Now that I spend a good share of my week helping folks prepare and file their 2012 income taxes, I know that the arrival in their mailbox of all their W-2, 1099-INT, 1099-B, 1099-DIV, 1099-R, 1099-MISC, 1098, 1098-E, and/or 1098-T forms has prompted all types of feelings – from anxiety about how much they owe to excitement as they anticipate a sizable refund! In fact, in the latter case, if she/he has already “spent” that refund, we can count on them getting to our office as quickly as possible.
Since readers have their minds on tax concerns, it is a great time to summarize the major tax law changes that were made by Congress. I will split them up into two sections: for 2012 (the return we need to complete before April 15) and for 2013.
TAX CHANGES FOR 2012:
Because the U.S. Congress experienced a policy-making stalemate for most of the past two years, they created a massive “tax Armageddon” at the end of 2012 that was intended to motivate members of both parties to reach a compromise before the nation fell over the so-called “Fiscal Cliff” on January 1. However, not even the specter of that “fall” succeeded in moving them to action before the end of the year. In fact, Congress had to extend its own deadline to January 2 in order to finally pass the American Taxpayer Relief Act of 2012. The final contents of that legislation have the greatest impact on 2013 taxes; however, here are some of its impacts on 2012:
1) Congress' tardy action on taxes forced the IRS to scramble on the final revisions for the official 2012 tax forms--
a) Therefore, the first day for e-filing was postponed (compared with a year ago) by 13 days (to Jan 30, 2013);
b) A number of forms needed for more complicated personal and business returns will not be finalized until some point later in February;
c) A number of deductions and tax breaks were not set to renew without Congressional action. It is a relief to millions that some breaks that were “at risk” are now restored (such as the “above the line” deduction for education-related expenses by teachers, and a $500 “Energy Efficient Credit”).
For 2013, here are the key changes:
1) By now, most folks have noticed that their “take home pay” is lower by at least 2%, because the temporary two-year suspension of a portion of the Social Security tax (FICA) has been restored.
2) One feature of U.S. tax law that most infuriates the average middle class taxpayer has been the “Alternative Minimum Tax” (AMT). It was originally designed (decades ago) to prevent the “ultra-rich” from using so many tax breaks that they paid little or no income tax. However, the geniuses who created it failed to tie the tax formula to inflation. As a result, through the years, more and more taxpayers have fallen into the “AMT trap”! As irate voters sent an ever increasing volume of protest letters to elected officials, Congress began an annual rite of creating a temporary “patch” to fix the problem. (“Short-sightedness”, your name is Congress!)
Despite these annual patches, a growing number of tax clients found the hoped-for benefits of various tax breaks evaporate on their return – and they were rightfully incensed and outraged. (At that point in the tax return process, it pays to be a good listener!)
Now, Congress has managed what it calls a “permanent fix” for the AMT. We'll see if it really “fixes” what tens of thousands of hard-working folks feel is essentially “arbitrary and unfair”.
3) A number of deductions and credits that would otherwise have died without action have been revived and expended:
a. Child Tax Credit – the $1,000 non-refundable credit per child (under age 17) has been extended through 2017.
b. Educator Expense Deduction – a $250 “above-the-line deduction.
c. $500 Energy Efficient Credit was extended through 2013.
d. Earned Income Tax Credit – the qualifying earned income scale for this refundable credit was raised and extended through 2017.
e. Higher Education Tuition Deduction – was renewed for 2012 and extended through 2017.
f. Deduction for State/Local Sales Tax-- was renewed for 2012 and extended into 2013 (for those living in states with low income tax rates).
g. Mortgage Debt Forgiveness Tax Break – this provision has been a major boon for the millions of those who have lost their home to short sale or foreclosure. It has been extended through 2013.
In Part II we will look at the changes in marginal tax rates – primarily impacting those in the higher income brackets.