Written by: Gene Smith, CPA

You have likely heard of tax increases that will impact those earning over $200,000, so we thought it would be good to spell out some of the possible tax increases for the “average” taxpayer if the Bush tax cuts expire at the end of 2012. If your understanding is those earning under $200,000 will not be impacted by the tax increases looming for 2013, you are sadly mistaken.

Payroll Tax – FICA withholding will return to 6.2% (up from 4.2%) and self-employment tax will return to 12.4% (up from 10.4%). Impact: all taxpayers.

Long Term Capital Gain – If you were in a 15% tax bracket or below, you paid zero tax on long term capital gains, but that will be increased to 10% for 2013 (8% of held over 5 years). If your tax rate was over 15%, you paid 15% tax on capital gains, but that will increase to 20% for 2013 (18% if held over 5 years). Impact: all taxpayers with capital gains.

Regular Tax Rates – Marginal rates will increase from 10% to 15%, the 15% rate remains, and the 25% marginal rate increases to 28%. Impact: all taxpayers.

Coverdell Education Accounts – The dollar limit for any one beneficiary is reduced to $500 from $2,000. There is also more narrowly defined expenses that qualify and limitations on when other education credits can be used when making a Coverdell withdrawal. For higher income earners the deduction is phased out completely. Impact: all lower to moderate income families making a Coverdell contribution.

American Opportunity Tax Credit – Is no longer available. Impact: lower income taxpayers paying college tuition.

Higher Education Loan Interest – The deduction limit remains at $2,500 but can only be taken the first 60 months for which payments are required (formerly no time limitation). Also the AGI phase-out ranges are reduced to $60,000 – $75,000 for joint filers. Impact: lower to moderate taxpayers paying student loan interest.

Alternative Minimum Tax (AMT) – this is a complex area and space does not allow for a detailed explanation, but it is estimated the number of taxpayers affected by the AMT will increase from 4 million in 2011 to 31 million in 2013. The most common AMT issue will arise if you are a taxpayer with large itemized deductions. Impact: middle income taxpayers.

Child Tax Credit – Is reduced from $1,000 to $500 per child. Impact: lower income taxpayers with children under the age of 17.

Child and Dependent Care Credit – Is reduced from a maximum credit of $3,000 to $2,400. Impact: lower income taxpayers paying child care expenses.

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