Tax breaks come and tax breaks go. But this year is different.
Strategy: Prepare for the possible loss of several critical tax winners at the end of 2012. These include the “Bush tax breaks” that were initially passed a decade ago.
On the other hand, certain other tax provisions are likely to be extended, including the annual “patch” for the alternative minimum tax (AMT) and tax incentives for energy-saving home improvements.
Here’s a quick rundown of nine key tax breaks for individuals and small business owners slated for the endangered list.
1. Tax rates: Absent any legislative action, tax rates will be higher in 2013. The income levels for all tax brackets will be adjusted upward and the “marriage penalty” for joint filers will become harsher. In addition, the two top tax rates of 33% and 35% will be replaced by rates of 36% and 39.6%, respectively.
2. Capital gains and dividends: For 2012, the maximum tax rate for long-term capital gains and qualified dividends is 15% (0% for certain low-income investors). Beginning in 2013, the maximum rate for long-term capital gain will increase to 20% (10% for low-income investors), while qualified dividends will be taxed at ordinary income rates reaching as high as 39.6% (see No.1).
3. Higher education credit: Parents who send their children to college can claim (subject to certain restrictions) the American Opportunity Tax Credit, formerly known as the Hope Scholarship credit. The maximum credit for 2012 is $2,500. But the maximum is scheduled to revert to $1,800 (the limit for the Hope Scholarship credit) in 2013.
4.deductions: Currently, a small business can write off a maximum of $125,000 of qualified property (inflation-indexed to $139,000 in 2012), although the maximum deduction is reduced on a dollar-for-dollar basis for purchases above a threshold of $500,000 (inflation-indexed to $560,000). The maximum is scheduled to drop back to $25,000 in 2013 with a $200,000 phaseout threshold.
5. Bonus depreciation deductions: As a complement to Section 179, you may also qualify for 50% bonus depreciation on qualified property placed in service in 2012. Without any extension, bonus depreciation will disappear completely next year.
6. Phaseouts of deductions. Previously, up to 80% of the most popular deductions, including deductions for charitable gifts, mortgage interest and state and local taxes, could be “phased out” under a special rule for high-income taxpayers. A similar rule applied to dependency exemptions. The phaseout rules were gradually reduced and finally repealed in 2010. But they will be back with a vengeance in 2013.
7. Child tax provisions: Several favorable tax provisions, including the child tax credit, the dependent care credit (i.e., the “child care credit”) and the adoption credit will be scaled back in 2013. Generally, the provisions will revert to limits established prior to 2010.
8. Payroll tax holiday: The 2% Social Security tax holiday for employees was extended through 2012. Barring another extension, in 2013 employees will have to pay the full 6.2% tax on wages up to the Social Security tax ceiling.
9. Estate and gift tax breaks: Several estate and gift tax provisions will “sunset” after 2012. This includes the generous $5 million estate tax exemption (inflation-indexed to $5.12 million in 2012), a top estate tax rate of 35%, portability of exemptions between the estates of spouses and corresponding benefits for gift and generation-skipping taxes. Generally, the law will return to the way it was before the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).
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