The 2012 Compendium Of Tax Filing Tips
Fear. Dread. Anxiety. Yes, it is that time of year again as the single most hated day of the year approaches - April 15th. This year, as I do most years, I compiled a list of tax tips to help you maximize your tax filing process and, hopefully, minimize some potentially costly errors. However, this year, I have solicited the help of my dear friend Richard Rosso, who is a certified financial planner and investment manager, and Elena Voronina who holds a master's degree in financial planning and heads the financial planning department of Streettalk Advisors. There is some overlap between the three of us but overall it is a fairly comprehensive list. So, get your 1040 form out, sharpen your pencil and let's get right into it.
Commonly Asked Tax Filling Questions
1) How Do I File My Taxes?
A big change for the 2012 tax year is for those individuals with incomes of $57,000 or less who can now use "Free File" through IRS.gov. Additionally, some states are offering similar options. Electronic e-filing is available to all taxpayers, regardless of income.
If you are "old school" and prefer to mail your return addresses may have changed this year. See Where To File for a list of IRS addresses.
2) What Is My Exemption Amount?
The exemption amount for 2012 is $3800 which is up from $3,700 in 2011
3) What Is The Standard Deduction Amounts?
The standard deduction for married couples filing a joint return is $11,900 for 2012. For single individuals, or married couples filing separate returns, it is $5,950 and for heads of household it increases by $200 to $8,700 for 2012.
4) What Are The Tax Brackets For 2012?
Single Filing Status
[Tax Rate Schedule X, Internal Revenue Code section 1(c)]
- 10% on taxable income from $0 to $8,700, plus
- 15% on taxable income over $8,700 to $35,350, plus
- 25% on taxable income over $35,350 to $85,650, plus
- 28% on taxable income over $85,650 to $178,650, plus
- 33% on taxable income over $178,650 to $388,350, plus
- 35% on taxable income over $388,350.
Married Filing Jointly or Qualifying Widow(er) Filing Status
[Tax Rate Schedule Y-1, Internal Revenue Code section 1(a)]
- 10% on taxable income from $0 to $17,400, plus
- 15% on taxable income over $17,400 to $70,700, plus
- 25% on taxable income over $70,700 to $142,700, plus
- 28% on taxable income over $142,700 to $217,450, plus
- 33% on taxable income over $217,450 to $388,350, plus
- 35% on taxable income over $388,350.
Married Filing Separately Filing Status
[Tax Rate Schedule Y-2, Internal Revenue Code section 1(d)]
- 10% on taxable income from $0 to $8,700, plus
- 15% on taxable income over $8,700 to $35,350, plus
- 25% on taxable income over $35,350 to $71,350, plus
- 28% on taxable income over $71,350 to $108,725, plus
- 33% on taxable income over $108,725 to $194,175, plus
- 35% on taxable income over $194,175.
Head of Household Filing Status
[Tax Rate Schedule Z, Internal Revenue Code section 1(b)]
- 10% on taxable income from $0 to $12,400, plus
- 15% on taxable income over $12,400 to $47,350, plus
- 25% on taxable income over $47,350 to $122,300, plus
- 28% on taxable income over $122,300 to $198,050, plus
- 33% on taxable income over $198,050 to $388,350, plus
- 35% on taxable income over $388,350.
5) What Are The Estate And Non-Citizen Spousal Gift Limits?
The one big positive that came out of the "fiscal cliff" deal was increase in the estate tax exclusion limits. In 2012 the exclusion amount is $5,120,000. The exclusion for gifts to a spouse, who is not a citizen of the United States, increases to $139,000 for 2012.
6) What Are The Itemized Deductions And Personal Exemption Limits?
The itemized deduction limitation and personal exemption phase-out rules were repealed for 2011 and 2012, which means taxpayers can deduct the full amount of their itemized deductions and personal exemptions in 2012. These limitations ($250,000 for individuals and $300,000 for joint filers)will go back into effect for tax year 2013.
7) What Tax Credits Are Available To Me.
Tax credits are dollar for dollar reduction in your tax liability. Here is a listing of some of the most common.
- The Earned Income Tax Credit (EITC) - The 2012 income limit for the EITC is under $50,270 for joint filers and under $45,060 for singles and the maximum credit is $5,891. IRS Publication 596
- The Child Tax Credit is up to $1,000 for each qualifying child who was under the age of 17 at the end of 2012. This credit phases out for married couples that earn more than $110,000 and single filers who earn more than $75,000. IRS Publication 972
- The Child and Dependent Care Credit is available for care for a dependent under age 13, so that you can work or look for a job. The credit is 20% to 35% of your total child-care expenses up to $6,000. IRS Publication 503
- The Retirement Savings Contributions Credit is for individuals with incomes of up to $28,750, head of households with $43,125 and married couples with joint incomes of up to $57,500 who may qualify for a credit of up to $1,000 per person. Form 8880
- Energy and Appliance Tax Credit is a potential credit of 10%, up to $500, for the cost of any energy-efficiency improvements to your home in 2012. Energy Star items qualify for the tax deduction and use IRS Form 5695
- The American Opportunity Tax Credit: In 2013, for the 2012 tax filing year, students can claim a $2,500 "higher education tax credit" for the first four years of college. This credit is based on 100% of the first $2,000 of tuition and related expenses plus 25% of the next $2,000 of the same paid during the tax year. Phase-outs begin at $80,000 for singles and $160,000 for joint filers.
- Lifetime learning credit: The modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $104,000 for joint filers, up from $102,000, and $52,000 for singles and heads of household, up from $51,000.
- Tuition and fee deductions: Every family can deduct up to $4,000 of college tuition and fees in 2012. Phase-outs begin at a modified AGI of between $65,001 and $80,000 for singles or between $130,001 and $160,000 for joint filers at which levels the deduction is reduced to $2,000. IRS Publication 970
- Student loan interest deduction: The $2,500 maximum deduction for interest paid on student loans begins to phase out for a married taxpayers filing a joint returns at $125,000 and phases out completely at $155,000. For single taxpayers, the phase out ranges remain at the 2011 levels.
- Itemized Deductions: Mortgage interest, charitable contributions and state and local taxes, etc. If deductible expenses exceed the 2012 standard deduction limits you should itemize your deductions.
- Sales tax: You can deduct sales tax paid in 2012 if the amount was greater than the state and local income taxes you paid. See the IRS's sales tax deduction estimator
- Medical expenses: 2012 medical expenses that exceed 7.5 percent of your adjusted gross income.
- Mileage: The 2012 rates are: Business use - 55.5 cents/mile; Medical and Moving - 23 cents/mile; and Charitable use - 14 cents/mile
- Mortgage insurance deduction: Borrowers with AGI's up to $100,000 may be able to treat qualified mortgage insurance as home mortgage interest, which means that 100 percent of 2011 premiums may be deductible. The insurance contract had to be issued after 2006 and deductions are phased out in 10 percent increments for homeowners with AGI's between $100,001 and $109,000. IRS Publication 936
Elena Voronina's Tax Tips
1. Make Contributions to Retirement Accounts:
Contribution limit is $5,000 (individuals age 50 and older can make an additional contribution of $1,000).
If you are covered by a company retirement plan and your income is beneath $58,000 ($92,000 for MFJ), you can deduct your entire contribution to a Traditional IRA account. The amount of your deduction will be phased out if your modified adjusted gross income is between $58,001 and $68,000 ($92,001 and $112,000 for MFJ).
If you are not covered by any plan at work, single filers may make a full deduction regardless of their income. If only one spouse participates in an employer plan, your full contribution qualifies as a tax deduction, if your modified adjusted gross income does not exceed $173,000 (phased-out deduction if income is between $173,001 and $183,000). You may make an IRA deduction on a line 32 of your tax return.
If your modified adjusted gross income is less than $110,000 ($173,000 for married filing jointly), you can contribute $5,000 to a Roth IRA account (individuals age 50 and older can make an additional contribution of $1,000). You can make reduced contributions to your Roth account if you are a single filer and your annual income is between $110,000 and $125,000 ($173,000-$183,000 for MFJ).
If your modified AGI is above these limits, you are ineligible to contribute to a Roth IRA account.
For 2012, a maximum combined contribution an individual may make to IRA and Roth IRA account is $5,000 (plus a catch-up contribution of $1,000).Deadline for the 2012 contributions is April 1, 2013.
2. Deduct your Health Savings Account Contributions - This is line 25 on form 1040 and for 2012 the maximum contribution to HSAs is $3,100 for self-only coverage and $6,250 for family coverage. Individuals age 55 and older can make an additional $1,000 contribution per year.
3. Itemize Deductions. You can claim the following deductions on Schedule A:
Medical Expenses in excess of 7.5% of your adjusted gross income
State and local taxes
Real estate taxes that you paid on your home
Home mortgage interest
Gifts to charity. You can deduct your cash donations up to 50% of your adjusted gross income (property donations deduction is limited to 30% or 20% of your adjusted gross income). The amount of your charitable contributions in excess of these limits can be carried forward to the next year tax return.
Casualty and theft losses. In order to determine the amount of deduction, you need to reduce the amount of loss by any reimbursement, $100, and further reduce it by 10% of your adjusted gross income.
Miscellaneous deductions include tax preparation, custodial, legal and accounting fees, gambling losses (up to the amount of gambling winnings), hobby expenses (limited to hobby income), safe deposit box rental, and other expenses.
5.Claim Tax Credits:
Foreign Tax Credit (line 47, form 1040). You can claim the credit for the tax paid in the foreign country if the source of income is subject to U.S. tax. To calculate the credit, you need to multiply your U.S. tax by a ratio of your total taxable income from the source outside the U.S. over the total taxable income.
Credit for child and dependent care expenses (line 48, form 1040). You can deduct up to 20-35% of qualifying expenses limited to $3,000 per a qualifying person ($6,000 for two or more persons). In order to claim this credit, you must have earned income for the year 2012 and paid care expenses so you could work, seek employment, or be a full-time student.
Education Credits (line 49, form 1040). You can take an advantage of two educational credits:
1) American Opportunity Credit allows you to deduct up to $2,500 for the qualified education expenses per eligible student per year. The amount of deduction is phased out if your modified adjusted gross income is between $80,000 and $90,000 ($160,000 and $180,000 for MFJ);
2) Lifetime Learning Credit allows you to deduct up to $2,000 of qualified education expenses per household. The credit is phased out if your modified adjusted gross income is between $52,000 and $62,000 ($104,000 and $124,000 for MFJ).
Child tax credit (line 51, form 1040). You can deduct up to $1,000 per qualifying child if your modified adjusted gross income is less than $75,000 ($110,000 MFJ).
6.Tips for Self-Employed individuals:
Deduct a part of self-employment tax (line 27, form 1040). To calculate a self-employment tax, file schedule SE.
Deduct a contribution to your self-employed retirement plan (line 28, form 1040). For 2012, you may contribute up to $50,000 ($1,000 catch-up contribution) to a self-employed retirement plan including SEP, solo 401(k), and Keogh plans. If you have a SIMPLE plan, the maximum contribution you may make is $11,500 and a catch-up contribution of $2,500.
Claim health insurance deduction (line 29, form 1040). You may deduct the health insurance premiums you paid for yourself, your spouse, and your dependents.
Deduct work-related expenses (Schedule C). You may deduct home office, travel, education expenses, phone/internet costs, and 50% of meals and entertainment, only if these expenses incurred for business purposes.
7. File An Extension If Necessary. To request a six-month extension, you will need to file a form 4868 before April 15, 2013.
Richard Rosso - Avoiding The Common Mistakes
Not only can common errors cost you when it comes to tax-form preparation, keep in mind, the American Taxpayer Relief Act of 2012 is anything but relief. Yes, taxpayers making $400,000 or more will see the biggest impact beginning in 2013; however, there are material changes for those making $200,000 or more, too. So, what can you and your financial advisers do to lessen the impact of higher taxes? Some ideas...
First, five ways to avoid the most common or blatant errors:
1). Just Bad Math – Adding incorrectly can cause delays, letters and headaches. It happens. Use a trusted tax software program or a professional to catch simple math errors which may cause delays in refunds or even penalties.
2). Missing Information – Pull your refund into one checking account. Taxpayers may direct proceeds into multiple accounts but I’ve seen one out of five taxpayers miss or transpose bank account numbers. The easiest path is a straight line. Direct a refund into a single account and double check your routing and bank account numbers.
3). Missing Signatures & Dates. Very common. And avoidable. You must date your return, too. Filing electronically can minimize this error and tax software will take you through an e-signature procedure.
4). Missing Forms. You forgot a 1099B or W2. Make sure all forms that are required are attached securely.
5). Cost Basis Oversights. In January of 2011, the IRS required brokers to report the cost basis (what you pay) for investments. Obviously, this is a way for the government to ensure accurate reporting of gains & losses for tax collection purposes. The 1099-B Form which outlines investment sales proceeds does not include all you need for accurate filing. For example, cost basis (what you paid) for investments prior to 2011 may not be included which means you must provide this data. It’s common for filers to forget to document cost basis which is often caught by the IRS.
Overall, the most common mistakes are also the simplest to rectify. Not double-checking your returns will result in missing tax credits and delayed refunds.
The tax effects of ATRA of 2012 will be felt this year - 2013. Clearly single taxpayers with taxable income of $400,000 or more and married taxpayers filing jointly with $450,000 of taxable income or greater face a new marginal income tax bracket of 39.6%.They will also see their long-term capital gains and qualified dividends taxed at a 20% rate. Add in the new 3.8% Medicare Contribution tax for this group and capital gains, qualified dividends could be taxed at a rate of 23.8% (20% + 3.8%). These taxpayers will also face an additional .9% Hospital Insurance Tax on wages.
But they’re not the only ones.
Those married filing jointly with an adjusted gross income of $250,000 for those filing jointly; $200,000 for single taxpayers will face the same Medicare Contribution tax on net investment income along with the HI tax.
Itemized deductions will also phase out for higher wage-earners this year, too. Allowable itemized deductions are now reduced by 3% of the excess of adjusted gross income over a specified threshold amount or 80% of the otherwise allowable itemized deductions for the year. Threshold amounts are $250,000 for single filers, $300,000 for married filing jointly.
Personal exemptions are also reduced by 2% for each $2,500 by which AGI exceeds a threshold amount, too. These thresholds are the same as the thresholds for itemized deductions.
This all gets complicated. Calculating the impact of these changes is a bit out of the scope of this writing. The message though, is clear: More taxpayers than you realize are getting slammed by higher taxes. It’s best you have a tax professional on your team who is incredibly competent. That’s a given. Never underestimate the benefits of a “tax-aware” financial adviser, either.
Candidly, you can’t let taxes completely drive your investment motives. Many times investors will make financial decisions with taxes as the primary consideration; ultimately, they miss out on opportunities to take profits thus allowing the markets to ostensibly take them away. Yet, there are steps you and your adviser can take to provide some “lift” to returns.
Here are a few pragmatic ideas:
1). Become More Tax Aware. Understand how important asset placement is. For example, consider holding or purchasing those investments which spin off greater taxable income, in tax-sheltered or tax-deferred vehicles like company retirement plans, tax-deferred variable annuities, variable life insurance, and IRAs.
Real estate investment trusts, various commodity-based exchange-traded funds like GLD, mutual funds that spin off large income/capital gains distributions, taxable bonds, all can create “tax drag” if held in non-retirement brokerage accounts, especially if you’re in the 39.6% tax bracket.
2). Tax-Free & Tax-Efficient Income is More Important than Ever. Municipal bonds (those of state & local government entities), MLPs (Master Limited Partnerships), “tax-efficient” or “low turnover” mutual funds, many stock-based exchange-traded growth funds would fit the bill.
Muni bonds will hold more significance for those in higher federal income tax brackets and dealing with the Medicare Contribution tax.
3). Tax-Loss Harvesting Regains Importance. Last year it appeared “tax-gain” harvesting was on the minds of investors where many were selling long-term appreciated assets as they feared higher capital gain rates in the future. This year, your financial adviser needs to embrace the value of tax-loss harvesting, again. For those who will face an additional 3.8% tax on long-term capital gains, the third and fourth quarters could be a good time to establish a tax-loss harvesting schedule with your financial professional. Harvesting involves selling a security at a loss to offset a capital gain. Make sure to ask your advisers (tax/financial) on how to avoid the wash-sale rule.
There’s nothing you can do to minimize the .9% Hospital Insurance tax on wages and self-employment income unless you’re willing to actually earn less (some have chosen to do this).
Unfortunately, increasing salary deferrals to your company retirement plan or 401(k) won’t reduce earned income for the .9% additional tax although bolstered savings will secure a more comfortable retirement.
Overall, 2013 (and beyond) will be challenging tax years - even if you don’t earn $400-$450,000.
Ongoing relationships with well-informed financial and tax professionals should keep you ahead of the game.