After all the talk about the fiscal cliff and healthcare reform credits, you may be dreading filing your taxes even more than usual this year.
Take heart: Most of the changes won’t hit until the 2013 tax year. If you have a simple return and you only take the standard deduction (two-thirds of all taxpayers do), your 2012 taxes should be treated a lot like last year’s.
Where you might feel a difference is in how long it takes to receive your refund. When the IRS delayed the start of filing season by eight days to Jan. 30, the agency was busy updating forms and software and adjusting tax calculations for the 137 million individual tax returns it processes annually. Early-bird tax payers who look forward to that quick refund will have to wait.
And even though tax-filing season officially has opened, the IRS isn’t ready yet for all categories of taxpayers. While you can download forms now, tax payers with many special situations — such as those who have adopted a child, employ certain green energy solutions or lease property — will begin filing according to a staggered schedule throughout February and March.
Programs including Intuit Inc.’s TurboTax will let you fill out the forms now and save for later, when they can be submitted. TurboTax Vice President Bob Meigan also warns taxpayers that because there were so many changes this year to the tax code, tax payers should be sure they are using the most recent version of any tax software program.
One change that may affect you this year was adjustments in the Alternative Minimum Tax, a charge created in 1969 to make sure that the wealthy couldn’t avoid paying tax altogether. Over the years, as both salaries and expenses have increased, the AMT has crunch many middle-class tax payers; Congress has now made adjustments and pegged future taxes to inflation.
For the 2012 tax year, the first $50,600 is exempt for individuals, and joint filers can make $78,750 before the AMT applies.
The good news: Various credits and deductions were extended, including some education-related deductions. The American Opportunity Tax Credit, extended through 2017, can be worth up to $2,500 for college tuition. And teachers will still be able to deduct up to $250 of their out-of-pocket expenses for the classroom.
This year, taxpayers have the choice of deducting state and local sales taxes instead of state and local income tax — a change that could benefit Floridians, who don’t pay a state income tax.
Given the complexity, most experts argue that you need to get help this season, whether it be a software program or professional tax preparer who works in an office.
If you’re using an online software, be sure it has been updated this year; TurboTax said its software reflects all the latest changes.
The value of working with a live account comes throughout the year.
Stu Sutta, a P.A. who’s worked in South Florida for over 20 years, says you should be hiring an accountant for their expertise with money management and the law, not simply to fill out forms on April 15th. “My clients should be talking to me all year,” says Sutta.
If you’re self employed, it’s more important than ever to stay on top of your records. Anecdotally, tax pros say that the IRS is auditing more self-employed individuals who make under $200,000. Be detailed with your records on mileage, meals, cellphones. The IRS knows Schedule C is where self-employed individuals tend to make inflated claims, so you want to hang onto physical receipts, not just the cancelled checks. Write the name of the person you had the business lunch with on the receipt, along and what you discussed. Keep a mileage log year round; it’s more valuable proof than one created just for the auditor.
Other changes coming for the 2013 tax year will involve changes in long-term capital gains tax rates for high-income earners and a 3.8 percent levy on investment income for earners above $200,000 per individual and $250,000 per couple to support Medicare. Those affected will want to work with their investment advisors to minimize tax consequences.
You still have time to contribute to an IRA for 2012 but if you or your spouse also has a 401K, you may not be able to deduct the entire contribution. For those age 50 and older, you can contribute as much as $6,000. If you’re younger, the maximum contribution is $5,000. Remember contributions to a traditional IRA are fully tax deductible if you don’t have a retirement plan at work.
WINDFALL IN 2013
Well aware of the fiscal cliff, many accountants advised their clients to take gains on equities and income properties before the end of 2012. Not that clients always listened. That brings us to our next potential scenario: a windfall in 2013. What if you sell an income property in 2013 and made a sizeable profit? That income could push you into the higher tax bracket.
John G. Ebenger, a director at accounting and advisory firm, Berkowitz, Pollack, & Brant says there may be a way to create an installment payment plan so that the money made from that sale could be received by you over multiple years.
Ebenger also says the rules for passive income have changed. If you own a rental property and have a management company taking care of it, you could be hit with an extra 3.8 percent tax. To declare it as active income, you may have to manage it yourself find another tax offset — like putting more money into your retirement account.
But if do take over the rental management, you’ll need to keep track of how often you visit, repairs and upgrades. Document all of it: mileage, frequency of trips, what you did and with whom.