Get Ready to Pay Thousands of Dollars More in Taxes
The biggest culprit: short-term extensions of tax breaks, many of which expired at the end of 2011.
Lawmakers have gotten in the habit of waiting until the last minute to extend many of these programs, but last year, they ran out of time. So now, you can't be sure how much your taxes will go up this year -- and unfortunately, there's no immediate relief in sight. Even worse, there's an even bigger looming deadline at the end of 2012 that could really crush your finances in future years.
Your Incredible Shrinking Paycheck
One big item at issue is the reduction in payroll taxes. Last year, employees got a 2 percentage point break in their Social Security taxes. Although Congress extended that break through Feb. 29, after that, the rate is set to go back up to 6.2% -- costing a family making $60,000 a year about $1,000 in extra taxes.
But a host of other lesser-known provisions could also have a big impact on your finances.
For example, if you live in a state with no income tax, you've been able to deduct sales tax that you pay -- but that option expired Dec. 31. So did a deduction for tuition and related educational expenses.
Another important tax break that's late in getting renewed -- assuming it does -- is the higher exemption from the dreaded alternative minimum tax. Originally envisioned as a way to capture at least some tax revenue from ultra-rich taxpayers who took advantage of other provisions to pay very little in taxes, the AMT now hits an estimated 3.8 million taxpayers. The number of people paying AMT would skyrocket by as much as 30 million if lawmakers don't get around to passing their annual "patch" in time -- and the extra tax bill could come to $8,000 for some of those taxpayers.
The Big Deadline
An even larger hit looms: At the end of 2012, a huge number of tax cuts from the early 2000s are set to expire:
- The current 10% tax bracket would disappear, rising to 15%. That would cost even low-income taxpayers as much as $870 a year. Other brackets would also rise, creating cascades of higher tax bills as you rise up through the tax tables.
- Several credits could also disappear or get cut. Credits for adoption expenses, child care, and the popular child tax credit are slated to fall sharply in 2013 and beyond. Because many people take these credits into account in figuring out how much tax to have withheld from their paychecks, workers could see refunds shrink or actually end up surprised to owe money to the IRS as a result of their reduction.
- On the investing side, lower rates that apply to some stock and mutual fund dividends are set to go away, while rates on capital gains would rise slightly. Although many see these solely as breaks for the rich, the current provisions actually allow lower-income taxpayers to pay no tax at all on dividend and capital gain income.
In past years, Congress has usually gotten around to extending tax breaks eventually. Even now that 2012 has begun, lawmakers can always go back and pass laws retroactively returning those breaks effective Jan. 1.
But as we've already seen with the payroll tax cut, an election year raises the potential for grandstanding and political tactics from legislators from every political party. That makes it far from a sure thing that you'll get relief in time to save you from a big rise in your tax bill for 2012.
For more on taxes and your money:
- Why Shrinking Tax Refunds Are a Good Thing
- Tax Season, Scam Season: How to Avoid Fake Refund Cons
- The Most-Often Overlooked Tax Deductions