Looking Ahead to 2013

Item— Highlight—
Fate of Bush-era tax cuts The Bush era tax cuts expire at the end of 2012. Their future was not decided when this book went to press. Prior to the 2012 elections, political gridlock kept Congress and the Administration from agreeing on an extension of the tax breaks or on a partial cutback. After the 2012 elections, there may be an agreement to extend the tax breaks for one year while a more permanent set of tax rules is worked out, but nothing is certain.
   At stake are numerous income tax breaks, everything from tax rates to various deductions and credits. Scheduled cutbacks will take effect automatically in 2013 unless Congress acts. For example, without an extension of the 2012 rules, the 10% tax bracket would disappear, and the top two rates on ordinary income would increase to 36% and 39.6%. Tax rates on long-term capital gains would increase. The 0% capital gains rate for 10% and 15% bracket taxpayers would disappear and the 15% rate would increase to 20% (10% if in the 15% bracket), with a rate of 18% (8% if in the 15% bracket) for sales of assets held over five years. Qualified dividends, which through 2012 are taxed at capital gain rates, would be taxed at ordinary income rates after 2012. Without an extension of the 2012 rules, marriage penalty relief that has benefited married couples filing jointly with respect to the limit for the 15% bracket and the amount of the basic standard deduction would be cut back. Some upper-income taxpayers would become subject to a phaseout of personal exemptions and overall itemized deductions. Tax credits such as the child tax credit, the dependent care credit, the adoption credit, and the earned income credit would be scaled back. Education-related benefits for Coverdell ESAs, the student loan interest deduction, and the exclusion for employer-provided assistance would be substantially reduced.
   Favorable gift tax and estate tax exemptions, exemption portability rules, and maximum tax rates are also set to expire at the end of 2012.
   We will be following developments and will provide updates in the e-Supplement at jklasser.com .
Affordable Care Act brings tax increases in 2013 The Supreme Court decision upholding the tax provisions of the Patient Protection and Affordable Care Act allows scheduled tax increases and reductions to take effect in 2013, assuming they are not repealed by next year’s Congress. Employees and self-employed workers with earnings over an applicable threshold will owe an additional Medicare tax of 0.9%. Investors with income over an applicable threshold will owe a 3.8% tax on the lesser of net investment income or the excess of modified adjusted gross income over the threshold. The floor for itemized medical expenses will increase from 7.5% of AGI to 10% for taxpayers under age 65. Employee salary-reduction contributions to health care flexible spending accounts will be limited to $2,500.
   See Section 28.4 of this book for further details on these tax changes.
2% payroll tax cut set to expire The 2% payroll tax cut that for 2011 and 2012 reduced the employee Social Security rate to 4.2% expires at the end of 2012. Without an extension, the employee withholding rate for Social Security would increase in 2013 to 6.2%; self-employed individuals would be subject to a combined Social Security rate (employee and employer shares) of 12.4% (instead of 10.4% as in 2011/2012) when figuring self-employment tax liability.
   Whether the 2% reduction will be extended beyond 2012 will be an issue for Congress in the expected lame duck session following the 2012 elections. See the e-Supplement at jklasser.com for an update.
American Opportunity Credit set to expire The enhanced benefits of the American Opportunity Credit are scheduled to expire at the end of 2012. Without an extension, the reduced benefits of the pre-2009 Hope credit would return in 2013. See the e-Supplement at jklasser.com for an update.

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