Congress will likely be busy in the closing months of 2012 as multiple tax laws have expired, or will expire at year end. It is unknown what, if any, action will be taken by Congress. Lack of action could negatively affect millions of taxpayers. Among the tax benefits affected are bonus depreciation, Sec. 179, Alternative Minimum Tax (AMT) exemptions, and estate law changes.
Bonus Depreciation, Sec. 179 and AMT Exemptions
Effective Jan. 1, 2012, the highly favored 100 percent bonus depreciation was reduced to 50 percent. The 50 percent bonus depreciation will expire at year end. Likewise, Sec. 179 has been reduced from $500,000 in 2011 to $139,000 for 2012, with a limit of $560,000 in additions before the deduction begins to phase out.
In 2012, the AMT exemption has been reduced to $33,750 for single filers and $45,000 for married taxpayers filing jointly. This exemption is down from $48,450 and $74,450 for single and married filers, respectively. Since 2000, Congress has passed an annual “AMT patch” that adjusted the exemption to a higher amount. Congress has been unwilling to pass a permanent fix that would annually adjust the exemption for inflation. The tax revenue lost with a permanent fix is estimated to cost in excess of one trillion dollars through 2022.
With the end of bonus depreciation, asset intensive industries such as trucking will face higher amounts of taxable income over the next few years as tax depreciation drops significantly. The cause is two-fold: (1) depreciation of new purchases will be spread over multiple years; and (2) little or no depreciation will be available from assets purchased in the past because the benefit has already been received via bonus depreciation and increased Sec. 179.
An estimated four million taxpayers paid AMT tax in 2011. Assuming no patch for 2012, roughly 30 million taxpayers would be subject to AMT. Both bonus depreciation and Sec. 179 are allowed under AMT, resulting in lower AMT taxable income in recent years. Compounding the reduction in depreciation with the reduction in the AMT exemption increases the likelihood of taxpayers with taxable income being subject to AMT tax.
Estate Tax Updates
Beginning on Jan. 1, 2012, an individual making a gift or leaving an estate worth $5.12 million ($5 million in 2011) was exempt from paying gift or estate tax, depending on lifetime transfers. Absent a law change, effective Jan. 1, 2013, the gift and estate tax exemptions are scheduled to revert back to the 2002 exemptions of $1 million.
Also expiring on Dec. 31, 2012, is the transferability of a decedent’s unused gift/estate exemption to a surviving spouse. Transferability of the exemption is accomplished by making an election on a timely filed estate tax return (IRS Form 706). A married couple can shield a total of $10.24 million from estate tax. Without this transferability feature, married couples will be required to carefully draft estate documents and title assets so as not to potentially waste the exemption of the first spouse to die.
Daniel Larson is a manager in Katz, Sapper & Miller's Transportation Services Group. For more information, contact Daniel at email@example.com or 317.452.1066.