Forget the Zombie Apocalypse: Taxmageddon Is Far Scarier (and Likelier)
If you have been following the recent federal tax debates, by now you have probably heard the term “fiscal cliff” mentioned numerous times. Expiring tax provisions, newly effective taxes, and mandated federal spending cuts threaten to wreak havoc on both the national and your personal economy—dropping us off a cliff into an economic abyss and ushering in Taxmageddon.
In this three-part series, BizFilings Business Owner’s Toolkit will walk you through the changes looming in three key areas:
- Individual taxes—changes to rates, deductions and credits, plus the new Medicare tax surcharges on earned income (See Part 2, "Individual Tax Planning Tips for Those on the Edge of the Fiscal Cliff")
- Investments—increases in capital gains rates, and the new Medicare tax on investment income
- Business growth and investment—depreciation and expensing election changes
But, we aren't going to just present facts about what may (or may not) change—there are plenty of other sources for that information. Instead, we will provide a variety of strategies that you can use to reduce the impact on your personal and business finances.
What Will 2013 Bring? Uncertainty Is Only Certainty
Just as four horsemen are unleashed in Revelation, there are four “horsemen” that are chomping at the bit to bring forth Taxmageddon.
- Expiration of Bush-era tax provisions, ranging from increases in individual and capital gain rates to the phaseout of exemptions for high-income taxpayers.
- Expiration of stimulus measures, including bonus depreciation and the enhanced expensing election
- Imposition of new Medicare taxes, on both earned income and a wide-variety of investment income
- Implementation of mandated budget cuts, reducing or eliminating 1,000 government programs, with resulting job loss and reductions in government purchasing (as well as service reductions.)
Before we dive into details on these, it’s helpful to understand the overall predicted impact. This combination of tax increases and spending cuts is designed to cut the federal deficit. And, there is no doubt that it will do just that. The most recent Congressional Budget Office (CBO) predicts a federal deficit reduction of over $500 billion.
However, many economists fear that the cure may prove worse that the illness—at least as measured short-term. In its most recent estimates, the CBO predicts a negative growth of 0.5 percent for 2013 with an unemployment increase of two million lost jobs, pushing the unemployment rate to 9.1 percent by the end of the year. Although analysts vary widely in their estimates, many agree that going over the fiscal cliff will end the shaky recovery and plunge the country back into a significant recession.
The federal budget cuts will, by definition, reduce federal spending. Most of the media’s focus has been on the tax increases ($500 billion)but the spending reductions ($135 billion) will also negatively impact on the economy. Ultimately, the likely contraction in the overall economy will reduce demand, directly hitting top-line growth opportunities. Decreased demand can lead to fewer workers being hired, or reductions in staffing, which will inflict further damage on the economy, creating the potential for successive rounds of increased taxes and/or reduced spending.
The Tax Policy Center estimates that taxes will increase by an average of $3,500 per household, forcing taxpayers to deplete savings or to reduce other spending to pay an increased tax burden. Reduced spending will further weaken the economy and hurt businesses. The small business owner gets the full double-whammy. The impact on the overall economy will hit your business bottom-line, while the increased taxes will hit your personal bottom-line.
As a small business owner, it is more essential than ever to monitor how your business is performing. The following BizFilings Business Owner’s Toolkit articles can help you do just that;
While the Presidential and Congressional elections will determine exactly what 2013 holds, it is likely that some provisions will expire and some cuts will occur. Therefore, preparation is essential during the last few months of this year. During this period of uncertainty, you need to take the following three-prong approach that can minimize the impact of tax increases.
- Evaluate your options
- Discuss strategies with your tax professional
- Be ready to implement tax strategies
In the second part of this series, we are going to focus on the expiring provisions that are likely to affect your personal income tax return. These include:
- increases in individual tax rates
- the return of the phaseout of personal exemptions and itemized deductions for high-income taxpayers
- the new Medicare tax surcharge on earned income for higher-income taxpayers
- the expanded reach of the alternative minimum tax, and
- expiration or reduction of individual tax credits
We’ll explore strategies to shift income to avoid increased taxes.
Part Three will cover strategies to help you minimize the impact of the increase in capital gains rates and the new tax—and surprisingly far-reaching—tax on investment income. We’ll explore timing of asset sales and whether it makes sense to “harvest” those gains now. Part Three will also cover the trade-offs you may want to make in purchasing assets for use in your business.
We also invite you to attend our forthcoming webinar: "Taxmageddon or How to Survive a Fall Off the Fiscal Cliff" scheduled for November 1, 2012. Click here to register.