Tax Issues Rise to Mind as April Approaches

As the April deadline to file federal taxes approaches, many Big “I” members and their clients are rightfully concerned about numerous tax issues being debated in Washington that could impact their very livelihood. Unfortunately, the political environment created by the presidential election year means progress on any outstanding tax policy issues is unlikely until a potential lame-duck congressional session after the November elections but before the end of 2012.

If current law isn’t amended, on Jan. 1, 2013, individual marginal tax rates, estate tax rates and exemption levels, as well as capital gains and dividends rates, will all increase to levels not seen since the Clinton administration. Additionally, the Patient Protection and Affordable Care Act (PPACA) contains two tax increases taking effect in 2013: a 0.9% increase on wages on individuals earning more than $200,000 per year ($250,000 for couples); and a 3.8% increase on investment income for taxpayers at the same income thresholds. This adds up to massive tax hikes down the road for individuals, families and small businesses.

The debt ceiling debate last summer and the ensuing battle in Congress to reduce the deficit has spurred some talk of an all-encompassing tax code reform effort. Many believe that U.S. tax code is long overdue for an overhaul, since the last comprehensive reform occurred during the Reagan administration and the code has become increasingly complex in the ensuing years. If such an effort gains steam, the Big “I” will prioritize ensuring that individual tax rates are addressed along with corporate tax rates, and that reasonable estate tax reform is also included.

Despite efforts by many for such an undertaking, presidential politics will likely trump all in 2012 and extinguish any political will in Congress for an expansive tax code reform effort. This will likely leave small business advocates such as the Big “I” with the remaining option of pushing for yet another extension of current rates after the November elections.

The last extension played out in a similar manner. In late 2010, President Barack Obama signed a short-term extension of the 2001 and 2003 tax rates until the end of 2012. This effort included those for individual tax rates, capital gains and dividends, and the estate tax rate was set at 35% with an inflation indexed $5 million exemption per individual ($10 million per couple) for two years.

As Congress moves forward, a top Big “I” priority is an extension of current law. The recent economic crisis forced many small businesses to scale back their operations and in some instances, cut their workforce. Many Main Street businesses, including thousands of Big “I” agencies, are organized as subchapter S corporations, partnerships or sole proprietorships and therefore pay taxes at individual rates. If individual tax rates are not extended again at the end of 2012, the top two tax rates for ordinary income will increase from 33% to 36% and from 35% to 39.6%, respectively. Additionally, long-term capital gains rates would increase from the current 15% level to 20% plus the new PPACA 3.8% (for those individuals earning more than $200,000 per year), and tax rates on qualified dividends would be raised from 15% to as high as 39.6%.

Allowing these rates to lapse would be severely detrimental to small businesses across the country. Another tax increase would siphon out much-needed capital from private businesses, leading to a negative effect on small business expansion and job growth.

An extension of current estate tax rates and exemption levels is also a priority. Estate tax rates are scheduled to increase again to the alarming levels of 55% with a $1 million exemption at the end of 2012. Without real, long-term relief, family-owned small businesses may be unable to plan ahead and make important business decisions in the coming years. The real world result of this punitive tax is lost jobs, since small businesses sometimes liquidate in order to cover estate taxes due.

Taxes are top of mind as the filing deadline approaches and as agents prepare for their annual pilgrimage to Capitol Hill on April 26. With a wave of tax increases looming on the horizon in 2013, tax reform will be a big issue to push in meetings with members of Congress.

Margarita Tapia (margarita.tapia@iiaba.net) is Big “I” director of public affairs.

W-2 Reporting Requirement Exemptions
The IRS has provided new guidance regarding a requirement that employers report the cost of employer-sponsored group health plan coverage on employees’ Form W-2. This reporting requirement was originally signed into law as part of the PPACA and is intended to increase transparency. The rules come into force beginning with 2012 W-2s, which will be issued in 2013.

One welcomed development in the new guidance is a further expansion of the exemption from the reporting requirement for employers who are required to file fewer than 250 W-2s. For 2011 the reporting requirement was optional for all employers, but now employers under the 250 W-2 threshold are exempted “unless and until” further guidance is issued.

Under this new reporting requirement, the value of the health plans reported is not taxable, notwithstanding the separate issue of the new so-called Cadillac tax on high-value plans in 2018.