The upcoming "Taxmageddon" and three simple ideas to help with this years taxes

October 15 is the official end of the tax filing season for 2011 income tax returns. We made it almost. Can’t stop thinking here did 2012 go?  I starting writing this email to you last week while the presidential debate was on the television in the background.  Of course there was much discussion, about what is going to happen to tax rates and who was lying about it.  What I found striking was no mention of the coming “Taxmageddon” – the date the largest tax hikes in the history of America will take effect.  I don’t recall it if there was.  This impending tax increase is mostly the result of the expiration of many long-standing policies that all expire at the end of 2012.

It is estimated the the combined effect of these apparently unprecedented tax hikes will be $494 billion in one year.  They will affect families and small businesses in several waves on January 1, 2013.

I have summarized the first wave below my source being the Americans for Tax Reform website:

    First Wave: Expiration of 2001 and 2003 Tax Relief

    In 2001 and 2003, the GOP Congress enacted several tax cuts for small business owners, families, and investors (later re-upped by President Obama and  in 2010).  The following tax hikes will occur on January 1, 2013:

    Personal income tax rates will rise on January 1, 2013.  The top income tax rate will rise from 35 to 39.6 percent (this is also the rate at which the majority of small business profits are taxed).  The lowest rate will rise from 10 to 15 percent.  All the rates in between will also rise.  Itemized deductions and personal exemptions will again phase out, which has the same mathematical effect as higher marginal tax rates.  The full list of marginal rate hikes is below:

    -The 10% bracket rises to a new and expanded 15%
    -The 25% bracket rises to 28%
    -The 28% bracket rises to 31%
    -The 33% bracket rises to 36%
    -The 35% bracket rises to 39.6%

    Higher taxes on marriage and family coming on January 1, 2013.  The “marriage penalty” (narrower tax brackets for married couples) will return from the first dollar of taxable income.  The child tax credit will be cut in half from $1000 to $500 per child.  The standard deduction will no longer be doubled for married couples relative to the single level.

    Middle Class Death Tax returns on January 1, 2013.  The death tax is currently 35% with an exemption of $5 million ($10 million for married couples).  For those dying on or after January 1 2013, there is a 55 percent top death tax rate on estates over $1 million.  A person leaving behind two homes and a retirement account could easily pass along a death tax bill to their loved ones.

    Higher tax rates on savers and investors on January 1, 2013.  The capital gains tax will rise from 15 percent this year to 23.8 percent in 2013.  The top dividends tax will rise from 15 percent this year to 43.4 percent in 2013.  This is because of scheduled rate hikes plus Obamacare’s investment surtax.


Mark Steber writes in the Huffington Post:

Taxmageddon means different things to different people, and it's potentially not good for anybody. For some it may mean lower paychecks starting the first of the year. For others it may be a smaller tax refund when they file tax returns in 2013. Finally, it may mean a delay to filing tax returns this year if new legislation is passed late.

Congress and the president have developed a habit of waiting until the very last minute to act on pressing tax legislation.  I don’t think there is a chance that 2012 will be any different.  We are crossing our fingers that something is going to be done before as Federal Reserve chairman Ben Bernanke called it a “massive fiscal cliff” takes effect.

Turning to this year are some ideas to help with your current taxes.


Adjust your tax withholding

Did you get a big refund this year? Or did you owe the IRS a lot? Either way, adjust your payroll withholding. Your goal is to get the Goldilocks "just right" amount of income taxes taken out of your paychecks so that it's as close as possible to your eventual tax bill.


Make a charitable deduction now.

Instead of waiting until December 31 to donate to your favorite nonprofit organization, give now. Your charity will be thrilled to get your money or unwanted household items now. And if you itemize, you've got an entry on the charities section of Schedule A. Just remember to get a receipt!

Contribute to your retirement plan now.

Don't forget to give to yourself! The sooner you put money into your retirement plans, the longer it has to grow to the amount that will ensure the type of post-work lifestyle you want. Put the maximum into your IRA, Roth or traditional. Don't forget your company's 401(k) plan.


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