There has been a considerable amount of press on Bush Tax Cuts set to expire on December 31, 2012. What is not well publicized is there are many other tax provisions that have expired or are set to expire this year. So what really is at stake?
Provisions set to expire in 2012
The current capital gain and dividend tax rates expire in 2012. The current long term capital gains tax rate for taxpayers in the 10% bracket is 0% and the tax rate for all others is 15%. The long term capital gains tax and dividend tax rates increases to 20% for all taxpayers in 2013.
Starting in 2013, the marginal income tax rates are set to increase. The marginal tax rates for 2012 are 10%, 15%, 25%, 28%, 33%, and 35%. The current marginal tax rates for 2013 are 15%, 28%, 31%, 36%, and 39.6%.
Earn income tax credit (EITC) provisions that helped larger families are set to expire. The maximum credit and income limits for families with three or more children are eliminated.
The payroll tax holiday is set to expire in 2012. The payroll tax holiday reduced social security payroll tax from 6.2% to 4.2%.
The limitation on itemized deductions known as “Pease” expires in 2012. For 2012, taxpayers can deduct all of their itemized deductions. If “Pease” limitations expire, itemized deductions of higher income taxpayers will be limited.
The American Opportunity Credit for tuition and other college expenses are set to expire in 2012. The current education credit is a maximum of $2,500 per year for 4 years. If this expires, the education credit will be a maximum of $1,800 per year for 2 years.
The child tax credit of $1,000 maximum per child expires in 2012. Under the old law, the maximum child tax credit was $500 per child.
Enhanced adoption tax credit is set to expire. The maximum credit for adoption expenses is up to $12,650 in 2012. If this law expires, the maximum will be about $5,000 to $6,000.
The provisions addressing the marriage penalty are set to expire. The marriage penalty comes into play when both spouses earn about the same amount of income. Under the current law, a married couple would pay as much or less then if the couple were single. If the marriage penalty provisions expire, a married couple with both spouses earning about the same amount of income would likely pay more taxes compared to being single.
Provisions that expired in 2011 (Note: These provisions can be retroactively extended)
The deduction for state or local sales tax in lieu of the deduction for state and local income taxes is no longer available. A car is purchased and the sales tax related to the purchase is $3,000. In the same year, the state and local taxes paid by the taxpayer is $2,000. If this provision is not extended, the taxpayer’s deduction will be limited to $2,000. In 2011, the taxpayer could have deducted $3,000.
For leasehold improvements, the provision to depreciate over 15-year straight-line recovery method has expired. The cost recovery period will revert back to a 39-year depreciation schedule.
Taxpayers over the age 70 ½ are no longer able make charitable contributions from their IRAs tax-free.
The deduction for qualified tuition and related expenses is no longer available.
The $250 deduction for classroom supplies personally purchased by teachers expired.
The Alternative Minimum Tax (AMT) patch expired. The AMT exemption was increased to about $48,000 for single filers and about $73,000 for married filing joint filers. If the patch is not extended, the AMT exemption will be $33,750 for single filers and $45,000 for married filing joint filers. More taxpayers will be subject to AMT if this is not extended.
The tax credit for research and experimentation expenses expired.
Section 179 Deduction will be reduced from the 2011 allowed deduction of $500,000 with a $2,000,000 phase out limit to $139,000 with a $560,000 phase out limit.
The deduction for mortgage insurance premiums expired.
The amount of laws that are set to expire or have expired is staggering. Unless these laws are extended, there may be a large impact on the amount of taxes taxpayers will owe. If you have questions or need help to understand the potential implications, do not hesitate to call ALG Tax Solutions at 855-MI-TaxHelp.
References: Olson, Nina. “2013 Objectives Report to Congress.” Taxpayer Advocate Service. 27June2012
IRS Circular 230 Disclosure: To the extent this writing contains advice on a federal tax issue, the advice is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed in this communication.