Without Congressional Action, Many Tax Provisions Will Expire.
If Congress doesn’t take action before the end of the year, federal tax increases will go into effect next year, raising levies on income, capital gains, dividends, wages, gifts, estates, and more. This is due to numerous tax provisions adopted by the Economic Growth and Tax Relief Reconciliation Act of 2001 (hereinafter EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (hereinafter JGTRRA), which are scheduled to expire at the end of 2012. The following is a summary of some of the more important tax provisions scheduled to expire.
Individual Tax Rates
Under EGTRRA our tax tax rates are 10, 15, 25, 28, 33, and 35 percent. Unless Congress acts, for tax years after 2012, the tax rates will go back to the pre-EGTRRA rates of 15, 28, 31, 36, and 39.6 percent. In other words without action, the 25%, 28%, 33%, and 35% tax rates will increase, and the 10% tax bracket will go away completely.
Tax rates on long-term capital gains and qualified dividends, which are currently 15% (0% for taxpayers in the lowest two income brackets) are also set to change. Without Congressional action, the long-term capital gains rate would revert to 20% for most taxpayers and to 10% for those in the 15% income tax bracket in 2013. Qualified dividends, meanwhile, would go back to being taxed as ordinary income, so for some investors, the top tax rate could rise to 39.6%
Marriage Penalty Relief
The marriage penalty will be back. EGTRRA increased the basic standard deduction for a married couple filing a joint return to twice the basic standard deduction for an unmarried individual filing a single return. The basic standard deduction for a married taxpayer filing separately continued to equal one-half of the basic standard deduction for a married couple filing jointly; thus, the basic standard deduction for unmarried individuals filing a single return and for married couples filing separately are the same.
After 2012, the law will revert to married couples filing jointly receiving a standard deduction which is 167 percent of the deduction for single individuals rather than 200 percent. Individuals filing as married filing separately will receive half of that amount.
EGTRRA also increased the size of the 15-percent regular income tax rate bracket for a married couple filing a joint return to twice the size of the corresponding rate bracket for an unmarried individual filing a single return. After 2012, the upper limit of the 15 percent bracket for married individuals filing jointly is scheduled to be 167 percent of the upper limit for single individuals, rather than 200 percent.
Child Tax Credit
After 2012, the child tax credit is scheduled to revert to $500 from its current $1,000. In addition, the more favorable rules relating to the amount of the credit that is refundable are scheduled to expire in 2012
Overall Limitation on Itemized Deductions
The limitation on certain itemized deductions (known as Pease, named for the congressman who helped create the legislation) and the phaseout of personal exemptions (known as PEP, personal exemption phaseout) also need to be addressed. These provisions have the effect of further increasing the tax rate of people in higher income tax brackets. PEP and Pease are currently suspended, but they will come back in 2013 unless Congress acts.
Other Tax Benefits Expiring
Other taxes that would be impacted include: tax benefits for education, adoption, and dependent care.
And some provisions have expired already!
Several popular tax provisions expired at the end of 2011. These provisions have routinely been extended in the past, but because of the tight budget situation, lawmakers will be scrutinizing them more closely, and some of the provisions may not be renewed. Here are a few of the items on the bubble:
The option to deduct state and local sales taxes on your federal return instead of state and local income taxes.
The ability to make tax-free individual retirement account (IRA) distributions to qualified charities at age 70½.
Various energy efficiency tax credits.
The ability to deduct mortgage insurance premiums on your federal tax return.
The alternative minimum tax (AMT) patch is another item that has yet to be renewed for 2012. Without it, the exemption amount will drop to the 2000 level of $45,000 from last year’s $74,450 for couples filing jointly. If that happens, about 31 million taxpayers would have to pay at least some AMT in 2012, compared to 4 million in 2011.
All in All, if our congress does nothing, they will have effectively increased your taxes, in an already difficult economic time.
This article is provided for information purposes only and should not be relied upon for legal or financial advice. We would be happy to discuss how the information in this article affects or may help you. For more details about this matter, please contact our offices at 847-466-7947 of 702-966-2770.
IRS CIRCULAR 230 DISCLOSURE: Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter.