Taxmageddon!

Average taxpayers, in addition to professional tax preparers are facing a specialized group of issues as the November Presidential election approaches and end-of-the-year tax planning looms. If Congress and the White House fail to act by December 31st, favorable Bush-era tax cuts will expire, along with a variety of business and investment tax breaks, increasing income tax rates to levels last seen in 2001. Unfortunately, our current political and legislative environment only increases the uncertainty as Republicans and Democrats are both hesitant to act until they know who will occupy the White House next year.
This political gridlock coupled with a vulnerable economy and the possibility of rising tax rates has been dubbed by many as “Taxmageddon.” So what does all this suggest for taxpayers? How will the 2012 tax filing season suffer and what tactic should taxpayers take for tax planning in 2013?

 

Our best advice is to stay informed of the probable changes that may affect your business and your personal tax position.

“Staying in the Know”


Many favorable tax provisions expired at the end of 2011. Unless Congress acts and passes retroactive changes by December 31st, many taxpayers will be affected by the following expired provisions when filing their 2012 income tax returns. Historically, many of these temporary provisions have been extended, but this year there is no guarantee that Congress will take action in time.

 

  • Increase in the alternative minimum tax exemption (AMT Patch),
  • Deduction for state and local tax for itemized filers,
  • Deduction for PMI (premium mortgage insurance) for itemized filers,
  • Provision for Tax – free IRA withdrawals for charitable donations (for those over age 70 ½ ).

Another handful of provisions are set to expire by the end of 2012, and it is unlikely that Congress will address these provisions until after the Presidential election. The IRS warns that late-year law changes make for an administrative nightmare and often result in delayed filings. While taxpayers (and the IRS) remain hopeful for tax reform, we may not see progress until late December making tax planning nearly impossible. Expiring provisions include the following:

 

  • Bush-era tax cuts in marginal income tax rates,
  • Reduced tax rates on dividends and long-term capital gains,
  • Marriage penalty relief provisions,
  • Expanded refundable credits for the child tax, adoption and earned income credit
  • The moratoria on the phase outs of itemized deductions,
  • The payroll tax cut, which reduced an employee’s share of Social Security taxes by two percentage points, and
  • A variety of previously extended temporary tax provisions (tax extenders) which affect individuals, businesses, charities, energy, community development, and disaster relief.

 

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