Tax issues to watch after Presidential Election

These personal tax matters and Tax issues to watch after Presidential Election could see changes in 2013, depending on who wins the White House.

Whatever happens in the election on Nov. 6, the next Congress and president will face a heaping helping of unfinished tax business. Here’s the second part of our two-part story on the most important unresolved personal tax issues — along with some fearless predictions.

Child Tax Credit

Starting next year, the maximum credit for each eligible under-age-17 child is scheduled to drop from the current $1,000 to only $500.

Prediction: The current deal will be extended through at least 2013.

Earned Income Tax Credit 

Legislation enacted in previous years increased the earned-income credit for families with three or more qualifying children and allowed married joint-filing couples to earn more without having their credits reduced. These changes, which help lower-income families, are scheduled to expire at year-end.

Prediction: The current more-generous rules will be extended through at least 2013.

Child-Care Tax Credit

Under the current rules, most parents can claim a credit of up to $600 for costs to care for one under-age-13 child, or up to $1,200 for costs to care for two or more under-age-13 kids, so the parents can work. Lower-income parents can claim larger credits of up to $1,050 and $2,100, respectively. Next year, the maximum credits are scheduled to drop to $480 and $960 for most parents; $720 and $1,440 for lower-income parents.

Prediction: The current more-generous rules will be extended through at least 2013.

Higher-Education Tax Credit

Next year, the American Opportunity credit, which can be worth up to $2,500 and can be claimed for four years of undergraduate education, is scheduled to be replaced by the less-generous Hope Scholarship credit. The Hope credit is smaller, it can only be claimed for the first two years of college, and it has stricter phaseout rules that can reduce or eliminate the credit as your income goes up.

Prediction: The more-generous American Opportunity credit will be extended through at least 2013.

Higher-Education Tuition Deduction

This write-off, which can amount to as much as $4,000 or $2,000 for higher-income folks, expired at the end of 2011.

Prediction: The deduction will be retroactively restored for 2012 and probably extended through at least 2013.

Student Loan Interest Deduction

This write-off, which can be as much as $2,500 (whether you itemize or not) is scheduled to fall under less-favorable rules in 2013. There will be a 60-month limit on deductible interest (there’s no limit right now), and a stricter phaseout provision will reduce or eliminate the deduction for many more middle-income taxpayers.

Starting next year, the maximum annual contribution to these federal-income-tax-free college savings accounts is scheduled to drop from the current $2,000 to a paltry $500, and a stricter contribution phaseout rule will apply.

Prediction: The current more taxpayer-friendly rules will get extended through at least 2013. Otherwise, going after this break won’t be worth the trouble.

Employer Educational Assistance Plans

Currently, employers can provide up to $5,250 in annual federal-income-tax-free educational assistance payments to an eligible employee. College and graduate school costs can be covered, and the education need not be job-related. This taxpayer-friendly deal will expire at year-end unless Congress extends it.

Prediction: It’ll be extended through at least 2013.

Option to Deduct State and Local Sales Taxes

From 2004 to 2011, individuals who paid little or no state income taxes were given the option of instead claiming an itemized deduction for state and local sales taxes. The option expired at the end of 2011.

Prediction: The option will be retroactively reinstated for 2012 and, I hope, extended through at least 2013.

Tax Breaks for Adoptive Parents

The Bush tax cut package included a major liberalization of the adoption tax credit and also established tax-free employer adoption-assistance payments. The current taxpayer-friendly rules are scheduled to expire at year-end. The credit would be halved and limited to special needs children only. Tax-free adoption-assistance payments from employers would disappear.

Prediction: The current taxpayer-friendly rules will be extended through at least 2013.

Charitable Donations From IRAs

For 2011, IRA owners who had reached age 70½ by Dec. 31 were allowed to make charitable donations of up to $100,000 directly out of their IRAs. The donations counted as IRA required minimum distributions. So, charitably inclined seniors with more IRA money than they needed could reduce their taxes by arranging for IRA donations to take the place of taxable required minimum distributions. This break expired at the end of 2011.

Prediction: It may be too late to bring the IRA donation deal back for 2012. In any case, there’s a good chance it will be resurrected for the 2013.

Tax-Free Treatment for Forgiven Principal Residence Mortgage Debt

For federal income tax purposes, a forgiven debt generally counts as taxable cancellation of debt (COD) income. However a temporary exception applies to COD income from canceled mortgage debt that was used to acquire a principal residence. Under the temporary rule, up to $2 million of COD income from principal residence acquisition debt that is canceled in 2007-12 is treated as a tax-free item. This super-generous provision is scheduled to expire at year-end.

Prediction: I doubt this deal will be extended in its current form, but a less-generous exception for smaller amounts of post-2012 forgiven principal residence mortgage debt might get through the new Congress.

$250 Deduction for Teachers’ School Expenses

For the past few years, teachers and other personnel at K-12 schools could deduct up to $250 of school-related expenses they paid for out of their own pockets — whether they itemized or not. This break expired at the end of 2011.

Prediction: The deduction will be retroactively restored for 2012.

$500 Energy-Efficient Home Improvement Credit

For 2011, taxpayers could claim a tax credit of up to $500 for certain energy-saving improvements to a principal residence. This break expired at the end of 2011.

Prediction: This one is probably gone for good.