September 18, 2012
Unless Congress acts prior to year end - most of the tax rate reductions and exemptions enacted since the Economic Growth and Tax Relief Reconciliation Act of 2001 will expire. Consider the following examples of the changes that will occur at year-end if Congress takes no action.
- Individual income tax rates will increase with the expiration of the changes made by the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003,
- For married couples filing joint tax returns and qualifying widows and widowers, the alternative minimum tax exemption will revert from $74,450 to $45,000,
- An additional 2% tax on self-employment income will occur due to the expiration of the Social Security tax relief enacted with passage of the Middle Class Tax Relief and Job Creation Act of 2012,
- The option to fully expense the purchase of fixed assets (i.e. bonus depreciation) under Internal Revenue Code (IRC) section 168(k) will expire,
- IRC section 179 deduction will be reduced from a maximum of $139,000 to $25,000 and the phase-out threshold will be reduced from $560,000 to $200,000,
- The estate tax exemption will revert from $5,120,000 to $1,000,000 per person. In addition, tax rates will increase to a maximum of 55% and the election to use a deceased spouse’s unused exclusion from estate tax will expire, and
- Many temporarily extended tax provisions will expire December 31, 2012, including but not limited to the increased dependent care credit, refundable credit for prior year minimum tax liability and exclusion from gross income for discharge of indebtedness on the principal residence.
In addition to expiring tax provisions, as a result of passage of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, the Medicare tax rate will change. For example, the Medicare tax rate on earned income exceeding $200,000 ($250,000 for couples filing a joint income tax return) will increase from 1.45% to 2.35%. In addition, net investment income will generally be subject to a 3.8% additional tax to the extent AGI exceeds $200,000 ($250,000 for couples filing a joint tax return) effective January 1, 2013.