Taxmageddon has become one of the big buzzwords of summer: It describes the fact that the Bush-era tax cuts are set to expire at the end of the year, which means tax increases for all--unless Congress acts. That means Americans can expect to pay more by way of increased income taxes across all tax brackets, lower tax credits (including for dependent care), and new Affordable Care Act taxes.
While "taxmageddon" sounds like political hyperbole to stir up emotions around election time, tax experts say it's real, and it's coming. "Congress will likely act to prevent disaster, but we probably won't have an answer anytime soon," says Barbara Weltman, author of J.K. Lasser's 1001 Deductions and Tax Breaks. She adds that Congress is now on vacation, and when it returns, it will also be busy with other hot topics, including the election itself.
"Nearly every taxpayer will be impacted by higher taxes and significant changes when they file their 2012 and 2013 tax returns," says Mark A. Steber, chief tax officer of Jackson Hewitt Tax Service. On average, U.S. households will pay an additional $3,800 in 2013 as a result of the changes. That's why Steber, along with other tax experts, suggest preparing for the likely changes now, months before they are expected to go into effect. Here are five of their top tips:
1. Check how you will be affected by the changes.
Expected tax increases depend on where you live, what tax credits you currently take advantage of, and how much you earn, among other factors. The Heritage Foundation offers a state-by-state and demographic-by-demographic explainer on the changes, which projects baby boomers, for example, will face a $4,223 average tax increase, while that number will be $1,099 for Millennials and $857 for retirees.
Checking on the details of the tax changes can also reveal whether or not you'll be affected by the loss of certain deductions, including the Educator Expense deduction, tuition and fees deduction, and sales tax deduction. The Alternative Minimum Tax will also likely affect more Americans, and the so-called marriage penalty, which largely affects married couple earning similar amounts, will also be more noticeable.
Predicting your own tax increases can make it easier to prepare by adjusting spending and saving habits in advance to lower the chance of a shocker on April 15.
2. Don't withhold too much, or too little.
Adjusting your withholding to avoid a massive refund check, as well as coming up short, can help ensure a stable income throughout the year, instead of ebbs and flows when it comes time to settle up with Uncle Sam. Anyone undergoing a major life event, including marriage or the birth of a child, should take extra care to check their withholding, because those big changes can also affect your tax rate.
3. Take advantage of all available deductions.
Home offices, car expenses, business-related meals--all can be legitimate deductions if recorded and filed correctly. Taxpayers can also minimize their tax bill by ensuring they use the least expensive filing status. Married people, for example, might find that filing separately reduces their tax bill.
4. Put away more for retirement.
Jackson Hewitt points out that putting money into a tax-advantaged retirement account, such as a 401(k), can help reduce your overall tax burden, while also boosting retirement savings. In 2012, taxpayers can put up to $17,000 in a 401(k) plan or $22,500 for those age 50 and over. (Lower-income taxpayers might also qualify for tax credits.)
5. Save up for your tax bill.
If your research reveals that you'll likely be on the hook for a bigger tax bill in 2013--and barring any changes, almost all Americans will be--then you probably want to consider adjusting your budget now. For the average tax increase per household of $3,800, that means spending about $320 less a month.
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