Remember when the Bush Tax Cuts passed? They were set to expire at the end of 2010. Then they were extended at the last minute, so that the rates in place would last for two more years. Now the original cuts are once again set to expire at the end of the year, wreaking potential havoc on the 2013 tax rates. The House has already passed a bill to extend the cuts for all Americans, while the Senate has passed a bill to extend them for only those making under $250,000 per year. Since Congress is in recess for much of the rest of 2012, and the extension of the cuts is causing such a deep divide between the two parties, there’s no guarantee that another extension will actually become law. Since we’re not sure what will happen, we thought we’d do a round-up of what exactly the expiring tax cuts 2012 will be at the end of the year if no further legislation is passed.
Update: A new bill will extend tax cuts for most people. Stay tuned for additional details from the Fiscal Cliff Deal in process.
Tax Cuts Expiring in December 2012
Generally speaking, the tax code and underlying income and investment tax rates (and related deductions) will revert back to pre-2001 rates if the Bush tax cuts expire at the end of 2012. These are the highlights of what that entails:
- Tax Brackets. First and most significantly, the 2013 income tax brackets would change, with the 10% rate disappearing, the 35% rate jumping to either 36% or 39.5%, and other rates increasing. Note that the current budget proposal (outlined here) preserves the 10% - 33% rates as-is and only increases rate for those currently in the 35% bracket. The Tax Policy Center does a good job of highlighting the current rates, the rates if the cuts expire with no further action, and the rates under the current proposed budget.
- Estate Taxes. Estate taxes have shifted dramatically over the last several years. If the Bush Tax Cuts expire, a 55% rate will apply to transferred assets exceeding $1,000,000 per person.
- Investment Taxes. If you sell an asset that you have owned for more than one year, you currently pay special rates that max out at 15% (taxpayers in the 10% or 15% tax bracket pay no capital gains taxes). The capital gains rates will jump to 10% and 20% if the current tax cuts expire. Additionally, all dividends will be subject to ordinary income rates.
- Credits and other changes. The child care tax credit will be reduced to $500 per child and other credits would be limited as well. The personal exemption and itemized deduction phase outs would return.
- Payroll Tax. Also set to expire at the end of 2012 is the Payroll Tax Cut that lowered Social Security taxes by two percentage points. This isn’t a part of the Bush Tax Cuts, but just like everything above will end at the end of 2012 and cause an increase in current taxes (and a corresponding decrease in your take-home pay).
It’s hard to know exactly what will happen and if the tax cuts will expire, but planning for a tax increase won’t hurt – we do know for sure that there’s almost no way taxes will go down! You can avoid incurring larger taxes next year by converting Roth IRAs, selling any appreciated investments you might want to unload soon (stocks/bonds and real property), and generally doing your best to move income to this year while pushing deductions to 2013. ”Worst” case scenario, rates don’t increase and you make some moves this year that would have cost you exactly the same next year. But if rates DO increase, you’ll rest a little easier knowing that you saved mega money by making big moves a few weeks or months in advance. You can use the tax calculator to project the impact of any potential changes you make in 2012.
- The Heritage Foundation has put together a detailed list of all tax laws scheduled to change (either because of expiration or new laws taking effect). It’s somewhat partisan in some of its language choices, but the numbers and rates cited are solid.
- The Tax Foundation has also put together a list showing what will happen if current laws are extended, what will happen if they are allowed to expire with no further action, and what will happen if the Obama Administration’s proposals are adopted.
More Tax Topics
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