Friday, December 28, 2012

Expiring Tax Cuts

Many of you probably are not aware that I have done taxes for over a decade and am an RTRP. In doing my continuing education and thinking about the fiscal cliff, it made my stomach turn to think about the tax increases coming our way.

It is important to note that their will be tax increases with the fiscal cliff problems but we already have a number of increases that are happening just because the Bush era tax cuts are expiring. Here is a list of some of the more significant tax increases not counting any that come out of the negotiations over the next week.

The AMT and Capital Gains changes will be a shock and impact many that don't realize it is coming. I have bolded the information that I think will impact traders at the highest level but all of this is important.

The Social Security payroll tax reduction in place for the last two years will increase 2% from 4.2% to 6.2%. This will mean an average of $40 less per paycheck for the average American.

The Child Tax Credit will decrease from $1,000 per child to only $500 per child. Ouch! A $1,000 impact for a two-child family.

The American Opportunity Tax Credit (for educational expenses) will decrease from $2,500 to $1,800 per student (and revert back to being the Hope Credit).

The tax rate on long-term capital gains will increase from 0 to 10% for lower income taxpayers and from 15% to 20% for those with higher incomes.

The tax rate on qualified dividends will increase from 15% to the taxpayer’s ordinary income rate (up to 39.6%).

Itemized deductions and personal exemptions will again be limited/phased out for higher income taxpayers.

The Alternative Minimum Tax ”patch” will disappear and the exemption amount will decrease to $48,450 for single taxpayers and $74,450 more married taxpayers.

Approximately 27 million more Americans will be subject to the AMT.

The Adoption Tax Credit will be reduced to $5,000 from $12,650. It will not be refundable but taxpayers will be able to carry forward unused amounts.

Coverdell Education Savings Account contributions will be limited to $500 per student (down from $2,000 per year, per student).

Income Tax Rates will increase from last year’s 10%, 15%, 25%, 28%, 33% and 35% to 15%, 28%, 31%, 36%, and 39.6%. Yes, that is right some of the lower income tax rates will increase by 50%. How's that for not impacting middle and lower class America?

The maximum Long-Term Capital Gains tax rate will increase from 15% to 20%.

The “Marriage Penalty” returns… Married couples will no longer get an equitable percentage of the single taxpayer amounts for the standard deduction, the 15% tax bracket or the earned income tax credit.

The Child and Dependent Care Credit amounts will decrease due to lower percentages, lower eligible expenses and an lower AGI phase-out.

The top rate for the Estate Tax will increase to 55% (up from 35%) and the exclusion amount will be reduced to $1,000,000 (down from last year’s $5,120,000). So to save money and in the words of Mr Charles Dickens ``If they would rather die,'' said Scrooge, ``they had better do it, and decrease the surplus population.

The Section 179 Deduction will be reduced to $25,000 with a qualifying property limit of $200,000 (down from $139,000 and $560,000 respectively). Bonus Depreciation will be eliminated.

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