The U.S. tax code can be startlingly confusing for many people – it’s a complex labyrinth that can be difficult to navigate even when there are no expected changes. With the fiscal cliff looming and with manufacturers uncertain what their tax rates will be in 2013 it can have a paralyzing effect. Moss Adams LLP, a public accounting firm has taken the time to explain where we stand and what will happen in 2013 if policymakers are unable to take action to avoid the fiscal cliff. Their analysis paints a stark picture of the significant increases that manufacturers face and adds to the mountain of evidence that we need action to prevent going over the fiscal cliff right now.

“Starting January 1, the federal estate tax rate is set to increase from 35 to 55 percent and the amount of wealth you can transfer without incurring federal transfer taxes drops significantly. When you include estate taxes that exist in many states, your combined effective rate could exceed 63 percent.

But that’s not all. The tax rates on ordinary income, capital gains, and qualifying dividends are also scheduled to increase in 2013, with the top marginal rate on qualified dividends set to increase from 15 to 43.4 percent. And finally, the Medicare tax on net investment income (3.8 percent for higher income individuals) is also scheduled to go into effect on January 1.

Income Considerations

As it currently stands, dividend income that will be realized in January 2013 will carry up to a 28.4 percent higher federal tax burden than dividend income realized in December 2012. This can have a significant impact on domestic manufacturers who export products using an IC DISC.

For pass-through entities such as S corporations, fully understanding the benefits and costs of electing bonus depreciation should be carefully evaluated given the potential increase in tax rates as future deductions may generate larger tax savings with higher tax rates.

The Bottom Line

With all of these tax rate and transfer tax exemption changes looming around the corner, now is the right time to review your estate plan and the individual tax items you may be able to control. And it’s important to understand potential legislative changes that may extend or change the current tax rates in order to avoid unnecessarily accelerating income into the current year.”

Mark Reis is a partner at Moss Adams LLP. He is based in San Francisco and has been in public accounting since 1986. He is a tax advisor to numerous manufacturing, distribution, and service companies.

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