2012 should be an interesting year for taxes because 1) it’s an election year and 2) the tax rate is expected to go up in 2013 (when the Bush tax cuts expire).
With the economy still crawling along at a snails pace, and with presidential candidates slugging away to get your vote, I’d be suprised if we didn’t see some tax law changes to help keep taxes low, but as William Perez of About.com explains in his 2012 preview post below, don’t expect to see those changes until the last hour…
The year 2012 is likely to be a contentious year when it comes to taxation. I’ve put together a short list of what I think will be the key tax issues that we’ll be dealing with this year.
Expiration of the Bush-era tax incentives. 2012 is the last year for an astonishingly wide range of tax incentives. Collectively these are referred to as the “Bush tax cuts,” since most of the tax provisions were enacted in 2001 when G.W. Bush was president. Some of the provisions that expire at the end of 2012 include:
- Our current six-tier tax rate structure (ranging from 10% to 35%) will be replaced in 2013 with a five-tiered tax rate structure (ranging from 15% to 39.6%)
- Dividends will lose their preferential 15% tax rate.
- Earned income credit, dependent care credit and child tax credit are reduced.
- Itemized deductions and personal exemptions will be reduced for higher-income persons.
- Employer-provided education assistance plans will be restricted to undergraduate studies only.
I expect this issue to dominate political news. As CNN smartly remarks, Congress likely will be “waiting to the very last minute” of 2012 before making any major tax changes. But taxpayers need not wait to the last minute to see what Congress decides. Kay Bell over at Bankrate.com has posted tax planning suggestions just in case the Bush tax cuts expire.
Expiration of the Payroll Tax Holiday. The temporary reduction in the Social Security tax rate expires at the end of February 2012. With such a short time-frame, I expect Congress to address this tax issue early in the year.
New Tax Form for Capital Gains Transactions. Taxpayers will be reporting their capital gains transactions on the new Form 8949. This new form is likely to cause confusion by taxpayers, their brokers, and tax professionals as we all get accustomed to this new reporting format. Claudia Hill says, “I’m giving this form the #1 trouble spot award for 2012″ (Forbes).
New Tax Form for Reporting Foreign Assets. If you have assets invested outside the U.S., you have a new tax form to fill out, the Form 8938. Taxpayers will use this form to let the IRS know exactly what assets, and their approximate market value, are held outside the U.S. While this form is used merely to disclose the existence of those foreign assets, there’s a hefty $10,000 fine for not filling out the form accurately. Robert Wood provides a good overview of Form 8938 (Forbes).
More scrutiny over the Earned Income Credit. The IRS is exerting greater pressure on tax professionals in an effort to reduce the amount of improper earned income tax credits. Namely, tax preparers can now be fined $500 for each return containing an improper EIC claim. Trish McIntire explains in her blog post If Your Preparer Won’t Do EITC.