Whether it is called "Taxmageddon" or the "fiscal cliff," millions of taxpayers at all income levels are at risk of paying more in taxes this year. For some, this could mean owing money to the IRS instead of getting a tax refund as they have previously. For Latinos, the fastest growing group of small business owners in the nation according to a recent survey, this could mean substantial tax increases beginning in 2013.
"The risks for individuals this year are that the alternative minimum tax (AMT) could revert to pre-2001 levels and many common tax breaks millions rely on may not be available. Taxpayers soon could find themselves in difficult financial positions," said Kathy Pickering, executive director of The Tax Institute at H&R Block. "Because the extension of these tax breaks requires action by Congress and the President, there isn't much taxpayers can do to avoid this situation. However, they should be aware of what tax breaks may and may not be available for 2012 in order to plan for their impact."
34 million could owe additional tax if AMT is not raised for 2012 income levels
Unless there is legislative action, 34 million taxpayers could be hit with the alternative minimum tax ÔÇô many for the first time. This could mean that in just two months, taxpayers who had grown accustomed to getting a tax refund could be hit with a hefty tax bill.
Whether or not the AMT will be patched for inflation (the last patch expired Dec. 31, 2011) is one of the biggest unknowns facing taxpayers, yet many aren't aware of its impact on their tax liability.
"The AMT is complex. It can affect taxpayers for different reasons and it is not always clear when or if it will apply," Pickering said. "AMT may kick in because of the taxpayer's income, certain deductions, or even because the taxpayer claimed certain credits."
According to analysis by The Tax Institute, if the AMT is not patched, a family earning $85,000 with two children in college could go from a tax refund of $1,056 tax refund to owing $1,400.
Additional analysis found that taxpayers in high-income tax states ÔÇô California, New York and New Jersey ÔÇô would be most affected by the AMT if it is not fixed by Congress before the end of 2012.
Expired common tax breaks could hit middle class families with additional $4,000 tax burden
2012 tax bills will be larger for millions of taxpayers since more than 70 tax provisions expired Dec. 31, 2011, and have not been renewed. These tax breaks impact all income levels and touch college students, teachers and homeowners. Following are some of the more popular expired tax breaks:
ÔÇó Tuition and fees deduction ÔÇô worth up to $4,000 per college student
ÔÇó State and local sales tax itemized deduction ÔÇô most impacting the millions of taxpayers who may reside in states with no income tax
ÔÇó Educator expense deduction ÔÇô worth up to $250 per teacher to help cover unreimbursed classroom expenses
ÔÇó Mortgage insurance premium ÔÇô deductible as residence interest
ÔÇó Charitable distributions from IRAs ÔÇô non-taxable up to $100,000.
"Fewer tax breaks mean fewer opportunities to reduce tax liability. Taxpayers need to know they might not be able to claim the same tax credits and deductions they did last year ÔÇô even if they still meet the qualifications ÔÇô because that tax break might no longer exist," Pickering said.