Wednesday, 7 November 2012

Fiscal Cliff: Looming Tax Hikes Stoke Uncertainty

The election is behind us, but a new uncertainty looms: Taxes.

If Congress and the newly reelected president don't take action, most Americans will see their taxes go up next year. And some are getting twitchy.

"We are getting calls from clients daily," said Scott Cramer, president of Cramer & Rauchegger, an estate planning firm based in central Florida with more than 200 clients. "They are very scared and nervous."

Cramer's clients are primarily concerned with taxes on capital gains, set to increase on Dec. 31, along with other tax hikes as part of the so-called fiscal cliff. The year-end game-changer is happening because tax cuts put into place under President George W. Bush are set to expire and Congress has failed to make a deal for an extension.

President Barack Obama has said he wants to let Bush-era tax cuts expire for the highest-income Americans. That means individuals earning $200,000 a year and families making more than $250,000 will revert back to 1990s income tax rates of 36 percent and 39.6 percent, respectively.

For middle-class earners, the president said he supports keeping current tax rates. But the middle-class doesn't escape the cliff. New taxes created under the Affordable Care Act go into effect for 2013 tax bills, including a 3.8 percent tax increase on investment income.

More immediately, the alternative minimum tax could also slam as many as 30 million American families on their 2012 tax bills unless it?s patched by Congress. This is an additional flat tax for those making a certain income. Without a patch, it may add thousands to the tax bill for some middle-class families, tax experts said.

Even if the Bush-era tax cuts are extended for millions of Main Street Americans, they will feel tax bill sticker shock on Jan. 1. The end of the payroll tax break will nibble away at income for as many as 160 million Americans. That means an American earning $50,000 annually will pay at least $80 more per month in taxes.

Add to that, there may be higher tax-withholding by employers unless the IRS updates its withholding tables, tax experts said.

So what's the bottom line for taxpayers who don't know what their bills holds next year?

?Don?t spend every penny in your paycheck this side of New Years,? said Robertson Williams, tax policy expert and senior fellow at the Tax Policy Institute. "There is a lot of political hardball to be played over the next eight weeks."

  • Residential Energy-Efficiency Credits

    No tax breaks for being green in 2012. Homeowner investments in energy-efficient double-pane windows or high-efficiency refrigerators, <a href="http://www.energytaxincentives.org/">don't get any tax benefit, and that could add to tax bills</a>. More than 43.5 million Americans have filed and received this benefit, with an average reduction in tax liability of $765.84, according to H&R Block.

  • Mortgage Insurance Premiums

    Bad news for homeowners: They cannot write off mortgage insurance premiums on 2012 tax returns. Congress can act to reauthorize these deductions retroactively to Jan. 1, 2012, and extend them through the end of 2013, but that would cost the government $1.3 billion over the next decade, the <a href="http://articles.latimes.com/2012/oct/07/business/la-fi-harney-20121007">Los Angeles Times reports</a>.

  • Adoption Credit

    Taxpayers who have out-of-pocket adoption expenses or who adopted a child with special needs can only claim the adoption credit to the extent of their tax liability. While the portion of the credit not taken into account in 2012, up to $12,650 per child, is carried forward to future years, the benefit is no longer fully refundable, according to tax experts.

  • Alternative Minimum Tax

    If the alternative minimum tax legislation is not retroactively patched for 2012, current law could result in an increased tax liability for up to 34 million Americans. According to a study by the Tax Institute at H&R Block, an average family making $85,000 with children in college could see their tax liability soar from a $1,056 refund to owing $1,400.

  • American Opportunity Tax Credit

    Tuition bills will be higher starting on Jan. 1 because families will lose the $2,500 American Opportunity Tax Credit, which ends in 2012 unless Congress takes action. More than 2.4 million Americans claimed this deduction in 2009, resulting in a combined decrease in taxable income of $5.4 billion, according to tax experts.

  • Payroll Tax Credit

    Paychecks will be smaller starting Jan. 1, 2013. An American making $50,000, for example, will lose $80 in monthly pay after the credit ends. The temporary credit also has lowered the amount workers contributed to Social Security by 2 percent.

  • Educator Expense Deduction

    Teachers lose their $250 maximum deduction on expenses related to buying school supplies. This credit expired at the end of 2011, and teachers won't be able to claim this benefit on their 2012 taxes unless Congress takes action. In 2009, more than 3.8 million teachers claimed this benefit for a combined deduction of $9.7 billion, according to H&R Block.

  • Sales Tax As An Itemized Deduction

    Taxpayers will no longer have the option of claiming an itemized deduction for state sales tax in lieu of state income tax. This expiration will have a greater impact on taxpayers who reside in a state with sales tax, but no income tax, including Alaska, Florida, Texas, Nevada, Washington, South Dakota, and Wyoming.

  • IRA Retirement Funds

    Taxpayers over age 70? no longer have the option of directing their income from an IRA distribution to a charitable organization. Starting this year, older taxpayers must include the distribution in income and claim a charitable deduction, resulting in a potentially higher tax bracket and a need to itemize instead of claiming the standard deduction, according to H&R Block.

  • Later refunds

    As if losing all those tax credits was not bad enough, the earliest date to file a 2012 tax return electronically has moved back to Jan. 22, 2013. As the IRS has indicated that refunds could take as long as 21 days to process this year, a refund in January to cover Christmas credit card payments, winter heating bills, or rent is unlikely.

Also on HuffPost:

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Source: http://www.huffingtonpost.com/2012/11/07/fiscal-cliff-tax-hikes-uncertainty_n_2089531.html

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