Tax-related issues took center stage in 2012. Between the drawn-out fiscal cliff negotiations, Romney’s 47% comment, the persistence of the Occupy movement, updated rules from the IRS and the presidential election, there was no shortage of tax talk. The talk becomes reality for Americans tomorrow (Jan. 30, 2013), when the IRS officially begins the 2012 tax filing season.
Here are the highlights, predictions, changes, opinions and other worthy information on the 2012 tax filing season.
Tax Revenue for 2012 Expected to Remain at Historical Low
2012 federal receipts are expected to equal 15.8% of GDP. Since 1950, only FY 2010 and 2011 brought in less revenue as a percentage of GDP. You can find all the historical US budget tables here.
Tax Compliance Costs Remain High
A CEI report on the cost of regulations calculated that last year’s tax compliance costs associated with paperwork burdens nears $300 billion – a number also cited by the Tax Foundation and GAO. The IRS Tax Payer Advocate Service (TAS) estimates total costs as closer to $163 billion – still a large sum. One number that is agreed on is time: individuals and business’ spend over 6.1 billion hours each year complying with tax-filing requirements. The TAS report puts this number in perspective: “To consume 6.1 billion hours, the ‘tax industry’ requires the equivalent of more than three million full-time workers.” Here’s another way of looking at it: If tax-related paperwork were a Fortune 500 company, where each hour spent on tax returns was equal to $20 of work, it would be fifth on the list of highest total revenues.
Given the confusion and delay with this year’s tax filing season, tax compliance costs can only be expected to rise.
Public Divided over Tax Policy Satisfaction
Well that looks promising, right? According to decades of polling by Gallup, for only the second time in 50 years, more Americans believe they are paying a fair amount in taxes then those who thought they were paying too much (47% – 46%).
In Jan. 2013, 36% of respondents were satisfied with the amount all Americans pay in federal taxes, up from 33% in 2012. However, the amount of Americans dissatisfied with tax rates and wanted a decrease also rose from 37% to 40%. Moreover, 53% of business owners said taxes were hurting their business’ a lot. Compared to 17 other national issues Gallup ran surveys on, taxation ranked as one of the areas Americans were least satisfied with, with similar approval ratings to those of immigration and energy policy. Only poverty/homelessness and the state of the economy were ranked significantly lower. Still, American’s approval of tax-rates has increased overall since the Bush-era tax cuts.
It remains to be seen how Americans will react to the tax-hikes (or cuts, depending on how you want to look at it) made by the “fiscal cliff” deal – the American Taxpayer Relief Act.
The Presidential Election and Tax Policy
The election undoubtedly shed new light on tax policy and reform, while highlighting the sharp divide between Democrats and Republicans stances on taxation. For example, in the first two debates alone the word “tax” was mentioned over 100 times. “Tax cuts” were also the 10th most searched election issue on google. Meanwhile, US House Budget Committee Chairman and vice presidential candidate Paul Ryan was the most searched for politician.
Republican presidential nominee Mitt Romney’s famous 47% comment gets the gold for being the most talked about tax topic in the 2012 election. In a secretly recorded address to campaign donors, Romney referenced the fact that 47% of Americans pay no income tax (technically 46%) and said that they were victims who would vote for Obama no matter what. The comment sparked a wave of criticism which eventually led Romney to apologize, but also a slew of news articles breaking down who pays what in taxes. See that breakdown in the graph below:
Online Sales Tax Grows Closer to Reality
In 2012, politicians made bi-partisan progress in implementing an online sales tax. A recent University of Tennessee study estimates that nearly $12 billion will be lost from potential state revenue in 2012 from failure to collect taxes on e-commerce trasactions. Total untaxed transactions amount to $23 billion, according to the Streamlined Sales Tax Governing Board. Amazon.com had been lobbying heavily against an online sales tax measure, but recently switched sides in light of a new business strategy. With bi-partisan support and corporate giants such as Wal-Mart and Amazon joining the fight, 2012 may have been the last full year for online shoppers to purchase products tax-free.
Read More: Online Sales Tax: Fair, but not fun
Filing Season Delayed for Second Time in Three Years
Due to last minute negotiations on the “fiscal cliff” deal, the IRS pushed back its processing date for returns by 8 days to Jan. 30th. They did the same thing in 2011, also as a result of congressional inaction. If you thought that meant the filing deadline would be extended, think again – it’s still April 15. Some filers will have to wait even longer, as the IRS has not yet provided forms for residential energy credits, depreciation and amortization and the general business credit.
E-filing on the Rise
The IRS revealed that over 80% of Americans filed their tax returns online. The switch to online filing is expected to increase again for the 2012 season. With the delayed processing date, the IRS recommends filing electronically to speed up refunds. E-filing refunds may be issued in as little as 10 days, compared to a minimum of 3-weeks for paper returns. All taxpayers can file for free by using the IRS e-file program. On Jan. 30, the IRS will launch the “Where’s my Refund” online tracking system, where taxpayers can check the status of their refund.
Social Security Tax Rate Up
Social security is a payroll tax that is automatically taken out of your paycheck, so you shouldn’t have to worry about this when filing your return. Still, it’s worth noting that in February, 2012 (following a 2-month extension of the break) the Social Security returned to its previous rate of 6.2%
Many Tax Benefits Increased due to Inflation Adjustments
In Oct., 2012 the IRS announced that personal exemption and standard deduction rates will rise, while income bracket thresholds will widen. On its website, the IRS highlighted the following changes:
- The value of each personal and dependent exemption, available to most taxpayers, is $3,800, up $100 from 2011.
- The new standard deduction is $11,900 for married couples filing a joint return, up $300, $5,950 for singles and married individuals filing separately, up $150, and $8,700 for heads of household, up $200. Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.
- Tax-bracket thresholds increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $70,700, up from $69,000 in 2011.
California hits Millionaires Hard on Taxes
The tax-hikes for earners making over $400,00 (filing individually) or $450,000 (filing jointly) will not take effect until the 2013 filing season. In California though, high income earners took a hit when voters passed Proposition 30. The legislation creates four new upper-income brackets for earners making over $200,000 / $250,000, with millionaires taking on the biggest hike with a top state tax rate of 13.3%. This led pro-golfer and California resident Phil Mickelsen to consider leaving the state and ending his golf career.
AMT Receives Permanent Patch, Adjusted for Inflation
Tax specialists have been noting the ineffectiveness of the Alternative Minimum Tax (AMT) legislation for years. The “fiscal cliff” deal made changes to the AMT threshold limits permanent and indexed for inflation, retroactive to 2012. This is good news since failure to fix the AMT would have resulted in a tax hike on as many as 30 million Americans.
More Americans Eligible for the Earned Income Tax Credit
The IRS estimates that 20% of the 26.5 million Americans eligible for the earned income tax credit (EITC) will not take advantage of it. To alleviate this information gap, the IRS launched an awareness campaign on the EITC on Jan. 25 to help spread the word. IRS commissioner Steven Miller says that, “this year, millions of workers could qualify for EITC for the first time, and the IRS urges them not to overlook this valuable credit.” Click here to learn more.
Celebrities with Tax Problems in 2012
Charlie Sheen gave Lindsey Lohan $100,000 to help her pay back-taxes. Lance Armstrong ran into some tricky issues with his personal taxes, and his cancer awareness non-profit, Livestrong, is allegedly under investigation by the IRS (See: Lance’s next Battle? Jousting with the IRS). Lauryn Hill owes over $1.5 million to the IRS. The list of celebrities with tax problems continued to grow in 2012.
In many ways outlined above, the 2012 tax filing season is unique, but most major changes won’t take place until the 2013 season. There are still a lot of questions as to how the changes from the American Taxpayer Relief Act, Obamacare, and upcoming second round of “fiscal cliff” negotiations wil pan out, but as Benjamin Franklin said, “nothing is certain but death and taxes.”
JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.