Expiring Tax Breaks Loom

Taxpayers across the income spectrum – from rich to poor – are set to see tax hikes due to several expiring tax cuts and the automatic spending reductions taking place on January 1, 2013.

The expiring provisions include Bush-era cuts on wage and investment income and cuts for married couples and families with children, among others. Also expiring is a two percentage-point temporary payroll tax cut.

Congress can extend some of these expiring provisions, but their actions are not certain. So that Certified Public Accountants, Enrolled Agents and tax preparers can council their clients about these tax provisions, here is an overview of many tax breaks set to expire in 2013:

Expiring Tax Cuts That Will Impact All Taxpayers

• Payroll Tax & Self-Employment Tax: Both the payroll withholding tax and self-employment tax rates have been reduced by two percentage points for two years. Payroll FICA withholding will return to 6.2% and self-employment tax will return to 12.4% in 2013.

• Regular Tax Rates: In addition to lower long-term capital gains rates, the regular marginal tax rates have been declining since 2001. However, without Congressional action, those reduced rates will return to the higher rates in effect prior to 2001.

• Long-Term Capital Gains Rates Increases: Taxpayers have enjoyed reduced long-term capital gains rates for several years as a result of the Bush-era tax cuts. In 2013, those reduced rates will return to the higher rates in effect prior to 2003.

Expiring Tax Cuts That Will Impact Lower Income Taxpayers

• American Opportunity Tax Credit: The American Opportunity Tax Credit (AOTC), which took the place of the Hope Education credit beginning in 2009, provided a credit of up to $2,500 to offset college expenses for up to four years. It is set to expire for 2013.

• Child Tax Credit: Since 2003, the child tax credit has been $1,000 for each qualified child who is under the age of 17 at the end of the year. However, this was a temporary provision that expires at the end of 2012. Beginning in 2013, the credit will revert to $500 per child.

• Child and Dependent Care Credit: As part of the Bush-era tax cuts, the maximum expenses qualifying for dependent care credit were raised from $2,400 ($4,800 for two or more qualifiers) to $3,000 ($6,000 for two or more qualifiers) and the income-based maximum credit percentage was raised from 30% to 35%. These increases are scheduled to revert to the lower amounts in 2013.

• Earned Income Tax Credit: In 2009, a credit category for three or more children was added, providing an increased credit for taxpayers with more than three qualifying children. However, that was a temporary measure which will expire at year’s end.

• Higher Education Loan Interest: A deduction of up to $2,500 is allowed for interest paid on loans for higher education. This deduction was originally limited to the first 60 months for which the interest payments were required. Congress later temporarily eliminated the 60-month limitation and increased the Adjusted Gross Income (AGI) phase-out. In 2013, these temporary changes are set to end.

Expiring Tax Cuts Impacting Moderate to Higher Income Taxpayers

• Coverdell Education Accounts: Several years ago, the tax benefits related to these accounts were liberalized and made more beneficial to taxpayers. In 2013, the dollar limit on these contributions will be reduced and other “liberalized” benefits will no longer apply.

• Exemption Phase-Out: Each taxpayer is entitled to a $3,800 tax exemption (deduction) for him or herself, his or her spouse and each dependent. Beginning in 2013, a reduction of the exemptions will return for higher income taxpayers.

• Itemized Deduction Phase-Out: Beginning in 2013, several itemized deductions will be phased out for higher income taxpayers. These include: taxes, interest (except investment interest), charitable contributions, employee job expenses and some other miscellaneous deductions. The income thresholds for 2013 have not been announced yet, but will inflation-adjusted amounts from 2009, which were $83,400 for married taxpayers filing separately and $166,800 for others.

Expiring Tax Cut That Impact Larger Businesses:

Bonus Depreciation: For several years, businesses have been able to take advantage of bonus depreciation that essentially allowed a 50 percent (100 percent during some periods) depreciation deduction of the cost of qualified business equipment for machinery in the year it was placed in service. The big business write-off expires after 2012.

For a detailed list of all expiring tax provisions, visit the Joint Committee on Taxation’s website here.