Recently President Obama proposed both tax hikes and tax breaks in his new jobs bill. However, what is receiving very little discussion currently are the Bush-era tax cuts that are set to expire at the end of 2012 and various other tax extenders that are set to expire at the end of 2011, or three months from now.There are over 60 provisions that are set to expire at the end of 2011. If Congress does not extend those provisions many taxpayers will see a tax hike through Congressional inaction.
Some of the tax extenders that are set to expire are as follows.
Alternative Minimum Tax (AMT) Exemption Amount. The 2011 AMT exemption amount for married filing joint taxpayers is $74,450 and $48,450 for single individuals. Those exemption amounts are scheduled to decrease in 2012 to $45,000 and $33,750, respectively. That could be a major hit for many taxpayers.
Mortgage Premium Insurance Deductions. Insurance premiums paid for qualified mortgage insurance will not be deductible as qualified interest after December 31, 2011. Mortgage interest is deducted on Schedule A and with this item set to expire many taxpayers’ itemized deductions will be less in 2012 unless Congress acts.
Sales Tax Deduction. For many years taxpayers could elect to deduct their state and local income taxes or their state and local sales tax. For states without an income tax this could be quite a deduction that is lost by those individuals.
Deductions for Tuition Related Expenses. Internal Revenue Code section 222(e) provides an above the line deduction for qualified tuition and related expenses. This amount ranges from $2,000 to $4,000 depending on income levels. This deduction will end after December 31, 2011 unless extended.
IRA Distributions for Charitable Purposes. Internal Revenue Code section 408(d)(8) allows up to $100,000 to be donated directly to a charity without first being included in the IRA owner’s income. Not only could this result in additional taxes owed but may also affect the amounts raised by charities.
Social Security Payroll Tax Cut. The 2010 Relief Act provided a 2% reduction in an employee’s share of the social security tax by reducing the rate from 6.2% to 4.2%. This reduction is set to expire at the end of 2011. This will affect almost all taxpayers.
Work Opportunity Tax Credit. Internal Revenue Code section 51 provides a credit equal to 40% of qualified first year wages earned by someone in a designated targeted group. This credit will sunset for workers who begin work after December 31, 2011.
Enhanced Section 179 Expensing. Internal Revenue Code section 179 provides enhanced expensing limits for property placed in service in 2010 or 2011. The expensing limit will decrease from $500,000 to $125,000 for 2012 and further reduced to $25,000 for tax years after 2012. This could be a major hit to businesses that need to invest in new property for their businesses. Where we do not know if this tax provision will be extended or not it makes it difficult to practice good tax planning. With the unknown a business may need to accelerate the purchase of equipment into 2011 to make sure they get the enhanced Section 179 expense deduction.
People argue over whether or not tax provisions that are set to expire or sunset can properly be classified as tax hikes. To me it is simple. If a tax provision that is scheduled to go away results in my paying more taxes that sun-setting tax provision is the same as a tax hike. If Congress does not act on these measures many taxpayers will have unexpected tax hikes when they can least afford them. These provisions are not targeted at the wealthy but will hit a much broader segment of our society. Be sure to let your politician know whether or not you think their inaction on tax provisions that are set to expire is the same as their voting on a tax hike.