(KTVI) - 'Taxmeggedon' is heading our way at the end of the year and could have significant impact on taxpayers as a host of reduced tax rates, credits, deductions, and other incentives expire on December 31, 2012.
With so many taxes in flux, it’s important for taxpayers to understand what may be affected, and how they can begin planning. Sandy Furuya, Senior Accounting Manager for Wamhoff Financial Planning and Accounting Services, shares some insight.
What is 'taxmeggedon'?
Taxmeggedon will hit in 2013, and refers to a combination of significant tax-related changes that will happen as 2012 comes to a close:
- The 'Bush-era tax cuts' are scheduled to expire after December 31, 2012
- Over 50 tax extenders are up for renewal
- The federal government will be under sequestration, which imposes across the board spending cuts after 2012
- In July 2012, the House and Senate passed competing bills to extend many of the expiring incentives, but it is increasingly likely that the fate of all of them will be decided by the lame-duck Congress after the November elections.
- Some observers anticipate no resolution until January 2013 or beyond.
The most common changes that will impact taxpayers include:
1. Tax Changes
- Without further Congressional action, individual income tax rates are scheduled to increase across the board effective January 1, 2013 as the current reduced tax rates expire
- The current 2% payroll tax holiday will also expire after 2012
- Marriage penalty relief will sunset
- The child tax credit, one of the most popular incentives in the Tax Code, will be cut in half
- The American Opportunity Tax Credit (AOTC), which helps with higher education expenses, will expire.
2. New Medicare Taxes
- In 2013, two new taxes go into effect
- The Patient Protection and Affordable Care Act (PPACA) includes a .9 percent Medicare tax on wages and self employment income, and a 3.8 percent Medicare contribution tax.
- The 3.8 percent Medicare contribution tax will apply after 2012 to single individuals with modified adjusted gross income in excess of $200,000 (married taxpayers, over $250,000)
3. What Taxpayers Can Do to Prepare for 'Taxmeggedon'
- Look at your income tax withholding, and make sure you`re having the appropriate amount taken out. Consider making adjustments as necessary.
- Consider recognizing as much income as possible in 2012.
- Explore if certain deductions can be evenly divided between 2012 and 2013, and which deductions may qualify (or not be as valuable) for AMT purposes.
- Consider prepaying education expenses in 2012, which could make it eligible for AOTC.]