If there’s a mantra to live by this tax season, it’s plan for change.
The first step in getting ready for April 15 is to take stock of any life events that happened last year that could affect your return. That means thinking beyond the obvious, such as getting married or having a child, advises Mark Steber, chief tax officer at Jackson Hewitt Tax Service. Bringing in much less income because of a layoff, doing contract work on the side, starting to care for an elderly parent, or living through a natural disaster such as Superstorm Sandy – all of this can qualify you for deductions you didn’t take in previous years.
Then comes the hard part – understanding what’s changed in the tax code that may affect you. Legislators tinker constantly with tax law: The IRS reports that, on average, more than one new provision is added to the code every day (adding up to approximately 4,680 since 2001). And the fiscal cliff deal signed January 3 added dozens more rules.
To minimize what you pay the government, it’s critical to understand which provisions have been revised since you last filed (it’s why many people hire professional tax preparers). Here are nine changes affecting individual filers in the 2012 tax year.
- The AMT fix: The alternative minimum tax requires those people earning above a certain income to pay a minimum tax rate. The fiscal cliff deal that became law on January 3 created an inflation adjustment for the AMT retroactive to last year. You won’t be affected if your 2012 income is $50,600 or less for unmarried taxpayers, $78,750 for joint filers, and $39,375 for married persons filing separately. And the fix means that if you aren’t hit by the AMT this year, you won’t be in the future if your income rises no faster than inflation.
- Stricter scrutiny of charitable deductions. A tax court decision last May reinforces the importance of getting a correctly worded statement from the nonprofits you donate to about the value of any goods or services you received in exchange – and if you received nothing in return (which is often the case), the statement needs to say that. The court ruled against one taxpayer whose written declaration from the charity did not contain language about the value of goods and services received in return, says Jeanette Dugas, a partner at tax accounting firm Dugas & Dugas in Winter Haven, Florida. After the IRS disallowed the deduction, the donor got a corrected statement, but the court ruled it was too late. “The IRS will not allow the correction of such receipts after the return is filed,” says Dugas .
- More reporting of foreign assets: If you think you can escape U.S. taxes by investing in assets abroad, reconsider. Previously, taxpayers had to report to the IRS any foreign bank accounts in which they held more than $10,000 at any time during the year. New in 2012 is that stricter reporting of other assets is required – think foreign stocks, bonds, gold, and the like – on new IRS form 8938, says Steber. Those who don’t comply are taking a big risk: The penalty for not filing can reach $10,000. And the U.S. is working closely with several governments, including France, Germany, and even previously secretive Switzerland, to cross-report on assets.
- No more estimating stock value: Individual taxpayers can no longer use estimates to report the cost basis for a stock, says Dugas. “If records are not available, then the IRS will treat the stock as having zero basis and all of the proceeds from the sale will be taxable,” she says. Let’s say you bought 10 shares of a stock at $250 ($2,500 total) and sold them at $275 ($2,750 total). You’ll pay capital gains tax on your $250 profit. But if you don’t have records, the IRS will assume that your purchase price was $0 and your profit was $2,750 – so you’ll be taxed on the $2,750 instead. Ouch.
- Claims for estate tax refunds. The law allows estates to take tax deductions for costs such as funeral expenses, administrative expenses, claims against the estate, and mortgages. But most of these deductions can be taken only if the fees have been paid within three years after the estate tax return was filed (the filing deadline is 9 months after the decedent’s death) or within two years after the tax was paid, whichever comes later. The problem is that, especially with estates caught up in protracted litigation, deductible expenses might not actually be paid until long after those deadlines. Starting in 2012, the IRS has provided a formal (and complex) procedure to deal with this problem. If you’re in this situation, the key term is “Schedule PC.” (Start here for instructions – but it’s better to talk to an accountant who handles estate taxes.)
- More support for electric vehicles: If you bought a plug-in electric motorcycle or motorized trike in 2012, the fiscal cliff deal was kind to you. Congress expanded an existing tax credit worth up to $2,500 or 10 percent of the cost (whichever is smaller) of the purchase of electric cars to also cover that electric scooter or trike you splurged on last year.
- Less support for adoption: The adoption tax credit lets parents deduct costs they incur as part of the adoption process – things like adoption fees, court costs, attorney fees, and travel expenses to meet with the child. For 2012, the maximum credit went down to $12,650 (from $13,360 in 2011) and converted from a refundable to a nonrefundable credit. (A refundable credit is one in which, if the credit reduces your tax liability to lower than zero, the IRS will refund the difference. With a nonrefundable credit, the IRS doesn’t give you a refund; the lowest your taxes can go is zero.)
- Cuts to the energy-efficiency tax credit: A provision of the 2009 stimulus bill increased tax credits for homeowners who made energy-saving improvements to existing homes, like buying more efficient water heaters, furnaces, or windows. In 2011, the maximum tax credit under the program was $500, but it’s now been reduced to $300. There’s also a $500 total cap on the credit over the years. In other words, if a taxpayer previously claimed $500 worth of the credit (such as $250 in 2010 and $250 in 2011), he can’t claim it at all this year, says Gary DuBoff of Utah-based accounting firm CBIZ MHM.
- Inflation adjustments: Every year, the IRS makes allowance for inflation – raising personal exemptions and standard deductions, widening tax brackets, raising mileage rates, and others. For 2012, the standard deduction rose $300 for married couples filing jointly to $11,900; by $150 to $5,950 for singles and married individuals filing separately; and by $200 to $8,700 for heads of household. Tax-bracket thresholds also increased for each filing status: For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $70,700, up from $69,000 in 2011. And the agency pegged the mileage rate for 2012 at 55.5 cents a mile, up from 51 cents in the first half of 2011. The IRS reports on these and other adjustment here.
While you’re doing your 2012 returns, you should start thinking about 2013, says Stan Rose, senior manager of the tax division at accounting and advisory services firm Baker Newman Noyes. The first quarterly 2013 tax payment for self-employed people and businesses is due on April 15, the same day as the 2012 returns, and next year’s rules changes are numerous and significant, he says.