You’ll face a higher tax bill next spring if Congress doesn’t act to revive a series of tax breaks that expired Dec. 31, 2011. Look for a nasty and dramatic fight over many of them as Congress battles over the big question of whether to extend the Bush tax cuts -- a debate that won’t even begin until after the November election. In the end, we think lawmakers will save them, but it won’t be pretty.
TOOL: Your Chances of an IRS Audit
Alternative minimum tax patch
The AMT is a parallel tax system created more than 40 years ago to prevent excessive use of tax breaks by the very wealthy, ensuring they pay at least some tax. Taxpayers whose income exceeds the AMT exemption – in 2011, $48,450 for individuals and $74,450 for married couples filing jointly – must calculate both regular tax and AMT liability and pay the larger of the two amounts. But exemption levels have, at least tentatively, dropped to $33,750 for individuals and $45,000 for married couples filing jointly in 2012, which will expose 31 million taxpayers to the higher AMT this year, according to Tax Policy Center estimates.
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Higher mass transportation benefit
This one's of particular interest to straphangers, van-riders and other users of public transit. A 2009 federal stimulus provision raised the maximum an employee could receive for transit, tax-free, from $120 to $230. That matched the tax-free limit for parking. With the expiration of this break, the maximum for 2012 dropped to $125. Employees who’ve asked to have an amount higher than that withheld from their paycheck to cover their total commuting costs will see their net pay come down, as the difference is now taxed. We see as having only a 50/50 chance of this break being renewed.
Deduction for direct IRA payouts to charity
Retirees who are 70½ or older could direct up to $100,000 of their IRA distributions directly to charity and exclude the donated amounts from taxable income. Not anymore in 2012, unless Congress reinstates this deduction.
Write-offs for state sales taxes
This particularly significant expired break allowed you to deduct either state income tax or state sales tax from your federal taxable income.
Teacher’s supplies deduction
Teachers, even if they didn’t itemize, were able to take an additional deduction of up to $250 for classroom supplies they paid for out of their own pockets.
Tuition and fees deduction
Taxpayers (up to certain income limits) who can't claim the more advantageous American Opportunity or Lifetime Learning credits can still reduce taxable income by up to $4,000 for tuition and other qualifying educational expenses -- if, of course, Congress reinstates this break.
Mortgage insurance premium deduction
Homeowners who don’t exceed certain income limits had been able to deduct premiums they pay on mortgage insurance policies issued after 2006 on their primary residence.
Personal tax credits applied against the alternative minimum tax
Credits such as the tuition and dependent-care credits were allowed to offset your AMT liability.
Research and Development credit
Like the AMT patch and direct IRA payouts, this credit, which allowed high-tech companies and others to subsidize research in areas that might go unexplored, has broad support. But it still falls to Congress to reauthorize it periodically.
If lawmakers wait too long, in 2013, we may have a repeat of the 2006 and 2010 filing seasons, when many taxpayers had to wait for the IRS to reprogram its computers before they could file their tax returns. In both cases, the start of the filing season was delayed for many until early to mid February.
Sneak preview: New tax benefits -- as well as burdens -- for 2012
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