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TAX TIPS FOR 2012
Taxes Heading Higher After 2012
Most tax experts will tell you to pay no tax before its time. However, impending income tax rate changes might make 2012 the exception to that traditional tax adage. The top ordinary income tax bracket in 2012 is 35 percent of annual taxable income. If Congress doesn't act, the highest tax rate will go to 39.6 percent in 2013. So, if you're in the top tax bracket, you might want to accelerate income into 2012 and pay taxes at the lower rate. AMT, alternative minimum tax, will increase for many people in 2012 since the exemption is dropping from $74,450 to $45,000. More people will be snared by AMT than ever before. In 2011 teachers can get a $250 deduction for classroom materials for the last time.
Take advantage of some favored rates while you can. Income tax rates will remain at the lower levels of 10%, 15%, 25%, 28%, 33%, and 35% until the end of 2012. If you can shift some income to 2012, it may be taxed at a lower rate than next year. Tax rates on capital gains and dividends remain at 15% this year and then revert to 20%. Taxpayers in the 10% and 15% brackets still enjoy 0% tax on gains and dividends for 2012. You might analyze if selling assets and taking capital gains this year versus next is advantageous for you.
New Investment Brokerage Rules
Beginning with the 2011 tax year, brokers must report an asset's basis, the value that is used to determine profit when you sell, to the IRS. That amount will show up on the 1099 forms you receive in 2012 for 2011 stock transactions. Additional basis reporting will be phased in, in 2012 and 2013. You might have heard of this new requirement when your investment managers asked which type of basis reporting you preferred they use. Generally, brokers must report the sale of securities on a first-in, first-out basis unless the customer specifically identifies which securities are to be sold.
You can convert your IRA to a Roth, regardless of your income level now, but the bill is due the year you convert. You can also unconvert, or recharacterize, a Roth conversion completed in 2011 until October 15, 2012. Also you’ll be filling out a new Form 8949 for 2011’s tax return. It records your cost in investments you’ve sold. Stockbrokers and mutual funds are required to track your cost, and report that on your 1099 forms which you’ll receive soon.
Charity Update
Everyone remembers to count the monetary gifts they make to their favorite charities. But expenses incurred while doing charitable work often aren't counted on tax returns. You can't deduct the value of your time spent volunteering, but if you buy supplies for a group, the cost of that material is deductible. Similarly, if you wear a uniform in doing your good deeds, for example as a hospital volunteer or youth group leader, the costs of that apparel and any cleaning bills also can be counted as charitable donations. So can the use of your vehicle for charitable purposes, such as delivering meals to the homebound in your community or taking the Scout troop on an outing. The IRS will let you deduct that travel at 14 cents per mile.
Job Search Expenses
While college students can't deduct the costs of hunting for that new job across the country, already-employed workers can. Costs associated with looking for a new job in your present occupation, including fees for resume preparation and employment of outplacement agencies, are deductible as long as you itemize. The one downside here is that these costs, along with other miscellaneous itemized expenses, must exceed 2 percent of your adjusted gross income before they produce any tax savings.
Military Deductions
Members of the military reserve forces and National Guard who travel more than 100 miles and stay overnight for the training exercises can deduct related expenses. This includes the cost of lodging and half the cost of meals. If you drive to the training, be sure to track your miles. You can deduct them on your 2011 return at 55.5 cents per mile, along with any parking or toll fees for driving your own car. You get this deduction whether or not you itemize, but you will have to fill out Form 2106.
Child and Dependent Care Credit
Millions of parents claim the Child and Dependent Care Credit each year to help cover the costs of after-school day care while mom and dad work. But some parents overlook claiming the tax credit for child care costs during the summer. This tax break also applies to summer day camp costs. The key here is that the camp is a day-only getaway that supervises the child while the parents work. You can't claim overnight camp costs. Remember, too, the dual nature of the credit's name: child and dependent. If you have an adult dependent who needs care so that you can work, those expenses can be claimed under this tax credit.
Mortgage Refinance Points
Taxpayers who itemize deductions know how difficult it often is to reach the 7.5 percent of adjusted gross income threshold required before you can claim any medical expenses. It might be easier to clear that earnings hurdle if you look at miscellaneous medical costs. Some of these include travel expenses to and from medical treatments, insurance premiums you pay for from already-taxed income and even alcohol or drug-abuse treatments. Self-employed taxpayers who are not covered by any other employer-paid plan, for example, one carried by a spouse, can deduct 100 percent of health insurance premiums as an adjustment to income.
When you get your 2011 W-2, you might notice some new information on the form. Box 12 is where employers will report the cost of your workplace's group
FORM 1099-K
If you get a Form 1099-K in 2012, don't toss it. The new form records payments received in 2011 by credit card or through third-party networks such as PayPal. This added income reporting mechanism was created as part of the Housing Assistance Tax Act of 2008 and is finally taking effect for the 2011 tax year because of concerns that some small businesses do not report all of their income. Previously, the Internal Revenue Service had to take taxpayers' word that all income was reported because the agency didn't have access to credit card or online payment details. The Form 1099-K corrects this problem.
College Credits
The American Opportunity Tax Credit was a centerpiece of the 2009 stimulus bill. The new education tax break expanded the existing Hope Credit, providing a credit of up to $2,500 of the cost of qualified tuition and related expenses, and up to $1,000 of the credit could come back to the taxpayer as a refund. The American Opportunity Credit was originally supposed to end in 2010, but it was extended through 2012. However, this could be the credit's last year. Congress is looking for ways to cut the federal deficit and allowing tax breaks to expire is an easy way to save some dollars. If you have eligible education expenses, be sure to claim the American Opportunity Credit while you can.
Itemized Deductions
Higher income earners will keep 100% of their itemized deductions and personal exemptions for 2012. That ends in 2013 when both of those are phased out, or reduced, once more. Shifting deductions to 2012 to the extent possible may make sense.
Miscellaneous
If your business pays for a cell phone for you, neither you nor your firm is required to keep records on personal versus business use anymore, in most cases. That benefit is not considered taxable income to you either.
2012 ushers in a higher contribution amount for pensions. You can contribute a maximum of $17,000 to your employer’s 401(k) plan.
Many people are now working from home, due to changes in their job or because of technology. The home office deduction is often overlooked, and can yield a deduction for you if separate rooms, or portions of rooms, are used “regularly and exclusively” for your office or for storage.
Estate taxes will change after this year also. We now have a 35% maximum tax rate and a $5.12 million exclusion before taxes are levied. That returns to a 55% tax rate and a $1 million exclusion after 2012 unless legislation is passed.
Interesting Tax Fact: The top 1% of taxpayers in the U.S. pays 38% of the taxes, while the bottom 50% of taxpayers pay 3%, based on 2008 data. We worked until April 12th last year in order to pay all of our taxes. After that, our earnings were our own.
As you’ve noted above, many of these tax changes occur at year-end. In an election year, it’s unlikely Congress will work together to pass laws in a timely fashion. So be prepared for last-minute and even after-the-fact tax changes.
CIRCULAR 230 NOTICES:
In accordance with U.S. Treasury Circular 230, please be advised that any federal tax advice contained in this communication is not intended to constitute a COVERED OPINION and it is not intended or written to be used and cannot be used for the purpose of avoiding tax-related penalties or promoting, marketing, or recommending to another party any tax-related matters.