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What the End of the Bush Tax Cuts Means for You—Part Two

Written by Eva Rosenberg on November 27, 2012 in Tax  |   3 comments

Disclaimer: This blog post was written before the election and is meant to summarize the possible effects of the end of the Bush-era tax cuts. In part one of this series, I outlined the changes that could affect individuals on January 1, 2013, if the…

Disclaimer: This blog post was written before the election and is meant to summarize the possible effects of the end of the Bush-era tax cuts.

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.

Businesses

  • 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. Eva is the author of several books and ebooks, including the new edition of Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.

3 comments

  1. disney says:

    this was very helpful

    • EFX Moderator, EM says:

      Disney, that’s great to hear, I’m glad. I hope you come back to the blog soon and find additional helpful information. Thanks.

  2. Jimmy Bur h Sr says:

    One must understand if you make good money in any situation it should be taxed the same as earned income,most workers don’t know about these tax incentives and can’t complete their own taxes each year,so I see an improvement for most by eliminating tar tax credits at this level and should never been approved anyway,so I think its time to stop it.


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