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$500 billion tax increase for 2013


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The "Fiscal Cliff"

A slew of tax provisions important to small business are set to expire at the end of 2012. These expiring taxes add up to an almost $500 billion tax increase for 2013 alone. This is a major concern for small business owners because it creates uncertainty since owners do not know what their tax liability will be in 2013. Also, it makes it difficult to hire new workers or make significant investments in a business. A recent NFIB Small Business Poll shows 22 percent of small business owners said uncertainty is the single most important external impediment to growth. (See the Taxmageddon is coming to Main Street factsheet)

According to an NFIB small business survey, 75 percent of small businesses are organized as pass-through entities meaning they pay taxes on their business income at the individual rate. Additionally, 54 percent of the private sector workforce is employed by pass-through entities. Therefore, any increase in the individual rate at the end of the year will hit America’s number one job creators the hardest.

Many observers have categorized these tax increases as sending the economy over a “fiscal cliff.” Congressional Budget Office analysis shows that real gross domestic product growth will be just 0.5 percent if nothing is done. When the economy is so fragile there is no reason why we should not be acting with great urgency.

Congress must deal with a wide variety of expiring provisions that directly impact small business before the end of 2012. These provisions include:

Individual income tax

  • The 10 percent bracket would disappear. The 15 percent bracket would become the lowest tax rate. And the 25, 28, 33 and 35 percent rate brackets would rise to 28, 31, 36 and 39.6 percent.
  • The capital gains rate on assets held longer than a year would increase to 20 percent from 15 percent for middle- and upper-income taxpayers and rise to 10 percent from zero for those with lower incomes.
  • Dividends would be taxed as ordinary income rather than at the same rate as capital gains.
  • The per-child tax credit would revert to $500 from its current level of $1,000 and would cease to be refundable.
  • Expansions of the earned income tax credit, the dependent care credit and the adoption credit would expire.

Estate tax

  • The maximum rate on taxable estates would rise to 55 percent from 35 percent.
  • The maximum estate size exempt from tax would fall to $1 million from $5 million.

Business taxes

  • Expensing limits under Section 179 will fall back to $25,000 and real property will no longer be included.
  • The holding period for built-in gains on appreciated S corporation assets will be reduced from 10 years to 5 years.
  • The start-up deduction for businesses will be reduced from $10,000 to $5,000.
  • Companies would no longer be able to claim a 50 percent bonus depreciation on qualified capital investments (Bonus depreciation of 100 percent of capital investments already expired at the end of 2011.)

Alternative minimum tax

  • An estimated 31 million additional taxpayers would be required to pay the AMT (only 4 million owed it in 2011).

Payroll tax

  • The employee share of the Social Security payroll tax would revert to 6.2 percent from 4.2 percent.


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31 million paying the AMT? That's nuts! That's 13% of everyone employed.

Also, a 55% tax rate on a 1 million dollar inherited estate is asinine.

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