Will expiring tax breaks be extended?
With the "Bush tax cuts" (extended for an additional two years by legislation passed in 2010) set to sunset at the end of 2012, federal income tax rates will jump up in 2013. We'll go from six federal tax brackets (10%, 15%, 25%, 28%, 33%, and 35%) to five (15%, 28%, 31%, 36%, and 39.6%). The maximum rate that applies to long-term capital gains will generally increase from 15% to 20%. And while the current lower long-term capital gain tax rates now apply to qualifying dividends, starting in 2013, dividends will once again be taxed as ordinary income.
Additionally, the temporary 2% reduction in the Social Security portion of the Federal Insurance Contributions Act (FICA) payroll tax, in place for the last two years, also expires at the end of 2012. And, lower alternative minimum tax (AMT) exemption amounts (the AMT-related provisions actually expired at the end of 2011) mean that there will be a dramatic increase in the number of individuals subject to AMT when they file their 2012 federal income tax returns in 2013.
Other breaks go away in 2013 as well.
- Estate and gift tax provisions will change significantly (reverting to 2001 rules). For example, the amount that can generally be excluded from estate and gift tax drops from $5.12 million in 2012 to $1 million in 2013, and the top tax rate increases from 35% to 55%.
- Itemized deductions and dependency exemptions will once again be phased out for individuals with high adjusted gross incomes (AGIs).
- The earned income tax credit, the child tax credit, and the American Opportunity (Hope) tax credit all revert to old, lower limits and less generous rules.
- Individuals will no longer be able to deduct student loan interest after the first 60 months of repayment.
There continues to be discussion about extending expiring provisions. The impasse, however, centers on whether tax breaks get extended for all, or only for individuals earning $200,000 or less (households earning $250,000 or less). Many expect there to be little chance of resolution until after the November election.
---Carolyn L. Mora, CPA, CFP®
Carolyn L. Mora is a Certified Public Accountant and Certified Financial Planner in El Paso, Texas where her work is focused on serving the tax and financial planning needs of physician practices, business entities and individuals. Ms. Mora has appeared as a speaker on tax matters and estate planning issues on several occasions, including serving as a speaker at the Women in Business Conferences conducted in El Paso and the Estate Planning Conference for Women hosted by the University of Texas at El Paso. She has also addressed the El Paso County Medical Society on the topic of tax planning for physicians. She is the author of a bi-weekly column appearing in the El Paso Times Personal Finance Section.