As we near the end of the year, there are a large number of things still in flux, mostly related to the so-called “Fiscal Cliff” of tax increases and spending cuts. Congress and the President are negotiating to avoid the Cliff, since most believe allowing the country to “go over” would push the economy back into recession.
What does this mean to you, you might ask? Below is a list of the benefits that are already expired for 2012 (or will expire at the end of this year) unless Congress acts to reinstate them. This is just a partial list of the items most likely to effect the average taxpayer.
The 10% tax bracket for the lowest income Americans moves to 15%.
The highest tax bracket will move from 35% to 39.6%
Interest and dividends will be taxed at ordinary income tax rates, rather than a maximum tax rate of 15%
Capital gains will be taxed at a maximum of 20%, rather than the current maximum of 15%.
Nearly 26 million more Americans will pay the “Alternative Minimum Tax” or AMT, which eliminates many tax deductions otherwise available and uses only two tax rates – 26% and 28% – to calculate Federal tax.
Adoption benefits provided by employers to assist employees with the cost of adoption will no longer be excluded from taxable income.
Tax-free tuition assistance provided by employers to their employees of up to $5,250 will not be allowed.
The 2% reduction of the employee’s portion of Social Security will expire, essentially reducing take-home pay by 2% for those earning up to $113,700.
The up-to $4,000 deduction for tuition and fees will not be allowed.
Mortgage insurance premiums will no longer be allowed as a deduction.
State and local sales taxes will not be allowed as a deduction in place of state and local income taxes, a provision that effects mostly those in states with no state income tax.
We’ll keep an eye toward Washington, and when there is a resolution to the Fiscal Cliff questions, we’ll bring you a full explanation.
If current law is allowed to continue into 2013 unchanged, most taxpayers will face higher tax rates on investment income like interest and dividends, and if the Bush-Era tax cuts are allowed to expire, many will pay higher taxes on ordinary income like salaries and business profits as well. The question for many is how to avoid paying these higher rates to the extent possible. Below are a few tips.
If you are considering selling a capital asset next year, like a rental property or appreciated stock, consider selling it at the end of 2011 instead to lock in the lower tax rates.
If you are considering converting a traditional IRA to a Roth, do it this year to take advantage of the lower rates. Also, when you take money out of the Roth account, it won’t reflect in your income when determining if you are subject to the 3.8% Medicare surtax on investment income, so you might avoid paying it altogether. Distributions from traditional IRA’s will be.
To the extent you can, accelerate income into 2012 to avoid the possibility of paying a higher rate on it come 2013.
The picture is clear: either rates will stay the same or go up; there aren’t many that believe taxes will decrease next year. As always, we’re here to help navigate the process.
In the past week, both House Republicans and Senate Democrats have introduced bills to extend the Bush-era tax cuts, most of which have either already expired or will expire at the end of this year.
The Republicans are moving to extend the cuts for all taxpayers, while the Democrats are pushing to extend them for only those earning $250,000 or less. Each plan faces almost certain refusal by the other side of the aisle, which leaves taxpayers in the same position they were – with expiring tax cuts and no good prospect for renewal.
We’ll keep you informed of all the latest as things develop.
On December 17, 2010, the US House of Representatives passed the 2010 Tax Relief Act on a bi-partisan vote. The law is expected to be signed into law by President Obama in its current form. Not a moment too soon, the Act provides for the following extensions through the end of 2012:
Income tax rates will be held at their current level
The Child Tax Credit, Earned Income Tax Credit, and American Opportunity tax credit (for higher education) have all been extended
Other elements of the bill lasting less than two years, among others, are
The AMT has been “patched” to prevent it from assessing additional tax on middle income earners. This is effective for the 2010 and 2011 tax years.
The $250.00 deduction for classroom expenses of elementary and secondary school teachers is extended for the 2010 and 2011 years.
A 2% reduction in payroll taxes for employee and self-employed individuals for 2011 only.
This means the amount of taxes withheld from an employees paycheck will decrease 2%, effectively resulting in a 2% raise in pay.
Self-employed tax payers will pay 2% less in self-employment taxes.
Expanded section 179 expensing for businesses was extended through the end of 2011, allowing businesses to deduct up to $500,000 of new asset costs in the first year.
Beginning with 2012, the act provides for 50% bonus depreciation in the first year of an asset’s use, in lieu of the expanded 179 expensing.
Additional changes were made surrounding the estate tax, and a number of other areas. Conspicuously absent was the provision to repeal the new 1099 reporting requirements.
Want more detail on how the changes will affect you or your business? Feel free to contact us!
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