Federal tax rates are going up in 2013 and accountants and tax attorneys have been busy advising clients on how to prepare. The biggest change will be in the tax rate for dividends. Under the Bush tax bill, enacted in 2001, the top tax rate on dividends was cut to 15 percent; if the bill expires with no compromise legislation to replace it, dividends will be treated as income and subject to 39.6 percent in the top tax bracket, plus a 3.8 percent levy on investment income as part of the federal health care law.
“All my clients are confident the tax rates are going up and not going down,” says Terri M. Lillesand, CPA at Schenck SC in Sheboygan. “The 3.8 percent (Medicare tax) on reported income over $250,000 is a done deal. I am making sure my clients understand the Bush tax cuts will expire but we don’t know what will happen.”
Unless Congress reached a tax compromise to preserve some of the Bush tax cuts, which are set to expire in 2013, a return to the old tax schedules will end the 0 to 15 percent rate on dividends and subject them to regular income rates. Many large public corporations acted to distribute regular or special dividends before the end of 2012.
Wal-Mart moved its quarterly dividend to Dec. 27 rather than Jan. 2, saving the Walton family, which owns 48 percent of the company’s stock, about $180 million. Wynne Resorts announced a $750 million special dividend to be paid in November.
Closer to home, Associated Banc-Corp announced a 60 percent increase in its dividend, according to Markit, which monitors the equities and credit markets.
“Capital gains are going up too,” says Jed Roher, a corporate and tax attorney at Godfrey & Kahn’s Madison law office, “but the delta (difference) between current and anticipated future rates isn’t as great as with dividends.”
Some of Godfrey & Kahn’s firm’s clients are Wisconsin companies that have grown into Fortune 500 corporations, while a lot are smaller family-owned companies where the firm helps owners look at the impact of taxes on a business and on the owners, including what they can do for estate planning.
The 3.8 percent Medicare tax will apply to passive investment income, says Roher, so owners of S corporations might want to see if they can take an active role – defined by the IRS as spending 500 hours a year in the business – to avoid the Medicare tax bite.
If your company rents from you, adds Lillesand, you might reduce the rent because it will be subject to both income tax and the 3.8 percent Medicare tax. “Rent is going to be hard to maneuver around,” Lillesand says.
Carried interest, the treatment of fees earned by private equity firms and hedge fund managers as long-term capital gains rather than ordinary income, is apt to see some revision this year, in part because Mitt Romney’s presidential campaign and the attention to Bain Capital made the arcane technical issue a political topic – Romney earned 31 percent of his income from carried interest, which was the reason his effective tax rate was about 14 percent.
Roher says the impact in Wisconsin won’t so much be on private equity, which has a relatively small presence in the state, but on property developers who often take their fee on exit and pay capital gains.
“A number of folks in Wisconsin, especially in the real estate industry, may need to think about how they structure the economics of their transactions,” he says. “They have been assuming they would get capital gains on the sale of the property but it may be a little hard to plan because we don’t know what the legislative solution will look like.”
Mary Greiner, a CPA at Schenck’s Appleton office, says one of the biggest changes for business will be the end of bonus depreciation. In 2011, businesses could deduct 100 percent of new assets. That went down to 50 percent in 2012 and in 2013 is set to return to standard depreciation. Expensing, which had a $139,000 limit in 2012 and a $560,000 investment ceiling, will go to a $25,000 limit and a $200,000 investment ceiling in 2013, she says.
Even tax attorneys don’t have crystal balls, but Roher was willing to offer a guess that while the bonus depreciation has been popular with both political parties, and it has been used as a tool to boost the economy in recession, its extension isn’t at all assured.
“Now any dollar expenditure has to be offset by revenue, and revenue is hard to come by,” he says.