The Bush era tax cuts, which were set to expire on Dec. 31, 2010 and were extended for two years, are going to expire on Dec. 31, 2012. If this happens the regular top rate on capital gains will rise from 15 percent to 20 percent. In addition, the provision known as the “Pease Limitation” will return in full force. This provision increases effective tax rates on high income earners by reducing the value of their itemized deductions. This will add about another 1.2 percentage points to the capital gains rate of high income earners.
And that’s not all. The health reform enacted in 2010 imposed a new tax on the net investment income of high income taxpayers, including capital gains, effective Jan. 1, 2013. This will add another 3.8 percentage points to the capital gains rate.
Put it all together, and unless another tax cut extension occurs (highly unlikely), the top tax rate on capital gains is currently scheduled to increase from 15% to 25% on Jan 1, 2013. Additionally, since 1978 the top capital gain rate has been increased to 28% on several occasions. So the possibility exists that the top rate has a chance of going above 25%.
With all the conversation about capital gains tax, the pending expiration of the Bush Tax Cuts and the additional tax associated with the 2010 health care legislation, now is the time to take action by any business owner considering selling his/her business during the next few years. A 15% capital gain tax rate is certainly much more appealing than the risk of experiencing a 25% to 30% rate.