Depreciation and long-term capital gains taxes

What has changed from 2011 to 2012 and what may happen in 2013.

Whether you own a business or farm, are retired or work for someone else, there are two things in life that you can count on – death and taxes. One of which comes every year.

There is a constant stream of what has to be considered when it comes to taxes – whether it deals with payroll, capital gains, or estate and gifting – there is an ever shifting world of rules and regulations that must be considered within the management of businesses and personal lives.

For many businesses and farms, depreciation plays a large tax role. In 2011 IRS Section 179 allowed for the direct expensing of up to $500,000 worth of qualifying assets with a phase out beginning at $2 million. This year Section 179 has been lowered to $139,000 with phase out beginning at $560,000. 2011 bonus depreciation allowed for 100 percent depreciation of qualifying assets while this year it is reduced to 50 percent for qualifying assets placed into service in 2012. According to Dr. Adam J. Kantrovich Regional Farm Management Educator for Michigan State University Extension, if no other changes occur and if congress does not act, the Section 179 limit will drop to $25,000 for the 2013 tax year. While this may officially take effect on Jan. 1, 2013, Congress can retroactively make changes to the tax law after the first of the year.

Another significant change that will affect businesses, farms and individuals is the change to long-term capital gains rates. Presently (2012) dependent on the income tax bracket of a taxpayer, capital gains are taxed at either zero percent or at a 15 percent rate. Beginning as of Jan. 1, 2013, these rates will increase to ten percent and 20 percent respectively. Along with this increase comes a 3.8 percent Medicare tax for single filers with income over $200,000 ($250,000 married filing jointly) as part of the Affordable Healthcare Act officially calling it the “unearned income Medicare contribution tax”. Although the details on this become a bit more complicated, it is not a “slam dunk” that someone with long term capital gains is going to be paying it, but it is something everyone needs to be aware of for planning purposes.

If you have any questions, please contact your local MSU Extension Farm Management Educator.

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