November 1, 2012 : Jenna Bromberg - Past Contributor
What is the ‘Fiscal Cliff’ and Why Should I Care?
Additional reporting by Teresa L. Clark.
You’ve probably heard of “Taxmageddon.” Or maybe you’ve caught wind of the “Fiscal Cliff.” The names are cute, but millions of folks are realizing their implications are not so cute: you may be at risk of paying more in taxes this year. This could mean you might owe money to the IRS — instead of getting the tax refund you’ve gotten used to.
So, what’s the deal? Roland Sabates, J.D., of The Tax Institute at H&R Block breaks it down for you.
As Roland mentioned, unless there is legislative action, 34 million taxpayers could be hit with the alternative minimum tax – many for the first time. Why should you care? Because this could mean that if you’ve grown accustomed to getting a tax refund, you could be hit with a hefty tax bill.
Whether or not the AMT will be patched for inflation (the last patch expired Dec. 31, 2011) is one of the biggest unknowns — but many people aren’t aware of its impact on their tax liability.
According to analysis by The Tax Institute, if the AMT is not patched, a family earning $85,000 with two children in college could go from a tax refund of $1,056 tax refund to owing $1,400. Additional analysis found that taxpayers in high-income tax states – California, New York and New Jersey – would be most affected by the AMT if it is not fixed by Congress before the end of 2012.
And don’t forget about the expiring tax provisions!
2012 tax bills will be larger for millions of taxpayers since more than 70 tax provisions expired December 31, 2011, and have not been renewed. These tax breaks impact all income levels and affect college students, teachers and homeowners. A few of the highlights:
- Tuition and fees deduction – worth up to $4,000 per college student
- State and local sales tax itemized deduction – most impacting the millions of taxpayers who may reside in states with no income tax
- Educator expense deduction – worth up to $250 per teacher to help cover unreimbursed classroom expenses
- Mortgage insurance premium – deductible as residence interest
- Charitable distributions from IRAs – non-taxable up to $100,000.
Bottom line: you might not be able to claim the same tax credits and deductions you did last year – even if you still meet the qualifications – because that tax break might no longer exist.
Make your end-of-year tax planning count — and make sure you’re prepared come tax time 2013.