While Congress and the President spar over whether to extend the Bush-era tax cuts, Johnson, Hickey & Murchison, PC, advises 2012 tax filers to take into account a number of expiring IRS provisions that will impact their tax liability.
“The ‘fiscal cliff’ debate in Washington brings a lot of uncertainty for businesses and individual tax filers in the Chattanooga area,” said Linda England, senior tax manager at JHM. “Depending on which provisions are allowed to expire and which are extended, Tennesseans may want to start looking for new deductions to take the place of their old favorites."
JHM has highlighted five expiring tax provisions that, unless extended by Congress, could significantly increase the amount of tax owed by the average filer:
No More State and Local Sales Tax Deduction.
Up until last year, individual filers could choose to deduct either their income tax or the sales tax that they paid in the prior year.# For states like Tennessee which have no income tax, the loss of this deduction will result in a significant 2012 tax increase for Tennesseans across the board.
Higher Alternative Minimum Tax.
The Alternative Minimum Tax, theoretically designed to keep higher-wage earners from taking advantage of too many tax loopholes, snagged taxpayers in lower brackets as well. Unless Congress extends a patch that corrects for the tax’s unintended overreach by increasing exemptions for lower income earners, the 2012 AMT will increase to its previous level, primarily affecting these lower income earners.
Higher Capital Gains and Dividend Taxes.
Those with taxable incomes in the lower tax bracket (singles making under $35,350 and households making under $47,350) will see their tax on capital gains and dividends increase from 0 to 10 percent in 2013. Similarly, those who fall in the middle and upper tax brackets (singles making over $35,350 and households making over $47,350) will see their tax increase from 15 percent to a maximum of 20 percent. While some dividends currently qualify as capital gains taxed at 0 percent, in 2013 dividends will be reclassified as ordinary income.
No More Payroll Tax Holiday.
Currently, employees pay 4.2 percent of their earnings (which employers match) into Social Security or Old Age, Survivors and Disability Insurance. In 2013, employees’ share will increase to 6.2 percent of their paychecks.
Lower Write-off Limit for Small Businesses.
Thanks to the 2009 American Recovery and Reinvestment Act, many small businesses currently write off up to $139,000 for investing in fixed assets during the tax year (based on criteria in Section 179 of the federal tax code), so long as income and investment don’t exceed $560,000. Beginning in 2013 however, the limit on Section 179 deductions will drop significantly to $25,000.
“If President and Congress cannot agree on how to avert the ‘fiscal cliff’ by Dec. 31, taxes will go up starting Jan. 1. With so much uncertainty surrounding this important debate, individual taxpayers and small businesses need to be aware of what lies ahead, because their 2012 tax bill may look very different,” Ms. England said.