KNOXVILLE — National news outlets are awash in reports on the "fiscal cliff" coming in January 2013 if Congress and the President fail to act. Lee Franck with Knoxville's H&R Block shared some key tax changes that are certain to impact local households, and what is coming in the next few years with the "Affordable Care Act."
According to Franck, the Alternative Minimum Tax will increase in 2013 and will cost an average household $2,000-3,000 more in taxes. These figures are for households that range in income from $50-100,000. The increases will be worse for those families who itemize their deductions on tax day.
Current tax rates, set during the Bush Administration and continued through the Obama presidency, are set to revert to levels existing prior to 2001. Rates would increase from 10, 15, 25, 28, 33 and 35 percent to 15, 28, 31, 36 and 39.6 percent. For the lowest income earners, seeing one's tax liability jump from 10-15 percent is equivalent to a 50 percent tax increase.
For those who have investments and receive dividends, the capital gains and dividends rates will increase from 0 and 15 percent, to 10 and 20 percent. There is potential that the top capital gains recipients could see their rates go over 20 percent.
This will affect those who sell property in 2013. Franck has been advising his clients to sell property before the end of the year, to avoid paying these higher rates.
Other tax credit changes that could hit Marion County families include the Earned Income Tax Credit and the child tax credit (reduced from $1,000 per child to $500).
A great deal of discussion is held regarding tax increases to those households that earn $250,000 or more, while protecting lower earning Americans. However, people in the $250K pay range do not take advantage of these credits, so those who will feel the effects of the expiration of these tax laws have lower incomes.
Franck believes if lower income families are hit with these tax increases, the economy will worsen. He does not believe that America is out of the economic slump that began in 2008.
The state and federal governments are also becoming more aggressive in their collections, and doing more to crack down on potential fraud, according to Franck. To be able to claim the Earned Income Tax Credit, the government now wants tax preparers to ask questions and require documentation to show proof that what a taxpayer is claiming is actually the truth. Franck said documentation that may be necessary when filing in 2013 includes photocopies of children's Social Security cards, letters from school verifying that the taxpayer is the primary provider for a child and more. Those claiming "head of household" will also be asked to provide copies of rent checks, utility bills and other forms of proof that you have paid these expenses.
"We don't want people to get blind-sided," Franck said.
"Affordable Care Act" impacts
Many new requirements will befall all taxpayers in 2014, due to the "Affordable Care Act." Franck said he and other H&R Block members intend to spend a great deal of time in 2013, after tax season, to educate people on what is coming in 2014.
Upper tax-bracket earners will see a 3.8 percent tax on investment income. Companies will be faced with a decision to either pay a penalty to the federal government or continue to provide health insurance. Franck believes most companies will opt to pay the penalty, and end their employer coverage, thus leaving employees with the task of finding another source of health insurance.
Not buying health insurance will lead to a higher tax bill in 2014. The US Supreme Court deemed the insurance purchasing mandate a "tax," and if one fails to prove he or she has purchased health insurance, the tax will be charged when filing after 2014. This could cost a family several hundred to over $1,000 in additional taxes.
"We've got a lot of educating to do about health care reform," Franck said.
Companies that will feel the greatest impact of the "Affordable Care Act" will be those mid-sized ones.
More audits already
Franck said the State of Iowa has already begun to increase the number of audits, at least among local customers. Many of the audit targets have been those who claim a dependent care credit on their taxes.
"They're questioning everything," Franck said. He saw two or three people, dealing with audits, each week over the summer.
Tax changes are hitting parents who are helping their children repay their student loans. In the past, parents who make payments on loans in their child's name were able to claim the interest as a deduction. They can no longer do this.
A major potential tax change, the mortgage interest deduction, is also set to expire at the end of the year. This would be a $40 billion tax increase and would cause further damage to the economy, Franck said.
"If they take that away, that would really kill the real estate market," Franck said.
H&R Block's Tax Institute has prepared quick-reference sheets that summarize tax law changes coming in 2013 and those specifically coming in relation to the "Affordable Care Act." These sheets accompany this article.
With all of the changes taking place, Franck urges people with questions to talk to their tax preparers. As of this writing, no deal had been reached between Congress and the President to address these major tax changes coming in 28 days.