Sunsetting Tax Provisions: What to Do?

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Congress is headed towards a battle over sunsetting tax rules, already expired tax breaks, and soon-to-expire tax breaks.  It appears that this fight won’t end until late this year. A reasonable alternative would be for Congress to give itself some time to work out a comprehensive tax reform plan by deferring the expiring tax provisions for another year. But in today's partisan political environment, a reasonable, albeit temporary, solution may not prevail. It therefore seems wise to consider and plan for both the best and worst scenarios, so you are ready to make a move when the legislative picture becomes clearer.

Below is a summary of some of the more important sunsetting tax law changes that you should consider.  You should discuss these items with your tax advisor and get prepared.

Tax rates will go up for most everyone.  The 10% bracket will disappear.  The lowest bracket will be 15%.  The top four brackets will rise from 25%, 28%, 33% and 35%  to  28%, 31%, 36% and 39.6%.
Long-term capital gain will be taxed at a maximum rate of 20% (18% for assets held more than five years).  Dividends paid to individuals will be no longer qualify for capital gain treatment and will be taxed at the same rates that apply to ordinary income.

The exclusion for employer-provided educational assistance will end after 2012.  The deduction for student loan interest will phase out over lower modified adjusted gross income (AGI) ranges and will only apply to interest paid during the first 60 months.

The standard deduction will be lower.  Most itemized deductions of higher-income taxpayers will be reduced by 3% of AGI above an inflation-adjusted figure.   Higher-income taxpayer's personal exemptions will be phased out when AGI exceeds an inflation-adjusted threshold.

The accumulated earnings tax rate and the personal holding company tax rate will rise from 15% to 39.6%.
The estate tax rules will change dramatically.  The top rate will be 55%.  A 5% surtax on the wealthiest of estates will phase out the benefit of graduated rates.  The unified credit exemption equivalent will be only $1 million, but the family-owned business deduction will be reinstated.  The generation skipping tax will be reinstated, with a top rate of 55% and a GST exemption amount of $1 million.  The gift tax rate will also increase to 55%.

If you would like to discuss any of the sunsetting tax law provisions, please give me a call or email 937-223-1130 or jsenney@pselaw.com.

AND ONE MORE THING. Thinking about selling your business? Do you know how to determine the value of your business? Are you getting paid cash at closing or over time in installments? Are you selling stock or assets? Is the buyer requiring you to make a 338 election?  Is the buyer assuming any liabilities? Are you staying on as an employee or consultant to help transition the business? Is the buyer keeping your employees? Do you know what the tax consequences of the sale will be? There are a lot of things to consider when selling a business. Call or email me if you want to talk about it. Jsenney@pselaw.com or 937-223-1130.