As Americans receive their first paychecks of the new year, there are some tax provisions they can count on.
Individual tax rates will be the same for 2012 as they were in 2011, as will the 15% maximum tax rate on capital gains. People at higher incomes won't see their personal exemptions or deductions phased out. And credits for adopting a child and for college expenses continue.
But several deductions, credits and other provisions that existed for 2011 will no longer be in place.
The alternative minimum tax exemptions will drop to pre-2001 levels if Congress doesn't pass a patch and make it retroactive to cover the entire year. If history is any guide, however, Congress will do that.
Similarly, without congressional action people over 70½ will no longer be able to make tax-free withdrawals from their IRAs for a charitable contribution, and teachers won't be able to take a $250 deduction for classroom supplies bought with their own money.
"During the course of 2012, the IRS will be keeping a close eye on developments in Congress," agency spokesman Terry Lemons said. "There are a lot of open question marks."
The 2012 presidential elections, the partisan discord in Congress and the outcry over the size of the federal deficit all add to the uncertainty. If there's any doubt, just consider the battle over extending the 2 percentage point cut in Social Security payroll taxes. Agreement could only be reached on a two-month extension despite statements by the White House and both Republicans and Democrats in Congress calling for retaining the reduction for all of 2012. That battle will resume later this year.
Tax experts advise people to monitor other developments as well.
The IRS recommends reviewing your withholding sometime during the year to make sure it is in line with what your tax liability is likely to be. There's a withholding calculator on its website, http://www.irs.gov/. By having less withheld, people can get their money upfront, rather than waiting for a refund.
For most of us, checking our withholding and preparing tax returns are among the biggest financial tasks we face, Lemons said.
Some of the tax law provisions still in effect for 2012:
- The Bush tax cuts, which set marginal income tax rates of 10%, 15%, 25%, 28%, 33% and 35%. These rates will increase beginning in 2013 unless they are renewed by Congress.
- Capital gains tax rates of 0% and 15%. Capital gains generally are the increase in the value of an asset, such as stock or a home, from time of purchase until sale. Net long-term capital gains — those on assets held more than a year — are taxed at the 0% or 15% rate. Net gains on assets held less than a year — short-term gains — are taxed at the regular income tax rates.
- The child tax credit of $1,000 per child. The credit will drop to $500 in 2013 unless Congress acts.
- The higher earned income tax credit for families with three or more children. After 2012, families with three or more children will be treated the same as those with two children if Congress doesn't pass an extension.
- The credit for expenses associated with the adoption of a child. However, the adoption credit is no longer refundable and is limited to $12,650 in 2012. It phases out for people with higher incomes.
- The American Opportunity Credit, which allows a maximum credit of $2,500 for tuition and other expenses for each of the first four years of higher education. The credit, which also phases out at higher incomes, is partially refundable.
- Some of the provisions that expired at the end of 2011:
- A patch for the alternative minimum tax. Absent congressional action, the exemption will drop to $45,000 for married couples filing jointly, $33,750 for single person or the head of a household, and $22,500 for married people filing separately.
- The deduction for state and local sales taxes, in lieu of state and local income taxes.
- The deduction for qualified tuition and fees.
