Many people are not aware of the extent to which the U.S. income tax laws will change next year if Congress does not move to make them permanent. This goes well beyond the much hyped payroll tax break. In fact, the $3,598 doesn’t even factor in the increase if that provision fails to win extension!
To make the situation clear, a recent Yahoo! news story (Why Your Tax Bill Might Surge Next Year) profiles a fictional married couple, meant to portray the average tax paying family.
Meet Bill and Joan.
Bill and Joan Smith are 26 years old, married and have two young children. Bill works in sales and earns $65,000 a year, while Joan has re-entered the work force and earns $35,000 a year.
This gives them a combined income of $100,000 annually – well below the various “millionaire” threshold often touted by politicians when trying to make a tax increase more palatable to the masses.
Bill still owes a chunk of change on his student loans, and pays about $3,000 a year in interest on them.
Since Joan went back to work, they need childcare. This costs them about $3,000 a year.
In addition to her salary, Joan also inherited some shares of AT&T stock from her grandmother. She earns $1,000 in dividends each year from that stock.
Factoring in their deduction for mortgage interest, they have $20,000 in itemized deductions for the year.
Meet the new tax code.
The Bush tax cuts are set to expire at the start of 2013, and when that happens the Smiths will pay $960 more in 2012 taxes than they will in 2011 taxes. This is the result of the elimination of and tightening of marginal tax rates .
Next on the chopping block, the student loan interest deduction. That will also expire without an extension, leaving Bill to lose out his $3,000 deduction and costing him about $840 more on his 2012 taxes.
The allowable child care deduction would drop from $3,000 to $2,400 an the child tax credit would drop in half costing them an additional $1,000 in taxes.
The marriage tax penalty is set to make a come back also, costing the Smiths an additional $500 in taxes.
Remember Joan’s AT&T stock that she inherited from her grandmother? Due to the increase on dividend tax rates when the Bush tax cuts expire it will cost her another $130 in taxes.
Tax law changes not considered.
All of the above ignores other aspects of the tax code, such as the Alternative Minimum Tax, which will ensnare more people if it is not adjusted yet again. Also missing from the analysis are a number of other itemized deductions and personal exemptions that phase out at certain levels of income.
Due to tax code changes in the coming year, the average American family will owe $3,598 more in taxes with no change in their income to offset this increase.
Here’s a list of what is due to expire in the next two years.
Major Individual Income Tax Benefits Expiring 12/31/2011:
• Personal tax credits applied against income tax no longer apply
• Higher alternative minimum tax exemptions revert back to extraordinarily-low thresholds
• $250 school teacher expense deduction ends
• Mortgage insurance premium deduction expires
• State and local sales tax deductions expire
• Tuition and related fees deduction end
• IRA to charity tax-free transfers stop
• 2% Social Security tax reduction ends
Major Individual Income Tax Benefits Expiring 12/31/2012:
• Marriage penalty equalization ends
• Dividends taxed at capital gains rates removed, taxed at regular rates now
• Capital gains low tax rates expires
• Removal of itemized deduction phase out for higher income Americans
• Removal of personal exemption phase out for higher income Americans
• Child care deduction limit of $3,000 reverts to $2,400
• Child credit reduces from $1,000 per child to $500 per child
• Low 10% tax bracket for low income Americans is eliminated
• Lower income tax rates and smaller brackets expires
• Refundable adoption credit and reduced deduction
• American Opportunity college education credit expires
• Major reduction in earned income credits and refunds
• Income tax exemption for debt forgiven on home foreclosures and repossessions
• Deduction for student loan interest ends
• Education IRA limit drops from $2,000 to $500