Jackson Hewitt’s Chief Tax Officer,
Mark Steber, recently explained the implications for average taxpayers should
we go off the “fiscal cliff.” It’s coming our way, so let’s take a look at the ways the fiscal
cliff can, and will, impact you.
- The “Extenders”, a group of short-term
tax benefits that have been extended regularly for more than 20 years, expired
December 31, 2011. They included many tax deductions and some smaller credits
such as the state and local sales tax deduction, and mortgage insurance premium
deduction, the up-to $250 Educator Expense deduction for teachers, the up-to
$500 energy credit for energy efficient home improvements, and the up to $4,000
tuition and fees deduction.
- The AMT “Patch” expired December 31,
2011. Up to 31 million taxpayers will be subject to either the additional tax
or will see their tax credits reduced by the AMT rules.
- The Bush-era tax cuts are due to
expire on December 31, 2012. Tax rates will go up beginning with a five percent
increase, from 10 percent to 15 percent on the first $8,500 of taxable income. In
addition to the loss of the 10 percent tax rate, the 25 percent tax rate also
expires and capital gain tax rates increase.
- Bush-era tax cuts from 2001 and 2003
are scheduled to expire. These tax cuts include reducing many credits, such as
the child tax credits, the credit for child care, and the earned income credit.
Additional tax cuts scheduled to expire also include the married taxpayer’s
standard deduction, tax rate spread, and maximum income limits for many tax
benefits. The expiring credits will also limit the student loan interest
deduction.
- Temporary tax cuts from the American
Recovery and Reinvestment Act (ARRA) in 2009 expired. This includes the
exclusion of the debt forgiven when a main home is foreclosed forcing many
taxpayers whose foreclosure won’t be final until 2013, or later, to pay taxes
on the forgiven mortgage debt.
- With tax rates increasing, tax
deductions being eliminated or limited, and credits dramatically reduced,
taxpayers will see a much smaller refund than in the past years. The Temporary
Payroll Tax Holiday, a two percent reduction in employee Social Security tax
withholding, expired December 31, 2012. Beginning January 2013, the average
taxpayer will see as much as a $1,000 decrease in take home pay.
- If Congress is unable to reach a
decision before the end of year or into next year, income tax filing and
refunds could be delayed for some taxpayers.
- With Congress deadlocked over the
federal budget, we are in danger of falling off the fiscal cliff. Lack of
agreement on the budget could lead to possible layoffs of government employees.
This could potentially reduce the number of employees at the IRS who ensure
technology and services continue to run smoothly during tax season, as well as
the number of employees available to help the public with tax questions and
issues.
- An automatic budget reduction of
around 8.2 percent for each government division will lead to reduced government
services, gradually impacting the work done by these departments.
- The Health Care Act starts impacting
more taxpayers with an increase to 10 percent for the medical deduction floor. Taxpayers
will pay an additional .09 percent Medicare taxes on wages greater than
$200,000 ($250,000 if married filing jointly) and will pay 3.8 percent
additional Medicare taxes on investment earnings greater than $200,000
($250,000) starting January 1, 2013.
“These and many other changes may impact you if we fall off the fiscal cliff in the coming days,” said Mark. “Also keep in mind that these changes noted above are already law and are in place, so if the government does nothing to amend these laws, what I’ve described is what’s known as the fiscal cliff. A fix, patch or new legislation is what is needed to prevent going over the cliff. It’s important to understand that this is not something that impacts only the rich or the high-income wage earners. It impacts many more and very likely you.”