There are many changes in the Federal Income Tax Laws that have been implemented already or will be soon. Some expired last January others will expire by year end. Tax increases are also on the horizon.
Newly Expired Tax Laws
The first five were temporary tax relief items that expired January 1st of this year are:
1. The Alternative Minimum Tax (AMT) Patch – This expiration will subject many more taxpayers with tax preferential items such as, tax free income or substantial itemized deductions, to be subject to the Alternative Minimum Tax.
2. Charitable Contribution of IRA Assets – The exception allowed taxpayers to transfer assets directly from their qualified accounts to charity without paying income tax. With the expiration of this provision, taxpayers must now first pay Federal Income Tax on the withdrawal and then may transfer an amount to the charity.
3. State Sales Tax Deduction – The deduction was an alternative which allowed taxpayers to take the higher of their state sales taxes or income taxes paid as an itemized deduction. The change will mostly affect people living in states without state income taxes and seniors in states where retirement income is not subject to state income taxes and therefore not deducted.
4. Home Energy Tax Credit – This was a credit available for windows, doors, heating systems, cooling systems, etc. After January 1, 2012, these improvements no longer qualify for a tax credit.
5. School Teachers Expenses Deduction of $250 – School teachers who have been dipping into their own pockets for items used in their classrooms, used to be to take a $250 deduction to account for these expenses.
Year End Expiring Tax Laws
The next impending batch of tax laws which are scheduled to expire at the end of 2012, barring any intervening Congressional actions, are:
1. Payroll Tax Cut of Two Percentage Points – This is a reduction in the amount of social security taxes that has been withheld from employee paychecks. The expiration of this cut will result in the resumption of the scheduled 6.2% withholding for FICA taxes.
2. Top Income Tax Rate Cap – The rate will increase from 35% to 39.6%.
3. Capital Gains Tax – Both the 0% and 15% tax brackets will disappear. They will be replaced by a single 20% bracket.
4. Qualified Dividends Tax Rate – No longer will dividends that meet the qualifications of this category be taxed at 15%. These are scheduled to revert to ordinary income tax status.
5. American Opportunity Education Credit – This credit (up to $2500), was available to offset some of the costs of post secondary education, is also set to expire 12/31/2012 as well.
January 2013 Tax Increases
There is also several tax increases scheduled to become effective on January 1, 2013. Among the most noteworthy:
1. Net Investment Income Tax – There will be an additional tax of 3.8% for individuals with Adjusted Gross Incomes of $200,000 and couples with AGI’s greater than $250,000. The purpose of this additional tax will be for additional Medicare funding.
2. Phase-out of Personal Exemption – For higher income taxpayers, the amount of their personal exemptions will be phased out as income increases.
3. Itemized Deductions Limit – These deductions will be limited for taxpayers with incomes exceeding $150,000.
4. Flexible Spending Accounts – FSA funding is being cut from $5000 to $2500.
With this plethora of changes already in place or on the horizon, what is a taxpayer to do? The answer to that is as individual as the person reading the question.
If, you are in an effected tax bracket and are contemplating liquidating an equity position that you currently own, it may be in your best interest to consider this transaction in 2012 before the increased tax rates will diminish your after tax return. If there is a way to pay for itemized deductions this year, if you are possibly in jeopardy of getting them phased out next, that may be a good choice for you.
The bottom line is to keep these changes in mind when making financial decisions in the upcoming year.
Kurt Rusch CLU,ChFC