Get Ready to Pay Thousands of Dollars More in Taxes

Get Ready to Pay Thousands of Dollars More in Taxes In this tough economy, most people don't have a whole lot of spare money floating around. Yet unless Congress acts soon, millions of Americans are looking down the barrel at expiring tax breaks that could leave you sending thousands of dollars more to the IRS.

The biggest culprit: short-term extensions of tax breaks, many of which expired at the end of 2011.

Lawmakers have gotten in the habit of waiting until the last minute to extend many of these programs, but last year, they ran out of time. So now, you can't be sure how much your taxes will go up this year -- and unfortunately, there's no immediate relief in sight. Even worse, there's an even bigger looming deadline at the end of 2012 that could really crush your finances in future years.

Your Incredible Shrinking Paycheck

One big item at issue is the reduction in payroll taxes. Last year, employees got a 2 percentage point break in their Social Security taxes. Although Congress extended that break through Feb. 29, after that, the rate is set to go back up to 6.2% -- costing a family making $60,000 a year about $1,000 in extra taxes.

But a host of other lesser-known provisions could also have a big impact on your finances.

For example, if you live in a state with no income tax, you've been able to deduct sales tax that you pay -- but that option expired Dec. 31. So did a deduction for tuition and related educational expenses.

Another important tax break that's late in getting renewed -- assuming it does -- is the higher exemption from the dreaded alternative minimum tax. Originally envisioned as a way to capture at least some tax revenue from ultra-rich taxpayers who took advantage of other provisions to pay very little in taxes, the AMT now hits an estimated 3.8 million taxpayers. The number of people paying AMT would skyrocket by as much as 30 million if lawmakers don't get around to passing their annual "patch" in time -- and the extra tax bill could come to $8,000 for some of those taxpayers.

The Big Deadline

An even larger hit looms: At the end of 2012, a huge number of tax cuts from the early 2000s are set to expire:
  • The current 10% tax bracket would disappear, rising to 15%. That would cost even low-income taxpayers as much as $870 a year. Other brackets would also rise, creating cascades of higher tax bills as you rise up through the tax tables.
  • Several credits could also disappear or get cut. Credits for adoption expenses, child care, and the popular child tax credit are slated to fall sharply in 2013 and beyond. Because many people take these credits into account in figuring out how much tax to have withheld from their paychecks, workers could see refunds shrink or actually end up surprised to owemoney to the IRS as a result of their reduction.
  • On the investing side, lower rates that apply to some stock and mutual fund dividends are set to go away, while rates on capital gains would rise slightly. Although many see these solely as breaks for the rich, the current provisions actually allow lower-income taxpayers to pay no tax at allon dividend and capital gain income.
Will the Worst Happen?

In past years, Congress has usually gotten around to extending tax breaks eventually. Even now that 2012 has begun, lawmakers can always go back and pass laws retroactively returning those breaks effective Jan. 1.

But as we've already seen with the payroll tax cut, an election year raises the potential for grandstanding and political tactics from legislators from every political party. That makes it far from a sure thing that you'll get relief in time to save you from a big rise in your tax bill for 2012.

For more on taxes and your money: Motley Fool contributor Dan Caplinger hates big tax bills. You can follow him on Twitter here.

Getting Married: What Newlyweds Need to Know

Getting married? Have you thought about how it will impact your taxes? You may need to select a tax filing status, adjust your withholding and sell your home.

Read More

Brought to you by TurboTax.com

An Early Withdrawal From Your 401(k): Understanding the Consequences

Cashing out or taking a loan on your 401(k) are two viable options if you're in need of funds. But, before you do so, here's a few things to know about the possible impacts on your taxes of an early withdrawal from your 401(k).

Read More

Brought to you by TurboTax.com

Guide to Unemployment and Taxes

The IRS considers unemployment compensation to be taxable income—which you must report on your federal tax return. State unemployment divisions issue an IRS Form 1099-G to each individual who receives unemployment benefits during the year.

Read More

Brought to you by TurboTax.com

10 Tax Tips for Filing an Amended Return

Say you happily filed your tax return by the end of February and were the envy of all your friends, but in June you realized you forgot to include income from last summer's freelance job. Don’t worry, all you need to do is file an amended return using Form 1040X.

Read More

Brought to you by TurboTax.com
Read Full Story
Your resource on tax filing
Tax season is here! Check out the Tax Center on AOL Finance for all the tips and tools you need to maximize your return.