At the end of 2012, the “Bush tax cuts” are set to expire—and it’s not just the top 1 percent who will be affected. Without new legislation, tax rates will increase for all taxpayers and certain deductions will be curtailed for some taxpayers. What follows is a summary of the most common changes scheduled to take effect this year and in 2013.

Alternative minimum tax
The alternative minimum tax is a parallel tax system that requires all taxpayers to compute their taxable income without the benefit of so-called tax preferences. An exemption is allowed (subject to phase-out for higher-income taxpayers). For 2012, the alternative minimum tax exemption amount is $45,000 (reduced from $74,450 in 2011) for married couples filing a joint income tax return and $33,750 for singles and heads of household (reduced from $48,450 in 2011).

The Tax Policy Center estimates that 31 million taxpayers will owe alternative minimum tax in 2012 if the 2011 exemption amounts are not retroactively restored. Taxpayers with taxable income in the $150,000 to $350,000 range will be affected the most.

Income tax rates
The current six income tax brackets will go to five brackets in 2013; the 10 percent and 25 percent brackets are scheduled to be eliminated, and other rate brackets are scheduled to rise (Table 1). The top marginal rate is scheduled to increase to 39.6 percent.

The “marriage penalty,” in which a married couple filing jointly pays more tax than two singles making the same income and filing separately, returns in 2013. In 2012, the cut-off for the 15 percent rate bracket for joint filers was exactly double that for single filers ($35,350 for single filers; $70,700 for joint filers). In 2013, the cut-off for the 15 percent rate bracket for single filers rises to $36,250, but the cut-off for joint filers falls to $60,550—or 167 percent of the single filing cut-off. The difference of $11,950 will be taxed at 28 percent instead of 15 percent.

Qualified dividends and long-term capital gains
Qualified dividends are currently taxed as long-term capital gains (ie, subject to a maximum tax rate of 15 percent). All dividends are scheduled to be taxed as ordinary income (ie, subject to a maximum tax rate of 39.6 percent) beginning in 2013 (Table 2).

The top long-term capital gains rate is scheduled to increase from 15 percent to 20 percent in 2013. Higher income taxpayers could also be subject to the new Affordable Care Act tax on their qualified dividends and long-term capital gains beginning in 2013.

Itemized deductions
Taxpayers with adjusted gross income in excess of $177,000 are scheduled to lose the benefit of a portion of their itemized deductions beginning in 2013. Itemized deductions will be reduced by 3 percent of adjusted gross income; some taxpayers could lose as much as 80 percent of their itemized deductions (Table 3).

Personal exemptions
Married taxpayers with adjusted gross income in excess of $265,550 who file a joint income tax return, heads of household with adjusted gross income in excess of $221,300, and single filers with adjusted gross income of more than $177,000 are scheduled to lose a portion of their personal exemptions in 2013. Some taxpayers could lose the deduction entirely.

Estate taxes
The top estate tax rate is scheduled to increase from 35 percent to 55 percent and the exemption amount is scheduled to decrease from $5,120,000 to $1,000,000.

Payroll tax cut
The employee social security tax rate is scheduled to increase from the current 4.2 percent to 6.2 percent in 2013, and the Social Security self-employment tax rate is scheduled to increase from 10.4 percent to 12.4 percent.

Depreciation/expensing of business assets
The 50 percent bonus depreciation provision is scheduled to expire at the end of 2012, and the election to expense qualified assets is scheduled to decrease from $139,000 to $25,000.

“Affordable Care Act” taxes
A new 3.8 percent tax on net investment income takes effect in 2013. The tax will affect joint filers whose modified adjusted gross income exceeds $250,000 ($200,000 in the case of unmarried single filers). The employee share of the Medicare tax will increase from 1.45 percent to 2.35 percent.

What it means
How likely is it that elected officials will allow all of these tax changes to go into effect? No one knows for sure. Many commentators have noted that the “fiscal cliff”—the combination of automatic spending cuts and tax increases scheduled to go into effect Jan. 1, 2013—will cause the U.S. economy to slip back into recession, forcing lawmakers to bargain for an extension of some tax cuts, at least for all but the wealthiest taxpayers.

But that leaves open the question of how the government will reduce its trillion-dollar budget deficit. When the Standard & Poor’s rating agency downgraded U.S. government debt from AAA to AA+, it warned that additional downgrades could be forthcoming unless the budget deficit narrowed. If another downgrade occurs and spooks investors, it might cause the sort of fiscal austerity currently being forced on the worst-off European countries. That will mean higher taxes for everyone.

David A. Simon, CPA, is director of tax services for Weltman Bernfield LLC, a certified public accounting and business consulting firm located in Buffalo Grove, Ill. He can be reached at dsimon@WeltmanBernfield.com

Editor’s note: This article is provided as general information only. For specific information, consult a qualified tax professional.