximum tax rate on long-term capital gain from 15% to 20%, while qualified dividends will be taxed at higher ordinary income tax rates of up to 39.6% (as opposed to a maximum 15% rate in 2012).

Other tax changes for individuals include phaseouts of big-ticket itemized deductions and personal exemptions. At a minimum, it appears likely that high-income taxpayers will see some reductions in itemized deductions this year.

Tax breaks for children: Several tax breaks involving children are being repealed or scaled back. But the president has publicly supported a permanent retention of the American Opportunity Tax Credit (AOTC) for higher-education expenses, improving the earned income credit for certain families and expanding child and dependent care tax credits. Note that the regular adoption credit, which generally expired after 2012, might also be revived.

Alternative minimum tax: The alternative minimum tax (AMT) that often applies to upper-middle-income taxpayers with big deductions for state and local taxes and lots of dependent exemption deductions, has been steadily encroaching on the middle of the middle class. At least Congress has approved a “patch” in the AMT exemption amounts the past few years. It hasn’t happened yet for 2012 returns, but the “smart money” is betting it will.

Corporate tax rates: The president has proposed a reduction in the top corporate tax rate from its current level of 35% to 28%. This sounds good to the business sector, but the reduction could be coordinated with other tax provisions that might cut back on write-offs and credits. We don’t expect any movement in this area until later in the year.

Estate and gift taxes: Under current law, the estate tax exemption is scheduled to plummet from its high-water mark of $5.12 million in 2012 to a paltry $1 million level in 2013. At the same time, the top estate tax rate will skyrocket from 35% to 55%. And a host of other estate and gift tax provisions officially “sunset” on Dec. 31, 2012.

The president has proposed an estate tax exemption of $3.5 million (the same as it was in 2009) with a top estate tax rate of 45%.These changes would be coordinated with other changes, including an extension of the “portability” of exemptions allowed between spouses.

Tip: Don’t make any significant moves based on what “might” happen.

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