As you were busy ringing in the new year, a number of tax breaks that could significantly increase the amount you’ll owe the taxman a year from now expired. On Jan. 1 many tax breaks expired, including the exemption amounts that determine whether you might be subject to the Alternative Minimum Tax (AMT). As of now, the levels have reverted to where they were more than 10 years ago.(1) If Congress can’t get its act together, “close to a third or more of Americans” end up paying this higher tax, according to John Roth, senior federal tax analyst at CCH, a major provider of tax accounting, research and software provider.
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In addition to this possible tax increase, key tax deductions have disappeared, including:
- college tuition expense
- teachers who spend their own money on classroom supplies
- state and local income tax for those who live in states that don’t impose an income tax (2)
- making a direct contribution to a charity from your IRA
- credit for homeowners to make their home more energy-efficient
The danger, according to Roth, is that “people might not realize [they owe more] until they get their taxes done,” and that could be a costly mistake because you could get hit with a penalty for underpaying your 2012 tax bill.
With that said, it’s important to keep in mind that this is an election year, and no politician wants to be accused of “raising” taxes. Historically, Congress has typically passed legislation retroactively “patching” these kinds of tax issues. Nonetheless, the acrimonious atmosphere in Washington means it’s especially dicey to assume what legislation Congress might pass. In fact, according to Roth, even the IRS “is not expecting Congress to do anything [about these issues] until after the election.”
Until these issues are settled, Ross says the dilemma facing millions of taxpayers comes down to, “Do I continue to pay what I’m paying and possibly risk an underpayment penalty? Should I adjust my withholding and have more withheld?” If you make estimated tax payments, you might want to discuss increasing these when you meet with your tax preparer to have your 2011 return done.
Estate planners will also find themselves in limbo this year because the amount allowed to be left to heirs estate tax-free automatically increased to $5,120,000. But when the clock strikes midnight on Dec. 31, this drops to $1 million. In addition, the ability of a surviving spouse to use any remaining exemption unused by the first spouse evaporates.
Roth has the following recommendations:
- If you’re employed, take a look at the amount of tax you’re having withheld from your paychecks, especially if you had a mortgage modification. If your monthly payments are smaller, “you’re not entitled to as big a tax break as in the past.”
- If you’re self-employed, try to anticipate your income this year and consider adjusting your quarterly estimated tax payments.
Keeping up with what--if any—changes Congress makes to the tax code this year and adjusting client accounts accordingly means this is going to be a busy year for tax advisors. “Mercedes dealers will be sending letters to anyone with ‘CPA’ after their name,” Roth predicts.
1 AMT exemption amounts: 2011 2012
Single Tax filer $48,450 $33,750
Married/Joint filers $74,450 $45,000
2. Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.
Ms. Buckner is a Retirement and Financial Planning Specialist and an instructor in Franklin Templeton Investments' global Academy. The views expressed in this article are only those of Ms. Buckner or the individual commentator identified therein, and are not necessarily the views of Franklin Templeton Investments, which has not reviewed, and is not responsible for, the content.
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