The basic ideas in this post come from Bob Jennings and were published November 07, 2011 on foxbusiness.com

You may not have a good idea what your income tax future will look like in 2013 if Congress fails to modify the existing tax rules. Many people have no idea what tax breaks are expiring this year and next, and how much it will cost in extra income tax.

According to Bob Jennings, the people who will be most affected are your average American family. He says their situation is a good example of the changes that will affect all of us. Here’s his example, followed by a list of tax laws scheduled to expire in 2011 and 2012.

Meet the Smiths: 26-year-olds Bill and Joan have been married for five years and have two small children. Bill is doing well and earns about $65,000 a year in sales. Joan has gone back to work and earns about $35,000 annually but child care costs $3,000. Bill owes money on his college student loans and will pay interest of about $3,000 on them in 2013.

Joan inherited some AT&T stock from her grandmother, which pays roughly $1,000 a year in dividends. Counting home mortgage interest, they have about $20,000 in itemized deductions.

According to Jennings and Foxbusiness,com, the Smiths will see a significant combined increase in income tax rates, and a tightening of tax brackets as a result of the expiration of the Bush tax cuts.  However, my comparison of the tax rate charts for 2011 and 2012 show only a marginal decrease in the income thresholds affecting the Smiths.  For example, with a joint income of $100,000, the income range for the 25% marginal tax bracket moves from $69,001 – $139,350 to $69,810 – $140,850.  That’s virtually the same tax at their income level.

However, for people making more money than the Smiths, there is a jump in the next bracket up, which goes from 33% to 36%. The next one goes up from 35% to 39.6%. This is in keeping with the administrations expressed desire to increase the tax on those making more money. I’m not sure why Jennings uses the Smiths to suggest the average American family will see a surge in income taxes if we don’t extend the Bush Tax Cuts.

Jennings goes on the say there are some things that will impact the Smith family and I’m hoping a CPA reading this blog will comment and correct me if I’m wrong.  Jennings says that Bill will lose the complete deduction of his student loan interest in 2013, costing about $840. The pair’s allowable deduction for child care will drop to $2,400 from $3,000, and they will also see their credit for children drop in half, costing another $1,000.

He says the marriage tax penalty will come back, costing them an estimated $500. The tax on their dividend income will increase to $280 from $150, adding another $130. And we are still stuck with the alternative minimum tax, which if not fixed, will add another tax as well. He implies this is all the fault of the Democrats who control the Senate. Maybe.

In summary, Jennings estimates the Smiths will owe about $3,600 more in income tax in 2013 that they did for 2011 with no change in income.  If he’s right, that will impact more than just the Smith family. Can anyone please comment on this and tell me if they agree or don’t agree.

Here is Jennings’ list of individual income tax benefits expiring on 12/31/2011:

Personal tax credits applied against income tax no longer apply

Higher alternative minimum tax exemptions revert back to extraordinarily-low thresholds

$250 school teacher expense deduction ends

Mortgage insurance premium deduction expires

State and local sales tax deductions expire

Tuition and related fees deduction end

IRA to charity tax-free transfers stop

2% Social Security tax reduction ends

Here’s his list of income tax benefits expiring on 12/31/2012

Marriage penalty equalization ends

Dividends taxed at capital gains rates removed, taxed at regular rates now

Capital gains low tax rates expires

Removal of itemized deduction phase out for higher income Americans

Removal of personal exemption phase out for higher income Americans

Child care deduction limit of $3,000 reverts to $2,400

Child credit reduces from $1,000 per child to $500 per child

Low 10% tax bracket for low income Americans is eliminated

Lower income tax rates and smaller brackets expires

Refundable adoption credit and reduced deduction

American Opportunity college education credit expires

Major reduction in earned income credits and refunds

Income tax exemption for debt forgiven on home foreclosures and repossessions

Deduction for student loan interest ends

Education IRA limit drops from $2,000 to $500