A Difficult Tax Year Behind Us, But 2012 Could Be Even HarderMay 09, 2012
Andrew S. Lattimer, CPA
Another grueling tax season has passed, this one more difficult than the previous one. Thanks to new increased disclosure filing requirements for Schedule D, brokerage statements that came later than usual, and the mere fact that there was an extra day due to Leap Year, made this year’s season seem longer and much more of a challenge. It’s great to have it behind us, but now is the time – believe it or not – to start looking towards next year.
There are several key tax provisions that expired this year, as well as others that will expire after December 31, 2012. With the election this upcoming year, the chance of getting changes made before November is unlikely.
The provisions that expired on December 31, 2011 will certainly hit most taxpayers in their wallet if they are not extended another year. The largest tax provision would be the higher Alternative Tax Exemption or AMT patch. In 2011, a taxpayer filing a joint return was allowed an AMT exemption amount of $74,450. Without an extension of this tax provision, that same AMT exemption amount would decrease to $45,000, which is, of course, a tremendous drop. And with an AMT tax rate of 26%, this could cost taxpayers approximately $7,500, as well as increase the number of taxpayers affected by the AMT.
Several other popular tax breaks that have expired are direct IRA payouts to charity, the Research and Development Tax Credit, the college tuition deduction and the write-off of $250 of supplies for teachers. In addition, for taxpayers that live in a low- or no-income tax state, the use of state sales tax as an itemized deduction has expired.
But that is what has already expired. The bigger issue lies with the tax provisions that will expire on December 31, 2012.
These issues need to be addressed before they expire, and will likely play a role in a Presidential hopeful’s platform. The biggest issue looming is the sunsetting of the Bush tax cuts, which would eliminate the lower income tax rates.
Currently, the highest tax rate is 35%, but will increase to 39.6% with the expiration of these tax cuts. In addition, the 15% maximum tax rate for long-term capital gains would be eliminated and increased to 20%. Finally, qualified dividends currently taxed at 15% would be taxed at ordinary income rates that could be as high as 39.6%.
The bottom line is this – without legislation to keep these tax rates, people should expect to see a higher tax bill in 2013.
In addition to tax rates increasing, the repeal of the personal exemption and itemized deduction phase-outs will be back. So not only will people pay a higher rate, but will also not have the same deductions as in the past, increasing the amount of taxable income.
Finally, the tax rates for estate and gift taxes will increase. Currently, the maximum tax rate is 35%, but this too will increase to a maximum rate of 55%. Also expiring would be the larger exemptions and the ability for a surviving spouse to take the late spouse’s unused exemption.
So buckle your seat belt for 2012 – this will be a wild ride, especially if those in charge in Washington D.C. don’t extend many of these important tax provisions.
Andrew S. Lattimer, CPA, is a partner with BlumShapiro, the largest regional accounting, tax and business consulting firm based in New England, with offices in Connecticut and Massachusetts. The firm, with nearly 300 professionals and staff, offers a diversity of services which includes auditing, accounting, tax and business advisory services. In addition, BlumShapiro provides a variety of specialized consulting services such as succession and estate planning, business technology services, employee benefit plans, litigation support and valuation, and financial staffing. The firm, with offices in West Hartford and Shelton, CT and Boston and Rockland, MA, serves a wide range of privately held companies, government and non-profit organizations and provides non-audit services for publicly traded companies.