Today, President Obama is expected to sign into law The American Taxpayer Relief Act of 2012, which addresses the “fiscal cliff” scenario looming over the 2013 tax year.  Included within the Law are a couple of items to note for taxpayers who are interested in the R&D Credit and Interest-Charge DISC:

  1.  The R&D Tax Credit is extended for 2012 and 2013 tax years.
  2. Qualified Dividends will continue to be taxed at the same rates as Capital Gains. The tax rate on Capital Gains increases to 20% from 15% for income over $400K for individuals and $450K for families.  Coupled with the new 3.8% Affordable Care Act surcharge added to dividends and capital gains beginning in 2013, the top rate for cap gains and dividends is now effectively 23.8%.
  3. On Ordinary Income, Congress effectively created a new top tax bracket.  Ordinary Income earned by individuals above $400K and by families over $450K will be taxed at 39.6% vs. 35%.
  4. In addition to the new 39.6% rate, Congress re-implemented the old Personal Exemption Phase-Out (“PEP”), as well as the “Pease” limitation.  The re-instatement of PEP and Pease will scale back deductions for higher-income individuals, leading to larger tax liabilities for these taxpayers.

Based upon the new laws, here are a couple of tax-planning considerations:

  1.  If you have export sales and have considered implementing an IC-DISC in the past but put it on the back-burner due to uncertainty over qualified dividend rates, now is the time to act.  However, you should strongly consider using a qualified and experienced advisor to assist with this process – the IRS has indicated that IC-DISC will receive more audit scrutiny in the future.
  2. With the PEP phase-out and the permanent Alternative Minimum Tax “patch”, certain taxpayers who were unable to utilize a R&D Credit previously due to AMT limitations may now be able to do so.  Even with the higher rates and deduction limitations not phasing in until 2013, you should consider capturing R&D Credits in 2012 even if the credits won’t fully be utilized in 2012.  The R&D Credit may be carried-forward for 20 years, and you may very well need these credits once (the “bad news” from) this law fully comes into effect.

For more information, please contact Tom Nally, Managing Director, at 281-741-0618, ortnally@trcgadvisors.com.

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