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Why Your Tax Bill Might Surge Next Year
by Bob Jennings
Wednesday, November 9, 2011
In a recent tax planning meeting with one of our clients, we shocked them with what their income tax future looked like for 2013 if -- on the off-chance -- Congress continues to do nothing to provide a long-term permanent set of tax laws.
They had no idea what tax breaks were expiring this year and next year, and how much it would cost them personally in extra income tax. But they aren't alone, many Americans and even tax professionals aren't aware that their tax bill could rise dramatically next year.
These clients are your average American family and their situation is a good example of the law changes that will affect all of us. Here's their tax situation with a table summarizing the expiring tax laws that are scheduled to occur in 2011 and 2012.
Meet the Smiths: 26-year-olds Bill and Joan have been married for five years and have two young children. Bill earns about $65,000 a year in sales and Joan has gone back to work and earns about $35,000 annually. Bill owes quite a bit on his college student loans and will pay about $3,000 in interest on them in 2013. With Joan working again, they are paying $3,000 for year-round child care. Joan inherited some AT&T stock from her grandmother, which pays her $1,000 in dividends every year. Finally, counting home mortgage interest, they have about $20,000 in itemized deductions.
The first big change affecting the Smiths will be a combined increase in income tax rates, and a tightening of tax brackets as a result of the expiration of the Bush tax cuts. We estimate this will cost them $960 in 2013.
Bill will lose the complete deduction of his student loan interest in 2013, costing about $840. The pair's allowable deduction for child care will drop to $2,400 from $3,000, and they will also see their credit for children drop in half, costing another $1,000.
The marriage tax penalty will come roaring back to hit the Smiths in 2013, costing an estimated $500. The tax on their dividend income will go increase to $280 from $150, adding another $130. Finally, although we did not calculate the effect, without Congressional action to once again "fix" the alternative minimum tax, the Smiths could owe this ugly tax as well!
Luckily for the Smiths but not for many Americans other major changes for 2013, which do not personally affect them, include a phase out of itemized deductions and personal exemptions if their income starts to climb.
In summary, because of tax laws expiring this year and next, we estimate that the Smiths will owe $3,598 more in income tax in 2013 than in 2011 with no change in their income.
Major Individual Income Tax Benefits Expiring 12/31/2011:
Personal tax credits applied against income tax no longer apply
Higher alternative minimum tax exemptions revert back to extraordinarily-low thresholds
$250 school teacher expense deduction ends
Mortgage insurance premium deduction expires
State and local sales tax deductions expire
Tuition and related fees deduction end
IRA to charity tax-free transfers stop
2% Social Security tax reduction ends
Major Individual Income Tax Benefits Expiring 12/31/2012:
Marriage penalty equalization ends
Dividends taxed at capital gains rates removed, taxed at regular rates now
Capital gains low tax rates expires
Removal of itemized deduction phase out for higher income Americans
Removal of personal exemption phase out for higher income Americans
Child care deduction limit of $3,000 reverts to $2,400
Child credit reduces from $1,000 per child to $500 per child
Low 10% tax bracket for low income Americans is eliminated
Lower income tax rates and smaller brackets expires
Refundable adoption credit and reduced deduction
American Opportunity college education credit expires
Major reduction in earned income credits and refunds
Income tax exemption for debt forgiven on home foreclosures and repossessions
Deduction for student loan interest ends
Education IRA limit drops from $2,000 to $500
Bob Jennings is a CPA, EA and CFP and author of "Understanding Social Security & Medicare."
___
This is why the administration harps on "tax the wealthy", they do not want the real impact to be discussed. The middle class will get hammered in the next two years.
by Bob Jennings
Wednesday, November 9, 2011
In a recent tax planning meeting with one of our clients, we shocked them with what their income tax future looked like for 2013 if -- on the off-chance -- Congress continues to do nothing to provide a long-term permanent set of tax laws.
They had no idea what tax breaks were expiring this year and next year, and how much it would cost them personally in extra income tax. But they aren't alone, many Americans and even tax professionals aren't aware that their tax bill could rise dramatically next year.
These clients are your average American family and their situation is a good example of the law changes that will affect all of us. Here's their tax situation with a table summarizing the expiring tax laws that are scheduled to occur in 2011 and 2012.
Meet the Smiths: 26-year-olds Bill and Joan have been married for five years and have two young children. Bill earns about $65,000 a year in sales and Joan has gone back to work and earns about $35,000 annually. Bill owes quite a bit on his college student loans and will pay about $3,000 in interest on them in 2013. With Joan working again, they are paying $3,000 for year-round child care. Joan inherited some AT&T stock from her grandmother, which pays her $1,000 in dividends every year. Finally, counting home mortgage interest, they have about $20,000 in itemized deductions.
The first big change affecting the Smiths will be a combined increase in income tax rates, and a tightening of tax brackets as a result of the expiration of the Bush tax cuts. We estimate this will cost them $960 in 2013.
Bill will lose the complete deduction of his student loan interest in 2013, costing about $840. The pair's allowable deduction for child care will drop to $2,400 from $3,000, and they will also see their credit for children drop in half, costing another $1,000.
The marriage tax penalty will come roaring back to hit the Smiths in 2013, costing an estimated $500. The tax on their dividend income will go increase to $280 from $150, adding another $130. Finally, although we did not calculate the effect, without Congressional action to once again "fix" the alternative minimum tax, the Smiths could owe this ugly tax as well!
Luckily for the Smiths but not for many Americans other major changes for 2013, which do not personally affect them, include a phase out of itemized deductions and personal exemptions if their income starts to climb.
In summary, because of tax laws expiring this year and next, we estimate that the Smiths will owe $3,598 more in income tax in 2013 than in 2011 with no change in their income.
Major Individual Income Tax Benefits Expiring 12/31/2011:
Personal tax credits applied against income tax no longer apply
Higher alternative minimum tax exemptions revert back to extraordinarily-low thresholds
$250 school teacher expense deduction ends
Mortgage insurance premium deduction expires
State and local sales tax deductions expire
Tuition and related fees deduction end
IRA to charity tax-free transfers stop
2% Social Security tax reduction ends
Major Individual Income Tax Benefits Expiring 12/31/2012:
Marriage penalty equalization ends
Dividends taxed at capital gains rates removed, taxed at regular rates now
Capital gains low tax rates expires
Removal of itemized deduction phase out for higher income Americans
Removal of personal exemption phase out for higher income Americans
Child care deduction limit of $3,000 reverts to $2,400
Child credit reduces from $1,000 per child to $500 per child
Low 10% tax bracket for low income Americans is eliminated
Lower income tax rates and smaller brackets expires
Refundable adoption credit and reduced deduction
American Opportunity college education credit expires
Major reduction in earned income credits and refunds
Income tax exemption for debt forgiven on home foreclosures and repossessions
Deduction for student loan interest ends
Education IRA limit drops from $2,000 to $500
Bob Jennings is a CPA, EA and CFP and author of "Understanding Social Security & Medicare."
___
This is why the administration harps on "tax the wealthy", they do not want the real impact to be discussed. The middle class will get hammered in the next two years.
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