As the end of the year grows closer, so does the uncertainty surrounding the "fiscal cliff" and tax planning for the future. A wide array of tax credits and cuts, which were mostly enacted during the Bush administration, are set to expire December 31, 2012, unless Congress takes action soon.
If not renewed, the expiring credits and cuts could cost households an average of $3,500 in higher taxes next year. The Illinois CPA Society (ICPAS) wants to make sure you're aware of the ones that may hit you or your clients the hardest so you can plan ahead.
Payroll Tax Holiday Disappears
In place for the last two years in an effort to boost the economy, this tax break, which was always meant to be temporary, helped put more cash in consumers' pockets - about $19 a week - by decreasing the amount of tax that came out of paychecks. When it expires at the end of the year, workers could see a 2 percent tax increase in their Social Security withholdings, which means lower take-home pay.
Alternative Minimum Tax (AMT) Kicks In
Over thirty-one million families may find themselves subject to AMT payments, up from four million last year. AMT, which is essentially an extra tax people have to pay on top of the regular income tax, was originally meant to keep people with very high incomes from using special tax benefits to pay little or no tax. Unfortunately, it now applies to millions of average-income taxpayers because the applicable income levels were never adjusted for inflation. With legislation exempting these taxpayers from paying AMT in 2010 and 2011 set to expire, millions of "regular" Americans could be paying thousands more in taxes beginning in 2012.
Child Tax Credit Decreases
Parents eligible to take the Child Tax Credit may see it slashed in half - to $500 from $1,000. To be eligible, taxpayers must be the parent or legal guardian of a child under seventeen who they claim as a dependent on their tax return. This standard deduction is meant to reduce federal income tax for each dependent child and helps to ease the costs children may incur over the course of the year.
Bracket Rates Tighten
Both single and joint filers could see tax bracket rates increase in 2013, no matter where your adjusted gross income (AGI) falls on the schedule. For example, if your income places you in a 10 percent rate bracket in 2012, the same income will put you in a position to be taxed at 15 percent in 2013. Married filers will also see the return of the "marriage penalty", which narrows brackets for married couples, as well as the elimination of a doubled standard deduction that was available in 2012 to increase their deduction amount. All of these hits mean that both single and married couples can expect to pay more in 2013.
Capital Gains Tax Increases
A capital gain is any profit made when selling an asset, including stock, bonds, or real estate; it may also be referred to as investment income. In 2012, these profits weren't taxed at all, but 2013 may bring a minimum 10 percent tax, costing individuals thousands of dollars.
Although not a done deal, the scheduled expiration of these credits and breaks could wreak havoc on Americans' finances if they don't plan ahead. In the event that Congress doesn't act to extend the deadlines, now is a good time to educate yourself and prepare your clients for what may be coming down the pipeline.
Source: October 31, 2012, Illinois CPA Society Press Release