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Keeping Your Balance: The election is over — so, now what?

Mark J. Kovaleski

Even in the vast compound of temples, peaceful gardens and picturesque waterfalls, newly re-elected President Obama could not escape the fiscal cliff that looms back home. On his recent trip to Bangkok, the president was heard joking with Secretary of State Hillary Rodham Clinton that, “We’re working on this budget. We’re going to need a lot of prayers for that.”

The president remarked that he believes in prayers. Well, he better have a few good ones in mind because next year American individuals and businesses are facing numerous tax changes.

For starters, the tax rates on ordinary income are set to go up for everyone. Unless Congress acts to extend the lower rates that are now in effect, the 10 percent bracket becomes 15 percent, and the top of the scale for Mitt Romney, Donald Trump and their friends moves from 35 percent to 39.6 percent.

A multitude of other tax breaks have expired or are scheduled to expire on Dec. 31. Here’s some information on some of the more important unresolved or expired tax issues along with some predictions on what might happen:

The Payroll Tax Holiday

In 2012, the Social Security tax applies to the first $110,100 of wages or self-employment income. This tax rate was reduced by 2 percent. The maximum savings for an individual, assuming they are earning $110,100 or more, is $2,202. A working couple could save up to $4,404. This Reduced Social Security Tax Rate is scheduled to expire Dec. 31.

What might happen to this tax break is anyone’s guess. One school of thought is that the payroll tax holiday might be extended through 2013 in an effort to keep more cash in the hands of consumers that they can then spend to help spur on the struggling economy.

Reduced long-term capital gains rates

The 2012 maximum federal income tax rate on long-term capital gains is 15 percent. Unless Congress decides to extend the current rates, this provision expires on Dec. 31,  and the long-term capital gains rate will increase to 20 percent.

An exception will apply to most long-term gains from investments acquired after Dec. 31, 2000, and held for more than five years. These gains will be taxed at 18 percent. Similar to the Payroll Tax Holiday, the existing rates could be extended if lawmakers believe it will help the economic landscape.

Reduced dividend rate

It might be time to say good-bye to the reduced dividend rate. Unless Congress acts, the current maximum tax rate on qualified dividends of 15 percent will increase. How much you ask? That depends on your individual tax bracket, because dividends will now be taxed as ordinary income. As mentioned above, the highest federal income tax rate could be as high as 39.6 percent.

Alternative minimum tax patch

At the last minute every year, Congress puts on its red Santa suit and flies down the chimney to leave the AMT patch under our collective Christmas tree. The patch prevents millions of households from the pain of this add-on tax. Historically the patch provides bigger AMT exemptions and allows various personal tax credits to offset the AMT. The last patch expired Dec. 31, 2011, but it is likely that a new patch will be installed for 2012.

Option to deduct state and local sales taxes

This option may be beneficial if a taxpayer lives in a state with no personal income tax or a very low state income tax rate. Since most, if not all readers are New York state residents, skip to the next item!

Favorable child credit rules

The maximum credit for an eligible child under age 17 is currently $1,000. For 2013, this credit is scheduled to be reduced to $500. In addition, the current rules for calculating the refunded portion of the credit will also expire, and as you probably can guess, will now be more stringent. There is hope that the current rules will be extended through 2013.

The above tax breaks all relate to individuals, but unfortunately, businesses also face tremendous uncertainty as a host of business tax breaks have also expired or are scheduled to expire at the end of the year.

Research and development credit

This long-standing break for qualifying research and development costs like wages, supplies and other R&D expenses expired at the end of 2011. Since 1981, this credit has expired and has been retroactively restated multiple times. Hopefully that holds true again this year.

100 percent first-year bonus depreciation

Business taxpayers could write off the entire cost of purchasing qualifying new assets in the first year. This tax break expired Dec. 31, 2011, and it does not look hopeful that it will be reinstated for 2013.

Liberalized section 179 deductions

In 2011, eligible small- and medium-sized businesses could write-off up to $500,000 of qualifying new and used assets and up to $250,000 of qualifying real estate improvements.

In 2012, the way the law currently stands, the maximum section 179 deduction for new and used assets is $139,000 and no deduction is allowed for real estate improvements.

For 2013, the maximum section 179 deduction is scheduled to be only $25,000. Odds are that there will be a substantial increase in the proposed future section 179 deduction but the real estate improvement provision will not be added back in to the mix.

What will happen with all these tax breaks? Congress might pass laws to bring back some of these breaks. Some might expire. The true hope is to find bipartisan agreement to extend vital individual and business tax breaks to revive the struggling economy. Bipartisan agreement — I hope we all believe in prayers.

Mark J. Kovaleski, CPA, is a partner with Mengel, Metzger, Barr & Co. LLP. He can be reached at