In part one of this series, I outlined the changes that could affect individuals on January 1, 2013, if the Bush tax cuts are allowed to expire. In part two, I’ll talk about the effect on gifts, estates, and small businesses.
Estates and gifts
One of the biggest changes that may impact people in big cities is the return of the death tax. Folks who were able to buy homes years ago in large urban areas like New York, Chicago, or Los Angeles for a fraction of today’s fair market value don’t think of themselves as millionaires. After all, if they sell their homes, where will they live in comparable comfort?
However, even with the decline in residential real estate values, their homes may still be worth far more than what they paid for them. As a result, these estates containing these homes can be worth in excess of $1 million. And effective January 1, 2013, the gift and estate tax limits will drop from $5 million each to $1 million. In addition, the top tax rate on estates will jump from 35 percent to 55 percent. Ouch!
Incidentally, the annual allowance for gift giving without filing a gift tax return will be $14,000 in 2013, up from $13,000 in 2012. That includes all gifts, not just monetary gifts.
- In 2013, the depreciation deduction under Section 179 will drop from $500,000 to $125,000. (This affects purchases of new or used business assets.) Smaller businesses are not likely to be affected.
- The special benefit on leasehold improvements, restaurant property, and qualified retail space improvement property eligible for up to $250,000 of Section 179 depreciation will be lost. Until now, this same property was allowed to be depreciated over 15 years instead of 39 years, giving rise to higher annual deductions. These businesses will have to return to a 39 year depreciation schedule. The shorter the time period for depreciation, the greater tax benefit the taxpayer receives.
- The special 100 percent bonus depreciation on new equipment purchases will be gone. This will affect the sales of new equipment, vehicles, and electronics, and it will reduce the manufacture of such items, as well. Instead of writing off the value of new equipment purchases in the year bought, the depreciation will take place over several years.
- The new hire retention credit will expire. That is worth up to $1,000 per employee.
- Builders will lose the Energy Efficient Home Credit, which is worth as much as $2,000 per home. Builders receive a tax credit of up to $2,000 for certain energy efficiency improvements and installations.
- The credit for increasing research activities expires. In the most recent IRS statistics (2009), only about 12,000 companies claimed it. Most of them were in the manufacturing industry as well as professional, scientific, and technical sectors. But these 12,359 companies received nearly $8 billion worth of credits.
Will your business be affected by these changes? If you have financing, it most likely will.
My good friends at CCH, a Wolters Kluwer company, are optimistic. They believe that Congress will take steps to extend many of the Bush-era tax breaks before the end of the year. What do you think?
Eva Rosenberg, EA, is the publisher of TaxMama.com®, where your tax questions are answered. She teaches tax professionals how to represent you when you have tax problems. She is the author of several books and e-books, including Small Business Taxes Made Easy. Follow her on Twitter: @TaxMama