Looming Tax Increases: Travelers, Be Prepared
By Joseph Smith, EA, contributor
By now you have probably heard about the many tax benefits set to expire at the end of 2012. These looming tax increases have been referred to as a “fiscal cliff” which is causing concern among low to middle income taxpayers. With Congress in a stalemate and the uncertainty of a lame duck Congress after the elections, it is difficult for taxpayers to plan for expenses that have a tax benefit. As a result, many low and middle class earners will see a significant increase in their taxes should these provisions be allowed to expire.
Below are four expiring tax breaks of particular interest to travelers:
1) Payroll and self-employment tax increases
Currently, employed taxpayers pay a 4.2% tax for Social Security. The employer pays 6.2%. A self-employed individual pays a 6.2% corporate contribution as well as the 4.2% individual rate. In 2013, the 4.2% individual portion of the Social Security tax will rise to 6.2%. For incomes of $50,000 a year, this will be an increase in taxes of $1,000.
2) Tax brackets
Our tax system is a progressive tax system made up of what are commonly known as “tax brackets.” Tax brackets do not necessarily determine the rate in which all of the income is taxed--it only determines the rate of tax for a particular range of earnings. This means each additional dollar of earnings is taxed at its own percentage rate. Currently, there are six tax brackets: 10%, 15%, 25%, 28%, 33%, and 35%. In 2013, the 10% tax bracket will dissolve, and the remaining brackets will increase leaving 15%, 28%, 31%, 36%, and 39.6%. Most travelers peak at the current 25% bracket. If these new rates return, this will be a significant tax increase.
3) The American Opportunity Tax Credit (AOTC)
This is a popular tax break for travelers finishing their bachelor’s degrees. It provides a tax credit of $2,500 for the first $4,000 paid for tuition and books during the first four years of college leading to an undergraduate degree. For someone taking courses toward a four-year degree, the tax rebate for the entire four years can be as high as $10,000. What’s really dicey about this credit is that $1,000 of it is “refundable.” A “refundable” tax credit is provided even when someone has no income or no income tax to pay. This credit is set to expire at the end of 2012, leaving only the Hope Educational Credit (for the first two years of school), the Lifetime Learning Credit (for all other years of school) and the Tuition and Fees deduction. These remaining provisions pale in comparison to the AOTC.
4) Child Tax Credit
Last but not least, the child tax credit, which currently is $1,000 for each qualifying child under the age of 17, will revert to $500. For a traveler with two eligible children, this will result in $1,000 tax increase for the year.
There are many other tax rules set to change in 2013, but these that are listed provide sufficient worry for middle class earners. Just these changes alone can increase taxes on the average traveler by $3,000-$4,000. Unless Congress addresses these issues soon, 2013 can be a particularly rough year.
Finally, to add insult to injury, any changes made by Congress during the latter part of the tax year can potentially delay the first date in which the IRS can process tax returns. Once a new tax law is written, the IRS has to tweak their computer systems to accommodate the new structure. This will delay refunds.
About the author:
Joseph Smith is an IRS Enrolled Agent (EA) and former travel respiratory therapist whose firm, TravelTax, provides tax preparation and audit representation for the mobile professional.
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