For months, elected government officials have held the American public hostage with their seeming inability to address critical issues. With the election over and done with, it's finally time for government leaders to act like leaders and start working on building some long-awaited certainty on our hodgepodge of tax laws currently on the books.
What's already gone
Already, a number of tax laws that were in effect for last year's tax returns have expired. It's not too late to bring them back retroactively, but any delay in doing so could force the IRS to hold off on coming up with complying tax forms. That in turn could force early filers to wait before they can file and receive much-anticipated refund checks.
Arguably the most substantial already-expired provision is the annual patch to the Alternative Minimum Tax. Current law allows an exemption from the AMT, but the amount isn't indexed for inflation. As a result, Congress has to pass a law every year that temporarily increases the exemption, but it has never been able to muster enough support to put a more permanent fix into place. The fallout from a potential failure to pass an AMT patch is huge, with millions of taxpayers possibly paying as much as $8,000 more in income taxes.
But several other provisions have already officially gotten chopped and need government action to bring them back. Among them are deductions for college tuition and other higher education, the choice to use state sales taxes as an itemized deduction, favorable treatment for charitable donations from IRAs, and deductions for teachers' school expenses.
Meanwhile, plenty of other provisions are set to change at the beginning of 2013, making up what's been well publicized as the fiscal cliff. The biggest changes are the increases of tax rates from their current bracket structure ranging from 10% to 35% to higher rates stretching from 15% to 39.6%. Special rates on dividends and capital gains are also set to expire.
But a host of other provisions are set to see big changes:
- Favorable provisions for the Earned Income Tax Credit expire, reducing the maximum credit amount for taxpayers.
- The temporary payroll tax holiday that reduced the amount of tax withheld from paychecks for Social Security by 2 percentage points is set to expire, pushing Social Security withholding back up to 6.2%.
- The child tax credit is slated to drop from $1,000 to $500.
- The contribution limits for Coverdell Education Savings Accounts will drop from $2,000 to $500, making them even less useful for college savings.
- Credits for college education and child care expenses will get reduced.
More tax reform needed
Yet beyond the immediate needs to address urgent issues are far-reaching reform ideas that the government needs to address. The link between lobbying and corporate tax benefits, for instance, disturbs many taxpayers' sense of fairness, with General Electric (NYSE:GE), Boeing (NYSE:BA), and Verizon (NYSE:VZ) among those spending big money to earn valuable tax subsidies. GE and Boeing also made a list of companies with very low effective corporate tax rates, even as GE, Oracle (NYSE:ORCL), and Cisco Systems (NASDAQ:CSCO) seek a repatriation tax holiday to bring overseas cash back into the country.
To their credit, both candidates saw the need during their campaigns for extensive tax reform proposals. Although political expediency kept details to a minimum, major changes are likely to happen in the coming months and years. Despite fears of gridlock due to a divided Congress, pressing matters like the ballooning national debt and the future of the ailing Social Security system demand a faster pace of action.
Watch and act
As the end of the year approaches, it'll be crunch time for lawmakers to move on tax provisions, especially ones that they'll need to enact retroactively. If your elected representatives, whether new or incumbent, are slow to act, take a minute and give them a push by getting in contact with them. The financial health of the nation is at stake.
Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter @DanCaplinger.