Last week we talked about the expiring Bush Tax Cuts and what that could mean for the 2013 tax brackets. This week we are discussing what the Fiscal Cliff means for the list of the expiring benefits and how all taxpayers will be affected. Without Congressional action before the end of December, almost everyone will be hit will some type of tax increase. Be sure to check the list for items that will apply to you to get an idea of how your tax situation will be impacted.
American Opportunity Tax Credit Expires
Who Is Impacted: Lower Income Families
The American Opportunity Tax Credit will expire after 2012. The AOTC, which expanded and renamed the already-existing Hope credit, could be claimed for tuition and certain fees you may have paid for higher education for a credit of up $2,500.
Who Is Impacted: Lower to moderate income taxpayers
A deduction of $2,500 is allowed for interest paid on loans for higher education. If this benefit is allowed to expire, the deduction will only be able to be claimed by eligible taxpayers for the first 60 months (5 years) of interest payments (currently there is no time provision). In addition, the income phase-out levels are reduced to $40,000- $55,000 for single filers and $60,000- $75,000 for married joint filers. The current phase-out range is $60,000- $75,000 for single filers and $120,000- $150,000 for married joint filers.
Who Is Impacted: Lower income taxpayers who have children
Since 2003, the child tax credit has been $1,000 for each qualified child of a taxpayer who is under the age of 17 at the end of the calendar year. However, at the end of 2012 this provision will expire, and beginning in 2013, the credit will revert to $500 per child.
Who Is Impacted: Lower income working taxpayers with children
As part of the Bush-era tax cuts, the maximum expenses qualifying for child and dependent care credit were raised from $2,400 ($4,800 for two or more qualifiers) to $3,000 ($6,000 for two or more qualifiers) and the income-based maximum credit percentage was raised from 30% to 35%. However, these increases are scheduled to revert to the back to the previous/ lower amounts in 2013.
Who Is Impacted: Lower income taxpayers with three or more children
In 2009, a credit category for three or more children was added, providing an increased credit for taxpayers with three or more qualifying children. However, the earned income tax credit will expire at the end of 2012.The expiration will reduce the maximum credit for individuals with three or more children by $650 in 2013. Note: Other changes that enhanced and simplified the credit computation are also set to expire.
Payroll Tax and Self-Employment Tax
Who Is Impacted: All working taxpayers
Both the payroll withholding tax and self-employment tax rate have been reduced by 2% points for two years, Beginning in 2013, payroll FICA withholding will return to 6.2% (up from 4.2%0 and self-employment tax will return to 12.4% (up from 10.4%).
Itemized Deduction Phase-Out
Who Is Impacted: Higher income families who itemize their deductions
Beginning in 2013, higher income taxpayers will again be subject to the phase-out of itemized deductions. The following itemized deductions are subject to phase-out: taxes, interest (except investment interest), charitable contributions, employee job expenses and other miscellaneous itemized deductions (excluding gambling and casualty or theft losses). If the itemized deductions are subject to the limit, the total of all itemized deductions is reduced by the smaller of:
1) 3% of the amount by which the AGI exceeds the annual limit, or
2) 80% of the itemized deductions that are affected by the limit.
The threshold amounts for 2013 have not been announced yet but will be inflation-adjusted amounts from 2009, which were $83,400 for married taxpayers filing separately and $166,800 for all others.
Who Is Impacted: Higher income families
In 2012, each taxpayer is entitled to a $3,800 tax exemption for themself, their spouse, and each dependent. Beginning in 2013, a phase-out of the exemptions will return for higher income taxpayers. The threshold amounts for 2013 have not been announced.
*Please keep in mind that this is not a complete list of all the tax benefits that may be affected if Congressional action is not taken.
It is important to point out that Congress could and probably will extend some of these provisions. The reason we provide our customers with this information is to let them know of these important changes, so they can review their tax situation and plan for all the possible scenarios. A helpful tool we found for reviewing your possible tax situation was a "Fiscal Cliff" Calculator by The Tax Policy Center. In using their Fiscal Cliff Calculator, you can compare the 2013 law if policies are allowed to expire completely, also known as “the Fiscal Cliff”, the 2013 Senate Democratic plan and the 2013 Republication plan. Check out the Tax Policy Center’s Fiscal Cliff Calculator and see how the amount of taxes you owe will be affected by each proposed plan.