This article was last updated on December 27
With 2011 drawing to a close, a number of popular and widely leveraged tax breaks are set to expire. A number of these may be extended into 2012, but with Congress in seemingly continual gridlock you can never know for sure. The best thing to do is plan as if the tax breaks will expire; and if they do get extended, consider it a bonus.
Social Security Payroll Tax Cut
For 2010 and 2011, the employee’s share of the Social Security tax deducted from their pay checks, was reduced by 2%, to 4.2% (10.4% for self-employed) under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Based on the social security wage base limit of $106,800, this was a tax break worth up to $2,135.
2012 Prediction: In his latest Jobs stimulus plan, President Obama has proposed extending and increasing the social security tax cut by another 1.1% for employees in 2012 to 3.1%. He has also proposed that businesses get the same 3.1% reduction on payroll taxes as employees for the first $5 million of their payroll. The full 6.2 percent employer contribution would be waived on the first $50 million net increase in a company’s payroll.
$500 Energy-Efficient Home Improvement Tax Credit
This year you could have claimed a tax credit of up to $500 for certain energy-saving improvements to your principal residence. But in 2012, like the previous energy related stimulus tax credits, you will likely have to say goodbye to this green tax break.
Alternative Minimum Tax (AMT)
Every year, for the last 30 years, Congress has “patched” alternative minimum tax rules by allowing larger exemptions/tax credits to prevent millions more households from being subject to AMT. Given the impact and history of the AMT it is a near certainty that a new patch will be approved for 2012.
Higher Education Tuition Deduction
Full-time or part-time students can write-off up to $4,000 for tuition and mandatory enrollment fees in 2011. This is in addition to the American Opportunity Tax Credit (AOTC), which is available through 2012, that allows parents and students to receive a tax credit of up to $2,500 for college expenses, based on certain income limits.
2012 Prediction: The higher education tax credit is highly likely to be extended through 2012.
State and Local Sales Taxes Deduction
For 2011, you have the option to claim an itemized deduction for general state and local sales taxes instead of claiming an itemized deduction for state and local income taxes. This option can be beneficial if your state has no personal income tax or you pay a very low state income tax rate. This deduction is highly likely to be extended through 2012.
Charitable Donations from IRAs
Under special provisions that have been extended a number of times, older owners of individual retirement accounts (IRAs) have a different way to give to charity. An IRA owner, age 70½ or over, can directly transfer tax-free up to $100,000 per year to an eligible charity. These charitable donations count as IRA required minimum distributions. So, charitably inclined seniors with more IRA money than they need can reduce taxes by arranging for IRA donations to take the place of taxable required minimum distributions.
2012 Prediction: More likely than not to be extended through 2012, even though it mainly benefits wealthier families.
Deduction for Teachers’ School Expenses
Teachers and other personnel at K-12 schools can take a $250 tax deduction for classroom supplies that they buy out of their own pockets, whether they itemize or not. This tax break is scheduled to expire at the end of 2011, but is highly likely to be extended through 2012.