The Bush-era tax cuts—enacted in 2001 and 2003—are scheduled to expire at the end of this year. Unless Congress acts, most taxpayers will see rate and other increases.
Here is what taxpayers should expect if it doesn't—with the caveat that anything could happen as the presidential election season heats up.
Higher Tax Rates for All
You might think only individuals in the top two brackets will face higher federal income taxes if the Bush cuts evaporate as scheduled on Jan. 1, 2013. But unless Congress takes action and the president (whoever that is) goes along, rates will go up for everyone.Specifically, the existing 10% bracket will go away, and the lowest "new" bracket will be 15%. The existing 25% bracket will be replaced by the new 28% bracket; the existing 28% bracket will be replaced by the new 31% bracket; the existing 33% bracket will be replaced by the 36% bracket; and the existing 35% bracket will be replaced by the 39.6% bracket.
Higher Capital Gains and Dividend Taxes
Right now, the maximum federal rate on long-term capital gains and dividends is 15%. Starting next year, the maximum rate on long-term gains is scheduled to increase to 20% (or 18% on gains from assets acquired after Dec. 31, 2000, and held for over five years). The maximum rate on dividends will skyrocket to 39.6%.People in the lowest two rate brackets of 10% and 15% currently pay 0% on long-term gains and dividends. Starting next year, they will pay 10% on long-term gains (or 8% on gains from assets acquired after Dec. 31, 2000, and held for over five years) and 15% and 28%, respectively, on dividends.
Harsher Marriage Penalty
The Bush tax cuts included several provisions to ease the so-called marriage penalty, which can cause a married couple to pay more in taxes than when they were single.Right now, the bottom two tax brackets for married joint-filing couples are twice as wide as those for singles. This helps keep the marriage penalty from biting lower- and middle-income couples. Starting next year, the joint-filer tax brackets will contract, causing higher tax bills for many couples.
Currently, the standard deduction for married joint-filing couples is double the amount for singles. Starting next year, the joint-filer standard deduction will fall back to about 167% of the amount for singles.
All this means that many lower- and middle-income couples are facing higher tax bills due to a harsher marriage penalty.
Return of Phase-Out Rules for Itemized Deductions
Before the Bush tax cuts, a phaseout rule could eliminate up to 80% of a higher-income individual's itemized deductions for mortgage interest, state and local taxes and charitable donations. The rule was gradually eased and finally eliminated in 2010.Next year, the phaseout will be back in full force unless Congress takes action and the president approves. So, if you itemize and have 2013 adjusted gross income above about $175,000 (or about $87,500 if you use married-filing-separate status), get ready for this phaseout rule to take a bite out of your wallet.
Return of Phase-Out Rule for Personal Exemptions
Another pre-Bush phaseout rule could eliminate some or all of a higher-income individual's personal-exemption deductions. (For 2012, such deductions are $3,800 each.) The rule was gradually cut back and finally eliminated in 2010. But it will be back next year barring action in Washington.So you need to be ready for yet another bite out of your wallet if you are a married joint-filer with 2013 adjusted gross income above about $265,000.
If you are single, the magic number will be about $175,000. If you use head-of-household filing status, watch out if your 2013 adjusted gross income exceeds about $220,000.
Some Bush Tax Cuts Are Likely to Be Continued
Some elements of the Bush tax cuts have bipartisan support and will likely be continued beyond this year. Examples include inflation-indexed alternative minimum tax, or AMT, exemption amounts, the ability to use nonrefundable personal tax credits to offset your AMT bill and the deduction for qualified higher-education tuition and fees.The current versions of the child tax credit, earned-income credit, dependent-care credit and adoption credit also are more likely than not to be continued. The Bush tax-cut legislation liberalized these credits, and later legislation liberalized them even more.
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