Taxes Take Center Stage as Year Ends

By: williamjones
November 1, 2012

By: Margarita Tapia

Congress has just a few weeks to wrap up the 112th Congress and taxes are top of mind for many Big “I” members, families and other businesses as 2012 comes to a close.

If there are no changes to current law, on Jan. 1, 2013, individual marginal tax rates, estate tax rates and exemption levels, capital gains and dividends rates will all increase to levels not seen since the Clinton Administration.

Unfortunately, the political environment created by the presidential election year means progress on the many outstanding tax policy issues will not take place until the lame-duck Congressional session after this month’s elections, or possibly even early next year with retroactive legislation. Few are expecting major action on a wholesale tax code overhaul this year, leaving small business advocates such as the Big “I” with the remaining option of pushing for yet another extension of current rates over the final weeks of the year.

At press time, the wild card in the tax rate extension battle was the outcome of the elections. Lame-duck Congressional sessions are notorious for their potential to produce unpredictable outcomes.

The last time rates were due to lapse, current law was extended in a lame-duck Congressional session. 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 extensions for individual, capital gains and dividends tax rates; 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.

Regardless of the outcome of the elections, a top Big “I” priority is another extension of current law. 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 35% to 39.6%, respectively. Furthermore, long-term capital gains rates would increase from the current 15% level to 20% and tax rates on qualified dividends would be raised from 15% to as high as 39.6%.

President Obama’s health care reform effort, the Patient Protection and Affordable Care Act (PPACA), also added two tax increases taking effect in 2013: a 0.9% increase on wages for 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 levels. These PPACA tax hikes could hurt individuals, families and small businesses.

Estate tax rates are scheduled to increase 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 will face challenges making financial decisions affecting their future and perpetuation.

As Dec. 31 rapidly approaches, many Big “I” members and their clients are rightfully concerned about how the tax debate in Washington, D.C., could impact their livelihoods. With the wave of scheduled tax increases looming on the horizon, an extension of current rates continues to be a high priority for the Big “I” government affairs team.

Margarita Tapia is Big “I” director of public affairs.

Long-Term Farm Bill Remains Unclear

When Congress adjourned for its pre-election campaign blitz, it left a crucial piece of legislation on the table. The future of the Farm Bill remains unclear as efforts to come to an agreement on a new five-year reauthorization also remain uncertain.

The Farm Bill officially expired Sept. 30, 2012, although important farm programs are funded until Dec. 31, 2012. If Congress doesn’t act before the end of the year, this safety net for America’s food producers will remain in limbo. American agriculture and crop insurance agents will soon feel the effect.

In May, the Senate passed its version of a Farm Bill which would cut the budget baseline for agriculture spending by $23 billion over 10 years. As the Senate bill was being drafted, a successful Big “I” grassroots campaign beat back an amendment that would have cut the Federal Crop Insurance Program (FCIP) by $12 billion.

In July, the House Agriculture Committee reported a Farm Bill draft to the full House for consideration. The House version would save $35 billion over 10 years while essentially leaving the FCIP alone. The House has yet to bring the Farm Bill to the floor for debate citing time constraints and the inability to come to an agreement on the funding for various farm programs. Disagreement over the amount of cuts to the SNAP or food stamp program is one of the main sticking points.

While efforts to negotiate a new five- year Farm Bill are ongoing, the chances of a full debate on the House floor before the end of the year are slim. Many have predicted a one-year extension of the current bill with renegotiation efforts beginning in January with a new Congress.

—M.T.