There continues to be a lot of talk about the “fiscal cliff” and what it could mean for taxpayers. The fiscal cliff specifically refers to a group of tax provisions, cuts and deductions that are expired or will expire on December 31, 2012, unless Congress renews them. If Congress does not renew these items, it could raise taxes for households by an average of $3,500 next year.
In efforts to help American taxpayers understand the impact the fiscal cliff could have on them, the Illinois CPA Society has released the following explanations:
Payroll Tax Holiday - For the past two years, this temporary tax break decreased the amount of tax that came out of paychecks and increased take-home pay by an average of $1,000 per year. Taxes could increase from 4.2 percent to 6.2 percent in Social Security withholdings on the first $113,700 in wages if the payroll tax holiday expires. This would decrease take-home pay be $2,274 for workers making at least that amount.
Alternative Minimum Tax (AMT) - The expiration of the Alternative Minimum Tax could affect more than 32 million people, an increase from 4 million last year. The AMT was originally put in place to prevent people with high incomes from using certain tax benefits to pay little or no tax. However, since the applicable income levels were never adjusted for inflation, it now applies to millions of average-income taxpayers and could result in more taxes paid for those affected.
Mortgage Interest Deduction Could Face Elimination – This deduction, which allows homeowners who itemize their returns to deduct the interest paid on their mortgages, could disappear if Congress doesn’t act. Currently, taxpayers are allowed to deduct interest on qualified debt of up to $1.1 million paid for primary homes, second homes and vacation residences – with limitations that vary per individual situation.
Child Tax Credit - If the provision for the Child Tax Credit ends, the credit may be reduced to $500 from $1,000. This credit is for the parent or legal guardian of a child under the age of 17 who they claim as a dependent on their tax return and is meant to offset some of the costs incurred over the course of the year for children.
Bracket Rates - Tax bracket rates could increase for single and joint-filers, regardless of Adjusted Gross Income. The “marriage penalty” is also set to return which would narrow the brackets for married couples and place them in higher rate brackets at lower incomes.
Capital Gains Tax - The rate at which capital gains are taxed could increase from 15 percent to 20 percent for taxpayers. Capital gain, or investment income, refers to the profit made from selling assets, such as stock, bonds and real estate.
Earned Income Tax Credit - The Earned Income Tax Credit gives up to $5,570 to workers who earn $50,000 or less and meet other eligibility requirements like age, parenthood and citizenship.
American Opportunity Tax Credit - This credit gives up to $2,500 to cover the cost of up to four years of post-secondary education and required course materials for a broad range of taxpayers. The alternative, the Hope Credit, has narrower eligibility requirements for qualified tuition amounts and purchases.
For more tips and advice or to find a CPA to help with the tax preparation and planning process, contact ICPAS - if you’re an Illinois resident - or your local CPA society.