United States: Year-End Tax Guide 2012

INTRODUCTION

Remove the blindfold

How is tax planning possible when you don't know what tax laws will look like in three months? Without legislative action, the new year is scheduled to bring dramatically higher taxes through both Medicare tax increases and the expiration of dozens of important tax cuts. With the election complicating the outlook and Congress in gridlock, you may feel as if you're doing tax planning with your eyes closed. Grant Thornton is offering to take off your blindfold.

There is opportunity in the uncertainty, but preparation is the key. You need to understand the various scenarios and crunch the numbers now, so that you have strategies to put into action when it's time to act. What will Congress do? Is this the year to turn tax planning on its head and accelerate tax and recognize gain before rates go up? Is it time to take advantage of a historic estate planning opportunity?

Whether you're managing the rates on your income and investments, the taxes on your privately held or pass-through business, or the income of executives and shareholders at your company, this guide will answer as many questions as possible. We'll cover what's new this year and offer the following help:

  • Planning for tax increases: Look to Chapter 2 for a special section on the tax increases scheduled for 2013 and a discussion of whether it is time to turn tax planning on its head.
  • Tax law changes: We've dedicated Chapter 1 to cover the most important tax changes for you and your business, and we've highlighted Tax law change alerts throughout the guide.
  • Action opportunities: We've highlighted our top 14 Action opportunities, strategies you can put into play right now.
  • Business perspective: We know you don't look at your tax situation as just an individual taxpayer, but also as a shareholder, owner, employee or executive. We've added sections throughout the guide that focus on tax opportunities from the Business perspective.

Caution: As always, our guide will help show you how to invest tax-efficiently for education and retirement and transfer your wealth to loved ones. But this guide simply can't cover all possible strategies, and when this guide went to print, legislation was pending that could affect many of the strategies and issues covered here. We've tried to point out within the guide those areas where legislation could make a difference, but you should check for the most up-to-date tax rules and regulations before making any tax decisions.

CHAPTER 1 - TAX LAW CHANGES: WHAT'S NEW THIS YEAR?

Very few tax changes have taken effect this year, as Congress remained deadlocked for much of the year over what to do about the avalanche of tax changes scheduled for 2013. Lawmakers did agree to extend 2011 payroll tax relief to cover all of 2012, but had otherwise failed to address most of the top tax priorities as this guide went to print. Congressional leaders are promising to address much of the unfinished tax agenda after the November elections, but in the meantime, 2012 has left us with no alternative minimum tax (AMT) relief and the expiration of a number of popular short-term tax provisions known as extenders.

Payroll tax relief

Lawmakers managed to extend a 2011 provision reducing the individual share of Social Security under the Federal Insurance Contributions Act (FICA) from 6.2% to 4.2% through the end of 2012. Social Security tax is imposed on wages up to an annually adjusted cap that reached $110,100 in 2012, so taxpayers at or above the wage cap receive a $2,202 tax cut from the provision.

The reduction in FICA taxes also applies to the self-employment tax, reducing the combined rate on self-employment income up to the $110,100 wage cap from 15.3% to 13.3%. This does not reduce the amount of self-employment taxes allowed as an above-the-line income tax deduction, which will continue to be calculated as one-half of 15.3% of self-employment income.

Alternative minimum tax

As this guide went to print, lawmakers were still promising to retroactively provide an AMT "patch" for 2012, but if they don't, the AMT exemption will plummet to $45,000 for joint filers and $33,750 for single filers. Millions more taxpayers will be subject to the AMT. Check with your local Grant Thornton tax professional for an update on legislation to increase the exemption in 2012.

Extenders

The popular temporary tax provisions known as extenders include dozens of tax provisions that expired at the end of 2011. When this guide went to print, lawmakers had proposed to extend these provisions retroactively for 2012, but they appeared unlikely to actually pass legislation until after the election when they reconvene to consider the 2001 and 2003 tax cuts and the AMT. If these provisions are not extended, both businesses and individuals would face significant tax increases in 2012. Key individual tax extenders that are currently expired include:

  • election to deduct state and local sales taxes,
  • above-the-line tuition deduction,
  • $250 above-the-line teacher expenses deduction,
  • tax-free charitable distributions from individual retirement accounts (IRAs),
  • withholding exception for interest-related dividends of regulated investment companies (RICs), and
  • estate tax look-through for RIC stock held by Non-residents.

BUSINESS PERSPECTIVE

What's new this year

The economic outlook for many businesses may have picked up, but the legislative well has finally run dry. Lawmakers in 2012 failed to provide any new stimulus tax incentives for the first time in years, and as this guide went to print, had also failed to agree on extending popular business provisions, including the research credit that expired at the end of 2011. The biggest changes this year for businesses actually came from outside the legislative arena, with the IRS imposing new rules on businesses and the Supreme Court upholding the 2010 health care reform legislation and its related tax provisions.

Business extenders

Many valuable business provisions commonly known as extenders also expired at the end of 2011. A failure to extend them for 2012 could be especially damaging for businesses, which often count on specific tax incentives included in the legislation. Major business provisions that have currently not been extended for 2012 include:

  • research credit;
  • 15-year cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements;
  • new markets tax credit;
  • Subpart F exception for active financing income;
  • look-through treatment for payments between related controlled foreign corporations under foreign personal holding company income rules; and
  • alternative fuel credit (including propane used in forklifts).

As this guide went to print, lawmakers were still pledging to extend many of these provisions retroactively for all of 2012. Contact a Grant Thornton professional to discuss the outlook for any specific extender provision that your business uses.

Expensing business investments

The amount of new equipment your business can expense under bonus depreciation rules and Section 179 has fallen this year. You were allowed to fully expense eligible property placed in service during 2011 under 100% bonus depreciation, but property placed in service in 2012 will qualify for only regular bonus depreciation, which allows you to deduct half of the cost of the property while the rest is depreciated using normal rules. This still provides an incentive for investment, especially because bonus depreciation is scheduled to expire altogether for property placed in service in 2013 (certain long-production-period property like airplanes have later deadlines for placing property in service). To qualify for bonus depreciation, property must generally have a useful life of 20 or fewer years under the modified accelerated cost recovery system (MACRS). The amount of business investment that you can expense under Section 179 has also fallen from $500,000 to $139,000 for tax years beginning in 2012 (with the phaseout dropping from $2 million to $560,000). As this guide went to print, lawmakers were discussing adjustment to these expensing provisions for 2012 and 2013, so check with a Grant Thornton professional for the latest update.

Health care legislation survives Supreme Court challenge

The health care reform legislation enacted in 2010 was upheld up by the Supreme Court almost in its entirety, meaning employers will have to comply with several new health benefit requirements taking effect this year and over the next several years, as well as many requirements that have already taken effect. For the first time this year, employers must report the cost of health coverage to their employees on Form W-2. For plan years beginning in 2013, employers must limit employee contributions to a health care flexible spending arrangement (FSA) to $2,500, and summaries of benefits and coverage must be provided to employees for plan years in which open enrollment begins on or after Sept. 23, 2012. For taxable years beginning after Dec. 31, 2012, employers will no longer be allowed to deduct the portion of retiree prescription drug coverage that is subsidized by the federal government. New Medicare taxes that were part of the health care legislation will also take effect in 2013, and the "pay or play" penalties for not offering adequate health coverage to employees are scheduled to take effect in 2014. See Chapter 7 for more information on the health care changes.

New 'repair' regulations for deducting or capitalizing costs

The IRS this year issued new regulations that dramatically alter the rules for determining when your business can deduct repair and maintenance costs or whether costs must be capitalized to tangible property. Taxpayers may benefit from accounting method changes under the new rules, so contact your local Grant Thornton tax professional for more information.

Organizational actions affecting basis

The IRS in late 2011 released the new Form 8937 for corporations to use in reporting organizational actions that affect the basis of their stock, which is now required for 2012. Corporations must generally either file the form with the IRS within 45 days of any action taken in 2012 or post the information on their public website. If the information is not posted to the website, corporations must also furnish a statement to all shareholders by Jan. 15, 2013.

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