Sell Now – Capital Gains Tax Goes Up in 2013

Cap Gain Tax

From the Tax Prof Blog citing the WSJ. George Lucas isn’t alone. Business owners race to their sell businesses in 2012 to avoid higher capital gains tax in 2013.

Wall Street Journal:  Looming Tax Hike Motivates Owners to Sell, by John D. McKinnon:

A looming increase in the capital-gains tax rate next year is fueling sales of some privately-held businesses.

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.

“It just made more sense for me to take my chips off the table and go do something else,” said Bert Wolf, 60 years old, who has an agreement to sell his compressed-gas business, Acetylene Oxygen Co. of Harlingen, Tex., before year-end. Mr. Wolf added that if he waited until after the tax increase to sell, he would have to expand the business at the current rate “for at least 3 or 4 more years to achieve the same after-tax sales dollar.” He is profiting on the sale of his business to Praxair Inc., a public company.  …

The top tax rate will go up at year-end by at least 3.8 percentage points because of a provision in President Barack Obama’s health-care overhaul law. But that will be added onto a top rate that will depend on negotiations between Mr. Obama and Congress after the November election, when they are expected to seek a deal on numerous tax and spending measures.

Mr. Obama and Congress agreed in late 2010 to extend the current 15% capital-gains tax rate through this year. Absent further action, the top capital gains tax rate will rise to 20% on Jan. 1. After adding the extra charge from the health-care law for higher-income households, the maximum tax on investment income would be 23.8%. When combined with the scheduled expiration of some other tax breaks for high earners, the maximum tax on investment income would be as high as 25%.

2013 Income Tax Rates Will Go Up

Income tax rates

If Congress and the President do nothing, income tax rates will go up in a big way in 2013. Here is what it will look like.

Individual Income Tax Rates

Tax Brackets (2012 Dollar Amounts) Marginal Rate
Unmarried Filers Married Joint Filers
Over But Not Over Over But Not Over 2012 2013
$0 $8,700 $0 $17,400 10% 15%
8,700 35,350 17,400 70,700* 15% 15%
35,350 85,650 70,700* 142,700 25% 28%
85,650 178,650 142,700 217,450 28% 31%
178,650 388,350 217,450 388,350 33% 36%
388,350 388,350 35% 39.6%

 

Long-Term Capital Gain Rates

Maximum Rates 2012 2013 2013 (including Medicare contribution tax)
Long-Term Capital Gain 15% 20% 23.8%
Qualified 5-Year Capital Gain 15% 18% 21.8%

 

Dividend Income Rates

Maximum Rates 2012 2013 2013 (including Medicare contribution tax)
Qualified Dividend Income 15% 39.6% 43.4%
Ordinary Dividend Income 35% 39.6% 43.4%

 

Section 179 Business Asset Expense Deduction

2012 2013
Maximum allowable expense $139,000 $25,000
Investment ceiling 560,000 200,000

 

Other Withholding Rate Changes

2012 2013
Employee portion of FICA payroll taxes 4.2% 6.2%
Backup withholding rate on reportable payments 28% 31%
Minimum witholding rate under flat rate method…
…on supplemental wages up to $1 million 25% 28%
…on supplemental wages in excess of $1 million 35% 39.6%
Voluntary withholding rate on unemployment benefits 10% 15%

 

Tax tables courtesy of Godfrey and Kahn