The most prominent was the debate over the payroll tax cut. It took weeks of dickering, but Congress finally approved extending the tax cut – but only for two months. That means we’re likely to either see another round of brinksmanship before the cuts are extended again, or payroll taxes will rise.
What does this mean for me?
The move keeps the Social Security tax rate at 4.2% through Feb. 29. Without the extension, it would have reverted to 6.2% on Jan. 1. That translates into an extra $40 per paycheck for a family earning $50,000 a yr. Because a yearlong cut would apply to the first $110,100 someone earns, Congress wanted to prevent individuals from shifting all their income to the first two months of the yr. So at this point the limit applies to the first $18,350 someone earns. If someone earns more than that during the first two months of the yr, they’ll pay an extra 2 percentage points in tax on their 2012 return.
What happened with the alternative minimum tax?
Congress has yet to address the alternative minimum tax “patch,” which is designed to limit the number of people required to pay AMT. Without the patch, the AMT tax exemptions would decrease from $74,450 for joint filers to $45,000, and from $48,450 for singles to $33,750.
If you may be subject to AMT, you should start planning now. The highest AMT tax rate is 28 percent, vs. 35 percent for regular federal taxes. If you think you might have to pay AMT for 2012 but not 2013, you should look at things like state and local tax payments, medical expenses, income and short-term capital gains, and adjust the timing so you get the biggest tax benefit.
What happened to the sales tax deduction?
The option of deducting state and local sales tax rather than state and local income tax on federal tax returns has lapsed. This can be a major blow to anyone who lives in the nine states – including Texas and Florida – who don’t pay state income tax. And even if you live in a state that does charge income tax, the change can have an impact if you planned to make a major purchase this year.
Of course, there are still 12 months left for Congress to change its mind and reinstate some of these provisions.
More Tax Questions? Browse Answers or ask tax planning questions online.
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