We’re really expecting this upcoming tax season to be one of the more challenging ones on record.
-Kathy Pickering, executive director of The Tax Institute at H&R Block.
(NEW YORK) MintPress – Forget the automatic tax increases that are set to go into effect on Jan. 1, 2013, says tax preparing giant, H&R Block.
More than 70 tax breaks already expired at the end of 2011, and, according to its latest analysis, if Congress fails to extend them retroactively, millions of Americans could be paying an additional $4,000 in taxes when it comes to filing 2012 returns in the spring.
Those breaks have unfortunately become lost in the bigger debate over the so-called fiscal cliff.
For now, the White House and Congress are at a standstill in the negotiations over how to address the Bush era tax cuts that are scheduled to expire on Dec. 31.
President Obama wants to let them come to an end for individuals with incomes above $200,000 and married couples with a combined income above $250,000, while extending the tax cuts for people making less.
House Speaker John Boehner (R-Ohio) and other Republicans have said they are open to more tax revenue through reducing or eliminating unspecified tax breaks but not through raising taxes.
Late last week, Boehner compromised slightly by proposing to raise top rates for people earning more than $1 million in exchange for deeper spending cuts, especially in health care and other mandatory social welfare programs.
Obama has not accepted that offer.
Other tax breaks that expired at the beginning of this year include deductions for college expenses, deductions for state and local sales taxes and a $250 deduction for teachers who buy classroom supplies with their own money.
The tax increases could vary greatly, depending on how much money a person makes and which deductions they qualify for.
For example, according to the H&R Block analysis, a single person making $65,000 who paid $6,000 in college tuition and fees would get a tax increase of $837, mainly because he or she would lose a deduction for college expenses.
Hitting hard
The biggest tax increase facing individuals for this year is the alternative minimum tax, or AMT.
The tax was first enacted in 1969 to ensure that wealthy people paid at least a certain minimum amount of tax, regardless of how many tax deductions and income shelters they used to try to reduce their tax bills.
Taxpayers must calculate their liability under the AMT, which allows for fewer exemptions, and the regular tax and pay whichever is greater.
The problem is that the AMT was not indexed for inflation, so as taxpayer earnings have increased over the decades, more people have hit the income level at which the AMT applies.
Rather than just adding a line to the AMT law saying that it would be indexed for inflation as are so many other tax-related laws, Congress has opted instead to put a so-called patch on the AMT every year or two, meaning the House and Senate raise the earnings level at which the AMT must be considered.
Lawmakers last did so in 2010 when they were fighting about the Bush era tax cuts back then, patching the AMT for two years.
Without a new adjustment for the 2012 tax year, according to the IRS, as many as 60 million Americans could be affected by the AMT, with 33 million of those potentially having to pay the tax, up from 4 million in 2010.
Calculations of the average AMT tax burden among those taxpayers vary, but a typical increase would be in the $3,500 to $4,000 range and the maximum would hit closer to $8,000.
The tax would affect individuals making more than $33,750 and married couples making more than $45,000.
Point of no return
Even those who don’t end up having to pay the tax could suffer if Congress doesn’t patch the ATM by the end of the year.
“Taxpayers and the IRS need to know what the tax provisions are for 2012, so that you know what you owe and we know how to process your return in January,” acting IRS commissioner Steven Miller said at a recent tax conference in Washington.
Also, he explained, the IRS’s computer systems have been programmed based on the assumption that Congress will act this year, leading to a delay in the agency’s ability to accept tax returns if lawmakers do nothing.
In the first quarter of this year, the IRS cut refund checks totaling $212.8 billion to 75.3 million taxpayers, with each check averaging $2,826.
Many people rely on those refunds, especially in the current economic recession, to pay bills and buy bigger ticket items.
But, Senate Majority Leader Harry Reid (D-Nev.) said last week that the Senate won’t consider a small-scale bill to avoid an expansion of the alternative minimum tax if no broader budget deal is reached.
The president met again with Boehner on Monday but there were no signs of any progress on reaching an agreement.
Taxpayers, be warned.
“Essentially, the IRS has said it will be chaos — chaos! — trying to make it work,” warned Rep. Sander Levin of Michigan, the ranking Democrat on the tax-writing House Ways and Means Committee.