Fiscal Cliff is looming. Expect Big Tax Increases under Obama. More IRS auditors have been hired!

By Jeffrey Brooks, CPA, CFP, MBA for Jbrooks Wealth Advisors, PC, a Professional CPA and CFP Firm 602-292-2009 Please consult with your professional tax CPA regarding your specific circumstances!

Years ago, I taught tax courses and the importance of being proactive to CPAs.
From that experience, I realize that most CPAs are not ready for the increases in taxes expected due to the Obama tax rates and the “Fiscal Cliff”! Did you know that your tax rates could exceed 50% of your income?

Many business owners—mostly founders who could gain a lot from a sale—are looking to close deals before next year, when the maximum tax on investment income is scheduled to rise from 15% currently to at least 23.8% on most capital gains, at least for higher-income households. Many sellers intend to convert their equity into retirement funds or just start anew.

The 2013 tax increase in the capital gains tax rates of 8.8% along with the Obama Health Plan tax of 3.8% for adjusted gross income for individuals over $200,000 and married couples over $250,000 along with higher pre-Bush tax rates could cost business people as much as 50% taxes on 2013 income!

In this article, I am not addressing the increases in business owner’s costs due to Obamacare health insurance cost coverage.

I am writing a “white paper” on MUST tax saving strategies after the 2012 election due to much higher income taxes for business people who have over $200,000 in adjusted gross income for singles and $250,000 in married.

When Congress last raised capital gains tax rates in 1986, lifting the top rate to 28% from 20%, the change triggered a wave of asset sales, including securities and companies, in the months before it took effect.

What do we expect to see in 2013?

We are going to see:

1. The increase in the top two tax federal rates from 33% to 36% and 35% to 39.6%.
2. The reinstatement of the limitation on itemized deductions for high-income taxpayers (I call this the “phase out rule”).
3. The taxation of dividends as ordinary income and at a top income tax rate of 39.6% and increase in the top tax rate applied to capital gains to 20%.
4. The increase in the 2.9% Medicare tax to 3.8% for high-income taxpayers and the application of the new 3.8 percent tax on investment income including flow-through business income, interest, dividends and capital gains.
5. With the combination of these tax changes at the beginning of 2013 the top tax rate on ordinary income will rise from 35% in 2012 to 40.9%, the top tax rate on dividends will rise from 15% to 44.7% and the top tax rate on capital gains will rise from 15% to 24.7%.
6. We could be looking at OVER 50% in income taxes due to the changes in #1 to #4 above, along with other taxes such as sales taxes, real estate taxes and payroll taxes (the increase in the FICA social security taxable limit, the additional .9% on compensation over $200K and state income taxes.
7. These higher tax rates result in a significant increase in the average marginal tax rates on business, wage, and investment income, as well as the marginal effective tax rate on new business investment.
What is the good news?
Regular C Corporations could get rate reductions.

The plan calls for the reduction of the corporate tax rate from 35 percent to 28 percent in order to encourage greater investment in the U.S. In addition, the corporate tax rate for manufacturers would be cut to 25 percent, or potentially even lower, with the expansion of the domestic production activities deduction.

However, most of my clients due not own C regular corporations but S corporations and partnerships. While these C regular corporation proposals would lower the tax rate on corporate earnings, the President’s 2013 budget proposal would significantly increase the tax rate on the distribution of after-tax corporate profits, and the rate of tax on the sale of appreciated corporate shares by certain investors.

The President’s budget proposes to increase the dividend tax rate from its current rate of 15 percent to a rate of 39.6 percent and also proposes to impose higher capital gains taxes on corporate shares owned by certain high-income individuals.

As well, beginning in 2013, the President’s health care reform law imposes a new 3.8 percent tax on all capital gains and dividends of high-income individuals.

In summary, due to the higher tax rates, CPAs and business owners need to focus more of their time on reducing income taxes. Income taxes could become the highest expenses after direct costs such as labor and product!

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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JBrooks Wealth Advisors, PC.

Certified Public Accountant
Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009