After a year of federal budget crisis deadlines and headlines, the one financial deadline that most Americans actually understand is approaching—April 15, or as it’s known, Tax Day.
As you tackle your 2012 federal income tax return, you might actually uncover a few surprises. Some deductions and exemptions increased, a few that had expired were reinstated, and Congress patched the alternative minimum tax (AMT) not just for 2012, but for the foreseeable future.
Here are some key points and useful tips to keep in mind as you tackle your 2012 tax returns.
Last-minute moves to consider
There's still time to potentially lower your tax bill for 2012 by contributing to a traditional IRA, a SEP-IRA if you’re self-employed, or a Health Savings Account (HSA). Provided you qualify, you can make your tax-deductible contribution to these accounts right up until the filing deadline, April 15. Don’t forget to specify that your contribution is for the 2012 tax year.
The 2012 contribution limits are:
- IRA — $5,000 if you’re under age 50, $6,000 if you were 50 or older by December 31, 2012.
- SEP-IRA — The lesser of 20% of your 2012 compensation if you are self-employed, 25% for other employees, or $50,000.
- HSA — $3,100 for individuals, $6,250 for families ($1,000 catch-up contribution if you were 55 or older by December 31, 2012).
You also can contribute to a 2012 Roth IRA up to the filing deadline, but keep in mind that you won’t get a tax deduction. The benefit of a Roth IRA comes when you can withdraw the money tax free in retirement, provided certain conditions are met.
Deduction, exemption, and bracket increases
In the category of “every little bit helps,” the personal exemption for you and each of your dependents increased $100 for 2012, to $3,800. Also, the standard deduction for taxpayers who choose not to itemize increased to $5,950 for single filers, up $150, and to $11,900 for joint filers, up $300.
The marginal tax brackets also shifted upward, which could shave a bit off your tax bill. For example, the upper limit of the 25% bracket for singles increased to $85,650, up $2,050, while the same bracket for joint filers went to $142,700, up $3,350. So if you were single with taxable income of $65,000, you would owe $95 less in 2012 than in 2011; and if you were married filing jointly with taxable income of $100,000, your tax would be $190 less.
The AMT is a separate method for calculating the taxes you owe that was originally designed to prevent wealthy taxpayers from piling up deductions to avoid paying federal income tax. Over the years, however, the AMT affected a growing number of average taxpayers, and Congress had enacted an annual “patch” to lessen its impact.
Again in 2012, Congress waited until almost the last minute to enact the patch, but then it went a step further by making it permanent and indexing it to inflation. For 2012, the AMT exemption will be $50,600 for unmarried individuals, $78,750 for married couples filing jointly, and $39,375 for married taxpayers filing separately. That’s good news because the patch will reduce the number of taxpayers affected by the AMT in 2012 to 4 million, from a previously projected 32 million, according to the Tax Policy Center of the Urban Institute and Brookings Institution.
New and extended deductions
Taking advantage of all the deductions you’re entitled to is a good idea, but keeping track of them isn’t always easy. For example, a couple of valuable tax breaks were buried in the 157-page “fiscal cliff” legislation—the American Tax Relief Act of 2012—that Congress passed on New Year's Eve.
One is the nonbusiness energy property tax credit, which is a fancy way of saying you get to subtract up to $500 from your tax bill if you make qualified energy-saving improvements to your home—including energy-efficient windows and doors. The credit had expired at the end of 2011, but the fiscal cliff legislation reinstated it for the 2012 and 2013 tax years. The $500 limit is a lifetime limit, not an annual limit, so if you’ve already claimed $500 in past years, you cannot claim $500 in 2012. See IRS Form 5695, Residential Energy Credits.
Another is a provision that retroactively allows workers to set aside up to $240 per month in pretax income to pay for using public transportation to get to work in 2012 (increasing to $245 in 2013), provided their employer offered such a plan. The amount for 2012 would have been $125 per month without the provision. Claiming the full deduction for 2012 could be complicated, however, so you may want to consult a tax professional.
For teachers, the fiscal cliff deal extended for 2012 and 2013 the educator expense deduction of $250 for out-of-pocket money they spend on classroom supplies, materials, books, and software. If you’re self-employed, don’t overlook a provision (not in the fiscal cliff deal) that allows you to deduct the full amount of health insurance premiums—not just for you, but also for your spouse and dependents. Even better, the Affordable Care Act of 2010 allows you to deduct the cost of health insurance for nondependent children under age 27.
For those giving to charity from their IRAs, the IRA charitable rollover provision was extended retroactively for 2012, and into 2013. If you are over age 70½, you can make tax-free distributions of up to $100,000 from your IRAs directly to qualified charities. If you made a qualified charitable distribution from an IRA in January 2013, you can treat it as if made in 2012. Also, if you took a distribution from an IRA in December 2012 to contribute that amount to a charity, it can count as an eligible charitable rollover.
Roth IRA conversion reminder
Although it might feel like a long time ago, if you took advantage of a one-time opportunity in 2010 to convert a traditional IRA to a Roth IRA and postpone payment of the resulting tax bill until 2011 and 2012, the second half of that tax liability is now due.
Also, maybe you were among the taxpayers who chose to convert a traditional IRA to a Roth IRA in 2012 out of concern that Congress would increase tax rates in 2013 and beyond, thereby increasing the tax bite resulting from a conversion. The fiscal cliff deal did indeed raise rates for high-income taxpayers, increasing the ordinary income tax rate for taxable income above $400,000 for individuals and $450,000 for couples. If the upshot of all this is that it may not have been the right time to convert to a Roth IRA—maybe because the investments in the account lost value (and therefore the cost to convert would be lower now) or your 2012 tax bill is going to be bigger than you expected—you might want to consider converting it back, a process known as recharacterization. In most cases, you have until October 15 of this year to do the recharacterization and refile your tax return.
If you’re a mutual fund or stock investor, you may have noticed changes in the 2012 Form 1099-B sent to you by Fidelity. Specifically, brokers are now required by federal law to include the cost basis for “covered securities” on the forms and report that information to the IRS. It is important to note that your tax reporting obligations have not changed. The change has been in the information that broker-dealers and mutual fund companies are required to report to the IRS.
All in all, paying your taxes for 2012 will probably not be as difficult as it might have been without the fiscal cliff legislation.
An important reminder: Congress enacted tax increases for 2013, mostly for high-income taxpayers. The sooner you understand what they are and how they affect you, the more effectively you can shape your tax strategies for the current year. (Read Viewpoints: Taxpayers guide to 2013).