While much of Washington is consumed by the debate over tax increases scheduled to take effect next year, big tax hikes already have gone into effect for millions of families and businesses this year.
More than 70 tax breaks enjoyed by individuals and businesses expired at the end of 2011. If Congress doesn't extend them retroactively back to the beginning of this year, a typical middle-class family could face a $4,000 tax increase when it files its 2012 return in the spring, according to an analysis by H&R Block, the tax preparing giant.
At the same time, businesses could lose dozens of tax breaks they have enjoyed for years, including generous credits for investing in research and development, write-offs for restaurants and retail stores that expand or upgrade and tax breaks for financial companies with overseas subsidiaries.
Lawmakers in both political parties say they expect to address this year's tax increases as part of a deal to avoid the "fiscal cliff" of automatic tax hikes and spending cuts scheduled to take effect next year. But as talks drag on, they are reluctant to deal separately with the 2012 tax increases because that would reduce pressure to reach a broader budget agreement.
Even if Congress does act, last-minute changes to federal tax laws could make it difficult for taxpayers to figure out their 2012 tax bills.
"We're really expecting this upcoming tax season to be one of the more challenging ones on record," said Kathy Pickering, executive director of The Tax Institute at H&R Block. "For your 2012 returns there's so much confusion about what will be impacted."
The biggest tax increase facing individuals for this year is the alternative minimum tax, or AMT. The tax was enacted in 1969 to ensure that wealthy people couldn't use tax breaks to avoid paying any federal taxes. The AMT, however, was never adjusted for inflation, so Congress routinely does that to keep it from imposing hefty tax increases on millions of middle-income families.
Congress last adjusted the AMT in 2010, and about 4 million taxpayers paid it in 2011. Without a new adjustment for the 2012 tax year, the AMT would reach an additional 28 million taxpayers, increasing their tax bill by an average of $3,700.
Other expired tax breaks include deductions for college expenses, deductions for state and local sales taxes, and a $250 deduction for teachers who buy classroom supplies with their own money. The sales tax deduction is geared toward taxpayers in states without state income taxes: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.
The tax increases could vary greatly, depending on how much money a person makes and which deductions that person qualifies for. For example, a single man making $65,000 who paid $6,000 in college tuition and fees would get a tax increase of $837, mainly because he would lose a deduction for college expenses, according to the H&R Block analysis.
A married couple with two young children and a $100,000 income could face a tax increase of more than $6,600 if they live in a state that doesn't have a state income tax. Most of that increase — about $4,015 — would come from the AMT. The AMT would also reduce their tax credits and they would lose a deduction for paying state and local sales taxes.