Sell in 2012!

Major capital gains tax increases coming in 2013!

If you have been sitting on the fence wondering when to sell your business, NOW would be the time to get serious. The Obama Administration has left little doubt about their plans to tax the wealthy. Most small business owners are included in this category and selling a business typically requires paying capital gains taxes, in one way or another.

Tax Increase #1 - 20% Capital Gains Tax in 2013

The Tax Relief, Unemployment Insurance Reauthorization and Jobs Creation Act of 2010 extends the Bush tax cuts until the end of 2012. On January 1, 2013, the tax rate will revert back to the former 20 percent capital gain tax rate that was in effect prior to 2003. Currently this tax rate is 15%.

Tax Increase #2 - 3.8% Medicare Tax in 2013

Beginning in 2013, the national health care reform legislation that became law in March, 2010, imposes a new 3.8 percent tax on certain investment income. The new tax will apply to single filers with incomes over $200,000 and married taxpayers with incomes over $250,000. Under this law, the investment tax provisions in Chapter 2A of the Internal Revenue Code are placed under the heading “Unearned Income Medicare Contribution.” In general, this new Medicare tax will apply to investment income that is subject to income tax, which includes capital gains. Pursuant to IRC Section 1402 (C)(1)(A)(iii), the investment income to which this new tax applies includes “net gain” (to the extent taken into account in computing taxable income) attributed to the disposition of property that qualifies as a capital asset under Section 1221 (capital gains), as well as gains on other property that are considered part of ordinary income. Also of relevance for rental property owners, this new tax applies to a real estate investor’s rental income if they have income above the $200,000/$250,000 income thresholds. The net effect of both capital gains tax increases is a new 23.8 percent tax rate for higher earners, the highest rate for long-term capital gains since 1997. The Joint Committee on Taxation estimates the new Medicare tax on investments will cost taxpayers over $30 billion annually. Additionally, the modified adjusted gross income threshold at which this Medicare tax will apply will not be indexed for inflation, which means an increasing number of taxpayers will be snared by this tax provision. Overall, the economic impact of these tax increases will be felt by the very investors who help promote long-term economic growth. In 2007, taxpayers with incomes greater than $200,000 reported 47 percent of all interest income, 60 percent of all dividends and 84 percent of all capital gains respectively.

The Coming Tax Increases