What expiring tax cuts mean to you

BY JENNA STATON

While the upcoming presidential election will no doubt have an effect on tax policy, the following tax provisions are currently set to expire, effective 1/1/13.
For a more comprehensive overview of these changes, you can visit our blog at blog.skodaminotti.com.
• 2% temporary social security payroll tax cut on wages: The social security portion of the employee contribution will return to 6.2%.
• Qualified dividends rate: Qualified dividends are currently taxed at 15%. All dividends will be taxed at ordinary rates.
• Long term capital gain rate: Long term capital gains (sales of securities held more than one year) are currently taxed at 15%,but will change to 20%.
• Income tax brackets: Taxable income is currently taxed at 10%, 15%, 25%, 28%, 33% and 35%. The brackets will return to 15%; 28%; 31%; 36% and 39.6%.
• Dollar limit on dependent care expenses: These maximum qualifying expenses will return to $2,400 (from $3,000) for one child and $4,800 ($6,000) for two or more qualifying individuals.
• Child tax credit: Currently, taxpayers with
one or more qualifying children may be able to claim a child tax credit of up to $1,000. This
credit will return to $500.
• American Opportunity Credit: Currently, education credits are available for qualified tuition and/or related expenses for students in the first four years of college. The student must be enrolled full time and be in a degreed program. The maximum credit is $2,500 per student and 40% refundable. This credit will revert back to the Hope Credit, with maximum credits of $1,800 for the first two years of qualified tuition and/or related expenses and will not be refundable.
• Earned Income Tax Credit: The earned income credit will revert back to maxing out at two dependents starting in 2013. To be eligible for the earned income credit, both your earned income and adjusted gross income needs to be within certain ranges. The maximum earned income credit for 2012 with three or more qualifying children is $5,891. The maximum earned income credit for 2013 will be $5,236.
• The work opportunity credit for hiring qualified veterans expires: The credit for qualified veterans expires in 2013.
• The refundable credit for prior year alternative minimum tax credits expire: Currently, any long term alternative minimum tax credits are able to be refunded. As of 1/1/2013, this provision expires.
• The standard deduction for married filers: The ‘marriage penalty’ is reinstated 1/1/2013 and
married taxpayers who do not itemize deductions
have a lower standard deduction.
• Limitation on itemized deductions: Common itemized deductions are state and local taxes, real estate taxes, mortgage interest, medical expenses, investment interest, and charitable contributions. As of 1/1/13, taxpayers who file jointly with an adjusted gross income over $175,000, will see a reduction in itemized deductions by 3%. Some taxpayers could lose up to 80% of their itemized deductions. The reduction does not apply to deductions for medical expenses, investment interest, casualty and theft losses, and gambling losses (which can only offset gambling winnings included in income).
• Debt and mortgage forgiveness tax relief for foreclosures and canceled debts: Currently, if a taxpayer’s main home is foreclosed on, the debt that is discharged is NOT included in income. Taxpayers will now need to include the discharged debt as income.
• Personal exemptions: Taxpayers filing jointly with an adjusted gross income over $122,500,
will have phase-outs in the personal exemptions
(previously $3,800).
• Estate and gift tax exemptions: Beginning in 2013, the estate and gift tax exemption reverts back to $1 million (from $5 million) and estate tax rates will revert to 55%.
• Flexible Spending Account limits: Only $2,500 may be set aside in a flexible spending account in 2013 (from $5,000).
• Bonus Depreciation: Currently, taxpayers purchasing assets for use in their business can expense their entire purchases under “bonus depreciation.” As of 1/1/13, businesses may expense up to 50% of these purchases and will depreciate the rest of the expense under the asset’s useful life.
• Code Section 179 Expensing: Businesses previously could expense up to $500,000 of assets used in business under Code Section 179. This limitation decreases to $125,000 in 2013. Current law enacts a 3.8% Medicare surtax on single taxpayers with income in excess of $200,000 and married filing joint filers with income above $250,000. The surtax will be on investment income including capital gains, interest, dividends, rents and royalties. High income taxpayers will be subject to a .9% increase in the Medicare tax. BXM

Jenna Staton, EA, is a manager at Skoda Minotti. Reach her at (440) 449-6800 or jstaton@skodaminotti.com.