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There are many tax breaks that are expected to expire in 2013, unless Congress reauthorizes the provisions. If not, this would mean that most taxpayers would experience much higher tax bills and lower refunds.

So what’s changing?

  • Higher Taxes:
    • Increased Tax Brackets: each tax bracket we see now will go back to the rate it was in 2001. The 10% bracket will fall into the 15%; the current 20% tax bracket will become 28%; 28% becomes 31%; 33% becomes 36%, and the top tax bracket jumps from 35% to 39.6%.
    • Increased Payroll Taxes: the 2% tax cut, given for employees, was only extended to 2012. In 2013, we will see that rate go back up to 6.2%.
  • Lower Credits:
    • Lower Child Tax Credit: this credit, available to most families with children under 17, will be cut from $1,000 per child to $500 per child. Also, it will no longer to refundable and will not offset AMT.
    • Lower Dependent Care Credit: The limit on eligible expenses for the dependent care credit for one child will decrease from $3,000 in 2012 to $2,400 and from $6,000 to $4,800 for two or more children.
    • Lower Adoption Credits: the adoption credit will soon only be available for adoptions of children with special needs. In 2012 the maximum expense amount allowable to be claimed is $12,650; 2013 this will drop to $6,000.
  • Lesser credits for Students:
    • Expiring American Opportunity Tax Credit: this credit will go back to being the Hope Scholarship Credit. The maximum credit amount will be lowered; it will no longer be refundable and most importantly will only be available for a student’s first two years of school.
    • Lowered Student Loan Interest Deduction: the current deduction permitted for up to $2,500 of student loan interest paid will be diminished for most taxpayers. It will only be available for the first 60 months of loan payments.
  • Fewer Credits for Low Income Tax Payers:
    • Decreased Earned Income Tax Credit: the higher percentage currently given to taxpayers with three or more children will end.   Also, the helpful adjustment for married couples will no longer be available.
    • Mortgage Forgiveness Relief Ends: taxpayers have been able to exclude from taxable income the amount of debt forgiveness related to their principal residence. This provision that was helpful to taxpayers that lost their homes due to foreclosures ends in 2012.

Considering that 2012 is an election year, it is difficult for Congress to make a final decision on how to handle all of these expiring tax provisions. As a result it is very challenging to predict what will happen and how to plan for the 2013 tax season for both taxpayers and tax professionals.