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A Sampler of Impending Tax Changes
October 1, 2012
If you have paid any attention to the upcoming Presidential election, which is hard to do even if try your best to avoid it, you know that both parties have setup the tax code as a wedge issue. Regardless of whose vision ultimately wins out, there are already a large number of scheduled changes to the tax code if Congress does not override current law. The vast majority of the scheduled changes are contained in the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (“JGTRRA”). Congress delayed action last year by renewing the EGTRRA and JGTRRA through the end of 2012, and while Congress certainly might do the same thing this year, at some point, something has to give. Although the EGTRRA and JGTRRA pertain to more than just individual tax returns, I want to point out the changes taxpayers will see on their individual returns. In no particular order, here is an abridged version of changes for individual returns: Tax Brackets – The 10% bracket disappears and the top four brackets increase from 25% to 28%, 28% to 31%, 33% to 36%, and 35% to 39.6%, respectively. Capital Gains – Long-term capital gains are taxed at a maximum rate of 20% (up from 15%). Dividends – Dividends paid to individuals are taxed at the same rates that apply to ordinary income (i.e., according to your tax bracket). Student Loan Interest Deduction – This deduction phases out quicker and applies only to interest paid during the first 60 months on a loan repayment plan. Earned Income Tax Credit – The most notable change, among many, is that earned income for EITC purposes includes exempt income (i.e., social security income). Child Tax Credit – The maximum credit drops from $1,000 to $500. In addition to the provisions above enacted under the EGTRRA or JGTRRA, there are also a number of tax provisions that were allowed to expire after 2011. Unless Congress legislates the expired provisions back into the tax code, the following are not allowed on an individual taxpayer’s 2012 tax return: General Sales Taxes – Taxpayers can no longer make the election to deduct state and local general sales taxes in lieu of deduction state and local income taxes. This change mostly affects taxpayers in states that do not pay state or local income taxes (i.e., Texas and Florida). Qualified Tuition Expenses – This above-the-line deduction, which means it was included as an adjustment on page 1 of Form 1040, is no longer available. Education credits will survive, but the deduction is gone. Mortgage Interest – Taxpayers are no longer able to treat mortgage insurance premiums as deductible qualified residence interest. This change most directly affects taxpayers who obtained mortgage loans through the FHA loan program. Teaching Deductions – The above-the-line deduction of up to $250 in expenses for elementary and secondary school teachers has expired. Finally, I want to point out that the temporary payroll tax cut first utilized in 2010, and subsequently renewed in 2011, is set to expire. This temporary cut lowered social security taxes (known as “OASDI”) two percentage points for both employees and the self-employed. If this temporary cut is allowed to expire, OASDI will rise from 4.2% to 6.2% for employees, and from 10.4% to 12.4% for the self-employed. Until next time, Alex