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Individual Tax Provisions Expiring at the End of 2012

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Several federal tax provisions are scheduled to expire at the end of the year 2012. Most of these are related to the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003, which collectively are referred to as the Bush-era tax cuts. These tax provisions were originally scheduled to sunset or expire at the end of 2010. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 extended these provisions for two additional years, resulting in a new sunset date of December 31, 2012, for these provisions.

What follows is a list of expiring provisions that relate to personal income taxes.

Changes to Individual Tax Rates

1. Social Security Taxes

Social Security taxes are scheduled to increase on January 2013. Currently employees pay 4.2% of their wages, and self-employed persons pay 10.4% of their net self-employed income. In 2013, the Social Security tax rate will revert to its normal rate of 6.2% for employees and 12.4% for the self-employed. The temporary reduction in the Social Security tax rate was originally legislated as part of the Tax Relief Act of 2010 and intended to be a one-year provision. The Social Security rate reduction was subsequently extended twice by HR 3765 through February 2012 and again by HR 3630 through the end of 2012. The Social Security wage base will also be increasing for 2013 to $113,700.

2. Personal Income Tax Rates

Ordinary tax rates on personal income are scheduled to revert to their pre-2001 levels. From 2001 through 2012, there are six tax rates ranging from 10% to 35%, which were implemented through Economic Growth and Tax Relief Reconciliation Act in 2001. For 2013, there will be five tax rates ranging from 15% to 39.6%. The lowest 10% tax rate will be eliminated and collapsed into a larger 15% tax bracket; in other words, the new 15% bracket for 2013 will encompass what in 2012 is the 10% and 15% brackets. The current 25% bracket will be replaced by a new 28% rate; the current 28% bracket will become 31%; the current 33% bracket will become 36%, and the current 35% bracket will become 39.6%. Furthermore, the 15% tax bracket for married couples filing jointly will no longer be double the 15% tax bracket for single filers.

3. Capital Gains Tax Rates

Long-term capital gains are taxed either at zero percent or at 15% for 2012. The tax rate on long-term gains is scheduled to revert in 2013 to a rate of 20%; a lower 10% rate would apply for individuals in the 15% tax bracket. We would also see the re-emergence of an 18% capital gains tax rate on assets held longer than five years; or 8% for individuals in the new 15% tax bracket.

4. Dividend Tax Rates

Dividends will be taxed at ordinary tax rates, which will range from 15% to 39.6%. The distinction between ordinary dividends and qualified dividends will be dropped after 2012. The Jobs and Growth Tax Relief Reconciliation Act introduced the concept of qualified dividends, which are taxed at the same rate that applies to long-term capital gains. Additionally, dividend income will be subject to a new Medicare surtax on unearned income at a rate of 3.8% starting in 2013.

5. Alternative Minimum Tax

Exemption amounts for the Alternative Minimum Tax are scheduled to decrease from $48,450 (2011 exemption for a single person) to $33,750 (2012 exemption amount). Exemption amounts for alternative minimum tax are set by law rather than being indexed to inflation, resulting in frequently legislative changes known as "AMT patches" to adjust the exemption amounts. The Tax Relief Act of 2010 set the AMT exemption amounts for the years 2010 and 2011. Currently, two bills are pending before Congress that would patch the AMT for 2012 and possibly for 2013.

Changes Impacting Deductions

6. Standard Deduction

Currently, the standard deduction for married couples filing jointly is exactly double that of a single person. For 2012, a single filer has a standard deduction of $5,950 and a married couple filing jointly has a standard deduction of $11,900. The IRS has not yet released standard deduction amounts for 2013. If this provision expires, the standard deduction for joint filers will be less than double the standard deduction for single filers, and the standard deduction for separate filers will be less than the amount available for single filers.

7. Personal Exemptions

Starting in 2013, the amount that can be deducted for personal exemptions will become subject to phase-out limitations for higher income individuals. The amount of personal exemptions that can be deducted is gradually reduced or phased-out if a person's adjusted gross income (AGI) exceeds a certain threshold amount. The personal exemption is reduced by two percent for each $2,500 (or fraction thereof) by which AGI exceeds the threshold. (For married couples filing separate returns, personal exemptions are reduced by two percent for each $1,250 by which AGI exceeds the threshold.) The last time phase-outs were in effect for personal exemptions was 2009. The phase-out rule has not been in effect for the years 2010, 2011 and 2012. The IRS has not yet released personal exemption and phase-out amounts for the year 2013. Publisher CCH projects that the personal exemption amount will be $3,900 and that the phase-out ranges will be "$267,200-$389,700 for married filing joint returns, $222,700-$345,200 for heads of household, $178,150-$300,650 for single filers and $133,600-$194,850 for married filing separately."

8. Limitation on Itemized Deductions

Higher-income persons may see their overall itemized deductions limited starting in 2013. Known as the Pease limitations, this provision limits the total amount that can be deducted as an itemized deduction for individuals with adjusted gross income (AGI) over a certain threshold amount. Publisher CCH estimates, "the itemized deduction phaseout for 2013 would be triggered at $89,075 AGI for married filing separately and $178,150 for others." Itemized deductions are reduced by the lesser of 3% of the taxpayer's AGI over the threshold amount or by 80% of otherwise allowable itemized deductions. The Tax Policy Center observes that the Pease limitation "is effectively just an income tax surcharge, equal to 3 percent of the taxpayer’s marginal tax rate." The Pease limitations on itemized deductions were not in effect for the years 2010, 2011 and 2012.

9. Student Loan Interest Deduction

Individuals can deduct interest paid on student loans up to $2,500 per year, and the amount of the deduction phases out based on income. Starting with the year 2013, student loan interest will be tax-deductible only for the first 60 months of repayment.

Changes Impacting Tax Credits

10. Child Tax Credit

Currently families may qualify for a child tax credit of up to $1,000 per dependent child under the age of 17. Starting in 2013, the maximum child tax credit is scheduled to be $500 per eligible child.
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