If nothing is done families across the USA will experience tremendous tax increase in 2013

The federal government is spending like a drunk sailor (my apologies to sailors in this comparison) and you knew the tax increases were coming at some point.

Why Your Tax Bill Might Surge Next Year

by Bob Jennings
Tuesday, November 8, 2011

In a recent tax planning meeting with one of our clients, we shocked them with what their income tax future looked like for 2013 if Congress continues to do nothing to provide a long-term permanent set of tax laws (and it looks as if lawmakers are headed down this track).

They had no idea what tax breaks were expiring this year and next year, and how much it would cost them personally in extra income tax. But they aren’t alone, many Americans and even tax professionals aren’t aware that their tax bill could rise dramatically next year.

More from FoxBusiness.com:Telling the Kids About Financial Woes: How Much too Much?

How Thieves Use Facebook to Steal Your Identity

How to Know if Your Prescription Drugs are Counterfeit

These clients are your average American family and their situation is a good example of the law changes that will affect all of us. Here’s their tax situation with a table summarizing the expiring tax laws that are scheduled to occur in 2011 and 2012.

Meet the Smiths: 26-year-olds Bill and Joan have been married for five years and have two young children. Bill earns about $65,000 a year in sales and Joan has gone back to work and earns about $35,000 annually. Bill owes quite a bit on his college student loans and will pay about $3,000 in interest on them in 2013. With Joan working again, they are paying $3,000 for year-round child care. Joan inherited some AT&T stock from her grandmother, which pays her $1,000 in dividends every year. Finally, counting home mortgage interest, they have about $20,000 in itemized deductions.

The first big change affecting the Smiths will be a combined increase in income tax rates, and a tightening of tax brackets as a result of the expiration of the Bush tax cuts. We estimate this will cost them $960 in 2013.

Bill will lose the complete deduction of his student loan interest in 2013, costing about $840. The pair’s allowable deduction for child care will drop to $2,400 from $3,000, and they will also see their credit for children drop in half, costing another $1,000.

The marriage tax penalty will come roaring back to hit the Smiths in 2013, costing an estimated $500. The tax on their dividend income will go increase to $280 from $150, adding another $130. Finally, although we did not calculate the effect, without Congressional action to once again “fix” the alternative minimum tax, the Smiths could owe this ugly tax as well!

Luckily for the Smiths — but not for many Americans — other major changes for 2013, which do not personally affect them, include a phase out of itemized deductions and personal exemptions if their income starts to climb.

In summary, because of tax laws expiring this year and next, we estimate that the Smiths will owe $3,598 more in income tax in 2013 than in 2011 with no change in their income.

Major Individual Income Tax Benefits Expiring 12/31/2011:

• Personal tax credits applied against income tax no longer apply

• Higher alternative minimum tax exemptions revert back to extraordinarily-low thresholds

• $250 school teacher expense deduction ends

• Mortgage insurance premium deduction expires

• State and local sales tax deductions expire

• Tuition and related fees deduction end

• IRA to charity tax-free transfers stop

• 2% Social Security tax reduction ends

Major Individual Income Tax Benefits Expiring 12/31/2012:

• Marriage penalty equalization ends

• Dividends taxed at capital gains rates removed, taxed at regular rates now

• Capital gains low tax rates expires

• Removal of itemized deduction phase out for higher income Americans

• Removal of personal exemption phase out for higher income Americans

• Child care deduction limit of $3,000 reverts to $2,400

• Child credit reduces from $1,000 per child to $500 per child

• Low 10% tax bracket for low income Americans is eliminated

• Lower income tax rates and smaller brackets expires

• Refundable adoption credit and reduced deduction

• American Opportunity college education credit expires

• Major reduction in earned income credits and refunds

• Income tax exemption for debt forgiven on home foreclosures and repossessions

• Deduction for student loan interest ends

• Education IRA limit drops from $2,000 to $500

Bob Jennings is a CPA, EA and CFP and author of “Understanding Social Security & Medicare.”

Taxes per Household Have Risen Dramatically

Though the economic downturn has temporarily lowered overall tax revenues, the tax burden on Americans is still high.

INFLATION-ADJUSTED DOLLARS (2010)

 
 
Download

Taxes per Household Have Risen Dramatically

Source: U.S. Census Bureau and White House Office of Management and Budget.

Chart 12 of 42

In Depth

  • Policy Papers for Researchers

  • Technical Notes

    The charts in this book are based primarily on data available as of March 2011 from the Office of Management and Budget (OMB) and the Congressional Budget Office (CBO). The charts using OMB data display the historical growth of the federal government to 2010 while the charts using CBO data display both historical and projected growth from as early as 1940 to 2084. Projections based on OMB data are taken from the White House Fiscal Year 2012 budget. The charts provide data on an annual basis except… Read More

  • Authors

    Emily GoffResearch Assistant
    Thomas A. Roe Institute for Economic Policy StudiesKathryn NixPolicy Analyst
    Center for Health Policy StudiesJohn FlemingSenior Data Graphics Editor

Related posts on taxes:

Milton Friedman discusses government spending

Milton Friedman – Do-Gooders And Special Interest Uploaded by LibertyPen on Nov 4, 2011 An effective alliance to grow government. http://www.LibertyPen ___________________________ Great article that quotes Milton Friedman: ‘Government Efficiency’: Trying to Turn Cats into Dogs Posted by Tad DeHaven I’ll have more to say later on Mitt Romney’s speech on federal spending, but his […]

Taxes per Household Have Risen Dramatically

Taxes per Household Have Risen Dramatically Though the economic downturn has temporarily lowered overall tax revenues, the tax burden on Americans is still high. INFLATION-ADJUSTED DOLLARS (2010)     Download Source: U.S. Census Bureau and White House Office of Management and Budget. Chart 12 of 42 Runaway Spending, Not Inadequate Tax Revenue, Is Responsible for Future Deficits The Top […]

Liberals like Brantley think taxing the rich will solve our problems

President Obama and other politicians are advocating higher taxes, with a particular emphasis on class-warfare taxes targeting the so-called rich. This Center for Freedom and Prosperity Foundation video explains why fiscal policy based on hate and envy is fundamentally misguided. For more information please visit our web page: www.freedomandprosperity.org. _________________ President Obama really does stick to […]

David Barton:The Bible on taxes

1 Of 5 / The Bible’s Influence In America / American Heritage Series / David Barton   David Barton has some great insights on this. http://www.wallbuilders.com/sIFR/font140.swf David Barton – 04/27/2006 Capital Gains Taxes The Capital Gains Tax, which is a tax on profits, actually penalizes a person for success the more profit you make the […]

Warren Buffett supporting Obama’s plan?

I recently read an article by Steve Brawner concerning Warren Buffett. Here is part of the article: [John Boozman] says that Buffett is being hypocritical to support Obama’s proposed tax increases because they wouldn’t solve the problem and wouldn’t affect him. In fact, he says, Obama’s bill might raise the secretary’s taxes if she and her […]

Federal government loves to eat up our money: “Yum Yum Eat em up”

The federal government loves to eat up more and more of our money. Back in the first few years of the 20th century our federal government usually spent about 3% of our money per year unless we were involved in a war, but now the percentage of GDP is up to almost 25%. It reminds […]

Cato Institute grades Perry’s flat tax

I really like to read Dan Mitchell’s opinions. Grading Perry’s Flat Tax: Some Missing Homework, but a Solid B+ Posted by Daniel J. Mitchell Governor Rick Perry of Texas has announced a plan, which he outlines in the Wall Street Journal, to replace the corrupt and inefficient internal revenue code with a flat tax. Let’s […]

Cato Institute looks at Herman Cain’s 9-9-9 plan (Republican Debate 10-19-11 Part 4 and 5 video clips)

Cato Institute looks at Herman Cain’s 9-9-9 plan pt 4 pt 5 Herman Cain has a lot to say about his 9-9-9 plan as do others in the debate above. I also enjoyed Cain’s comments on the Occupy Wall Street crowd in the clips above. Below is closer look at it. Cain 9-9-9: Huge Tax […]

Romney wants to eliminate Capital Gains Tax for everyone except those who are real job creators

Obama: Raise Taxes, Capital Gains – “For Purposes of Fairness” Everyone knows that if you eliminate the capital gains tax then those who are wealthy will put more money into creating jobs. However, Mitt Romney feels so guilty about being wealthy that he has proposed eliminating the capital gains for everyone except for those making […]

With Govt Spending at 41% of GDP should President Obama try to raise taxes?

Cato Institute: Government spending is 41% of GDP I love the Cato Institute because they give us the facts that liberals just can’t refute. Instead of trying to raise our taxes, President Obama should be cutting spending. American Government Spending: 41% of GDP Posted by Chris Edwards My good friend Kathy Ruffing at CBPP takes […]

Post a comment or leave a trackback: Trackback URL.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: