Unless Congress acts by year-end, these are the changes you’ll see in the tax rules effective January 1, 2013.
So what does the Fiscal Cliff look like?
Social Security taxes:
Employee’s share will increase to 6.2% after 2012, up from 4.2%.
Income Tax Rates:
An estimated 90% of households will see their income taxes increase.
Maximum long-term rate will increase from 15% to 20% after 2012.
Top 15% rate will be eliminated; dividends will be taxed as ordinary income with a top rate of 39.6%.
Child Tax Credit:
Current $1,000 credit per qualifying child will be reduced to $500 after 2012.
Exemption amounts will be $33,750 for singles, $45,000 for couples.
Top 2013 rate will increase to 55% (up from 35%); exclusion amount will be reduced to $1,000,000 (down from 2012 amount of $5,120,000).
Deductions & Exemptions:
After 2012, high-income taxpayers will again lose a portion of itemized deductions and personal exemptions.
Section 179 expensing limit will be reduced to $25,000, with a total qualifying property limit of $200,000, which will be down from 2012 levels of $139,000 and $560,000 respectively. 50% bonus depreciation will expire.
The contribution limit for an education savings account contribution will be $500, down from 2012 limit of $2,000. The Expanded American Opportunity Credit will expire and be replaced by prior Hope Credit.
Tax extenders: These tax breaks expired at the end of 2011:
Teachers’ classroom expense deduction, state and local sales tax deduction, tax-free charitable IRA distributions for those 70½ and older, higher education tuition deduction, business R&D credit, and 15-year depreciation for leasehold improvements and restaurant property.
With all these talks about the ‘fiscal cliff,’ there are some on this list that are likely to expire, and some that are likely to be extended…and even more that are still up for debate. Congress and President Obama are fervently working on these provisions. Stay tuned, and we’ll keep you posted! Meanwhile, for you visual learners, here’s a great (non-partisan!) video from the Urban Institute.