Your Taxes are Changing

(Photo: SP8254)

With the Bush tax cuts set to expire again at the end of 2012 and the US mired in political gridlock, I wanted to take a high level look at what to expect with taxes. Obviously, we don’t know what will happen in Washington. A lot will be decided by the results of the coming election and the subsequent lame-duck session of Congress, however a lot of things are scheduled to happen if Congress doesn’t intervene.

If the Bush tax cuts are allowed to expire:

• Our tax brackets are changing for 2013. The lowest bracket moves up from 10% to 15%. The 15% bracket becomes smaller forcing more people into a higher bracket. The highest tax brackets increase 3% to 4.6%.
• Capital gains and qualified dividends will be taxed at up to 20%.
• Student loan interest phases out more quickly and is only deductible during the first 60 months payments are made.
• The standard deduction for married filing jointly is reduced (helping bring back the marriage penalty).
• The qualifications for the Earned Income Tax Credit are tightened so that fewer people will qualify.
• The child tax credit drops from $1,000 to $500.

Some things have already changed for 2012 that you might not have noticed:

• You can’t deduct sales tax instead of state income tax. This is a big one for all my clients in Texas.
• Teachers could deduct up to $250 of classroom related expenses. Not any more.

This is a quick review of the tax changes most likely to affect my clients. There are quite a few more things scheduled to change as well. And of course, Congress could decide to extend the Bush tax cuts again and make everything I just wrote irrelevant. I love it.

If you are concerned about how these changes will affect your situation, please get in touch. If you have a suggestion for what Congress should do on tax policy, let me know in the comments below.