UPCOMING CHANGES IN THE TAX LAW FOR BUSINESSES AND INDIVIDUALS

August 21, 2012

Presented by

Robert M. Herbst, CPA Managing Shareholder of

UPCOMING TAX LAW CHANGES FOR BUSINESSES AND INDIVIDUALS Every year brings tax law changes for businesses and individuals. And every year, those businesses try to look ahead and plan for those changes. This year, however, is a bit different, in that the changes that are slated for 2013 and 2014 are more sweeping than most years. This fact, combined with the political climate and the upcoming national election, make tax and business planning even more vital than usual. Below are some of the most significant changes that are on the horizon: Changes for Businesses: The changes below are due for implementation on January 1, 2013: No More Bonus Depreciation Ordinarily, the cost of fixed assets must be deducted over a period of time as described in the tax law. For the last several years, however, a business that purchased qualifying fixed assets could deduct one-half of the cost in the year of purchase. This provision expires at the end of 2012. 179 Depreciation Reduction Section 179 of the Internal Revenue Code allows businesses to deduct the cost of qualifying property in the year of purchase, subject to certain requirements and limitations. For 2012, the maximum amount that may be deducted under 179 is $125,000, but the limit beginning in 2013 drops to $25,000. The major factors that may limit the allowable deduction are as follows: o Deduction is limited to the taxable income of the entity o The deduction is reduced, dollar for dollar, by the cost of all property purchased by the business over a specified threshold. The thresholds for 2012 and 2013, respectively, are $500,000 and $200,000. This means that for 2012, once a business purchases more than $625,000 in fixed assets, the business does not qualify for any deduction under 179. Work Opportunity Credit for Hiring Unemployed Veterans Expires

Changes for Individuals: Beginning January 1, 2013, the following changes take effect: Income Tax Rates Change: o All ordinary income tax rates increase - highest rate set to increase from 35% to 39.6% o Increased capital gains tax rate current law taxes long-term capital gains at a maximum rate of 15% - beginning in 2013, this rate increases to 20% o No more special qualified dividend rates - current law taxes qualified dividend income at a maximum rate of 15% (0% for taxpayers in the lower tax brackets); beginning in 2013, that income will be taxed at ordinary income tax rates o New additional 3.8% tax on investment income for taxpayers with income over $200,000 ($250,000 if filing a joint return) this new tax is discussed in more detail in the next section Page 2 of 4

Expiration of the Payroll Tax Cut Ordinarily, most employees must pay 7.65% of wages for FICA and Medicare. These taxes are withheld by the employer, who matches the employees portion and remits them all to the IRS. For 2011 & 2012, the employees portion of the payroll taxes was reduced to 5.65%, while the employers portion remained at 7.65%. Beginning in 2013, the employees portion of payroll taxes goes back to 7.65%. Increases to Self-Employment Tax Rate Unlike taxpayers employed by someone else, selfemployed taxpayers are responsible for both halves of their payroll taxes. So for 2011 & 2012, selfemployed taxpayers were liable for a 13.3% on their earnings. Beginning in 2012, this rate will increase to 15.3%. Note that this tax is in addition to regular income tax. Reduction to the Exclusion Amount for Estate Taxes For 2012, no Estate Tax will be due for taxpayers who die with an estate valued at less than $5,000,000. Beginning in 2013, this limit drops to $1,000,000 and the Estate Tax rate increases to 55% from 35%.

Patient Protection and Affordable Care Act (PPACA): Following is a summary of the new provisions under the PPACA, organized by the year of implementation. Please note that details of many of the provisions are not yet available. Those details will be made available as the assigned agencies issue their respective guidance: 2013 o o

Additional Medicare Tax taxpayers will be liable for an additional 0.9% tax on wages and/or self-employment earnings over $200,000 ($250,000 if married filing jointly) Additional Medicare Tax (Part 2) taxpayers will be liable for an additional 3.8% tax on the lesser of: The taxpayers net investment income or AGI in excess of $200,000 ($250,000 if MFJ) Medical Expenses Threshold Increase currently, an individual taxpayer may deduct medical expenses in excess of 7.5% of Adjusted Gross Income; beginning in 2013, this threshold increases to 10% of AGI Small Employer Health Insurance Tax Credit qualifying employers (less than 25 full-time employees paying average wages less than $50,000) may be eligible for a tax credit equal to 35% of qualifying health insurance premiums paid for employees Health Insurance Benefit Reporting on Form W-2 large employers (those who filed more than 250 Forms W-2 in the preceding year) must report the cost of employer-provided health coverage on employees Forms W-2. This amount is for information only and is not taxable to the employee.

2014 o

All non-exempt individuals must secure health insurance meeting minimum requirements for themselves and their dependents or pay a penalty to the IRS Page 3 of 4

o o

Employers with more than 50 employees must provide affordable health insurance that meets minimum coverage requirements for employees or pay penalties to the IRS Small Employer Health Insurance Tax Credit changes: Credit increases to 50% of premiums paid for employees To claim credit, the employer must participate in an insurance exchange (federal- or state-sponsored)

2015 o o

All employers that provide health insurance for employees must annually report certain basic information about the coverage and the covered employees Employers with more than 50 employees must report more detailed information about the coverage and covered employees

All of the provisions above are subject to numerous limitations, qualifications, and restrictions. No tax provision can be applied to every situation in the same manner or have the same effect. Therefore, we strongly recommend you contact your professional tax advisor before assuming any of these provisions apply to your situation.

For further questions, please contact Bob Herbst at (210) 614-2284 or at rmherbst@fhkcpa.com.

Circular 230 Notice: In order for us to comply with certain U.S. Treasury regulations, unless expressly stated otherwise, any U.S. federal tax advice that may be contained in this written communication is not intended or written to be used, and cannot be used, by any person for the purpose of (i) avoiding any tax penalties that may be imposed by the Internal Revenue Service or any other U. S. Federal taxing authority or agency or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

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