Fiscal Cliff – Tax Changes Affecting Horse Owners

Posted by on Jan 3, 2013 in News | 0 comments

From the American Horse Council

 

The country went over the “cliff,” but, like a bungee jumper, after a short fall it was pulled back up to the precipice.  Congress’ passage of the American Taxpayer Relief Act of 2012 in 2012 and the President’s signing it in 2013 broke the Congressional impasse and got the country past the Fiscal Cliff for now.  We now sit on the bench next to the sign indicating a “Scenic Overlook.”  But we can relax and enjoy the view for only a few months, until the delay of the across-the-board budget cuts expires and it comes time to raise the U.S. debt limit.

The following is a summary of some of the provisions in the new law that will affect those in the horse industry.  All threshold figures assume that the taxpayer is married and filing a joint return.  A taxpayer filing in a different status changes the thresholds.  The new law:

  • Permanently extends the “middle class tax rates” at 25%, 28%, and 33% for married taxpayers earning less than $450,000 for 2013 and thereafter.  For those families making over that amount, the marginal tax rate increases to 39.6%, a 4% increase.
  • Extends the Section 179 expense deduction at $500,000 with a phase-out dollar-for-dollar once investment reaches $2 million.  It applies retroactively for 2012 and extends through 2013.  This applies to horses and other depreciable property.
  • Extends the current 50% bonus depreciation for qualifying new property,  including horses, purchased and placed in service through 2013.
  • Makes permanent the capital gains and dividends tax rate for married couples with incomes below $450,000 at zero or 15%.  For those with incomes above $450,000 the rate for capital gains and dividends is set permanently at 20%, rather than taxing dividend income at the same rate as ordinary income, now 39.6%.
  • Makes permanent alternative minimum tax relief by increasing the exemption and phase-out amounts to $78,750 for married taxpayers filing jointly, both figures indexed for inflation.
  • Permanently repeals the itemized deduction limitation for married taxpayers making less than $300,000.  For families earning more than that, deductions would still be reduced.  There was a concern that any itemized deduction limitation might adversely affect taxpayers who wager on horseracing, but thanks to industry friends in Congress who realized the unfairness of such a limitation, the new law exempts wagering losses from the overall limitation on itemized deductions.  In other words, wagering losses can still be deducted up to the amount of wagering winnings on a taxpayer’s return.
  • Makes permanent the estate tax exemption at $5 million with a top tax rate of 40%, indexed for inflation.
  • Permanently repeals the Personal Exemption Phase-out for married taxpayers filing jointly making below $300,000.  Continues the phase-out for others.
  • Extends for two years the increased contribution limits and carryforward period for contributions of appreciated real property for conservation purposes.
  • Extends the current Farm Bill through September 30, 2013.

The bill delays for two months the automatic across-the-board budget cuts that were to take effect on January 1, 2013 under “sequestration.”  This means that government agencies will continue to operate at current levels.  This also sets the next Congressional showdown for March, when the sequestration cuts again loom and the U.S. will again reach its debt limit.

As always, taxpayers should check with their personal tax advisors to see how these changes will affect them.  But expect to be back at the overlook bench in 60 days.

 

 

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