Taxmageddon means different things to different people, and it's potentially not good for anybody. For some it may mean lower paychecks starting the first of the year. For others it may be a smaller tax refund when they file tax returns in 2013. Finally, it may mean a delay to filing tax returns this year if new legislation is passed late.
Let's begin with paychecks. Take home pay may be lower beginning January 1, 2013 unless we get some changes to the current expiring tax provisions. Why? Three major areas of change.
The first change is the increase in Social Security taxes paid. The Payroll Tax Holiday has reduced worker's social security tax withholding by two percent since January 2011. This is scheduled to expire December 31, 2012, meaning your paycheck will instantly go down two percent starting in January.
The second major change to impact taxpayers beginning in January 2013 will be increased tax withholdings out of each paycheck due to other expiring provisions. A current group of tax laws created in 2001 through 2003, commonly referred to as the Bush Cuts, will expire in the coming weeks. These tax changes lowered taxes and increased deductions and credits available to taxpayers. If they expire on December 31, 2012 as scheduled, we will see an increase in taxes at all income levels -- not just the rich.
Many changes will affect the increase in taxes so let's look at those that will impact taxpayers at the lower and middle income levels.
- Tax rates will revert back to early, higher rates, and the 10 percent tax bracket is expired. This change alone will cost a single taxpayer with taxable income of $8,700 an additional $585 in income taxes.
- The marriage penalty is reinstated under the change causing the standard deduction to decrease and taxes to increase for many married couples.
- In addition to the changes in the tax tables and the standard deduction, most of the child related credits will be impacted by this change as well. The maximum allowed child care credit will be reduced to $1,440 (from $2,100) for two eligible dependents. The Child Tax Credit will be reduced to $500 per qualifying child (from $1,000). The Earned Income tax credit will be dramatically reduced as well.
Finally if Congress, and subsequently the IRS, make changes after the election, any delay in passing the law and updating IRS systems, forms, and software could possibly lead to delays in tax filing season. For the 75 percent of taxpayers that typically enjoy an early refund averaging about $3,000 - this could be a painful delay.
As you can see, the tax changes we are currently looking at in 2013 will impact most taxpayers in this country beginning with a change in your take home pay the first pay check of the year. Now is the time to start planning accordingly so you aren't caught by surprise.