Tuesday, January 22, 2013

Say goodbye to the alternative minimum tax - permanently

WASHINGTON (AP) ? Taxpayers preparing to file their 2012 returns can breathe a collective sigh of relief.

The alternative minimum tax or AMT has been patched ? permanently ? and several tax credits and deductions that technically expired at the end of 2011 were extended as part of the fiscal cliff legislation that Congress passed and President Barack Obama signed into law in January.

"It certainly puts back into place many of the tax benefits that had expired for many people," said Mark Steber, chief tax officer with Jackson Hewitt Tax Services. "The extenders will be back on people's tax returns, making their 2012 refunds larger than they would have been."

But the delay in congressional action could mean confusion for some taxpayers over what credits and deductions still exist.

That could make going it alone on tax day costly. Experts say people should seek some guidance, whether it's from a professional tax preparer, up-to-date software programs or tax guides, before filing returns.

More than 90 percent of taxpayers go to a tax preparer or use tax software to file their returns, estimated Jim Buttonow, a 20-year IRS veteran who is now vice president of products for New River Innovation, a tax technology company.

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The Internal Revenue Service will begin accepting returns Jan. 30, an eight-day delay necessitated by the late congressional action.

"We have worked hard to open tax season as soon as possible," IRS Acting Commissioner Steven T. Miller said in a statement. "This date ensures we have the time we need to update and test our processing systems."

The agency said most taxpayers ? more than 120 million households ? would be able to begin filing Jan. 30. But filing for those claiming energy credits, depreciation of property or general business credits will be delayed until late February or March.

Last year, the agency received 137 million returns.

Electronic filing increased by 6.2 percent to 113 million in 2012, an upward trend that tax experts expect to continue. Although most electronically filed returns are by tax professionals, increasing percentages of individuals are doing their own returns electronically.

Nearly 104 million people received refunds last year totaling about $283 billion. The average refund was $2,707, slightly less than the year before, according to the IRS.

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As people sit down to do their taxes this year, they'll find that the standard deduction has been adjusted higher for inflation, to $11,900 for married couples filing jointly, $8,700 for heads of households and $5,950 for single taxpayers.

About two-thirds of taxpayers claim the standard deduction, according to Barbara Weltman, an author of J.K. Lasser's Tax Guide 2013.

Each personal exemption is worth $3,800 this year, up from $3,700 in 2011. Look expansively at dependents beyond your children under 19, or 24 if in college. For example, if you're paying more than half the support for your parents and their taxable income is less than the $3,800 exemption, you might be able to claim them as dependents even if they're not living in your own home.

"If a parent's only income is Social Security, chances are little or none of the Social Security will be taxable. Otherwise, very few people would get to claim a parent," said Jackie Perlman, principal tax research analyst with H&R Block's Tax Institute.

Single taxpayers with qualified children or relatives as dependents also may be able to use head of household filing status, which is more advantageous to the taxpayer.

There also are higher mileage rate deductions ? 55.5 cents per mile if you use your car for business, 23 cents per mile for moving or medical issues and 14 cents a mile for charity.

Capital gains rates are unchanged from 2011 ? a maximum of 15 percent for assets held more than a year.

And don't forget planning for retirement. You can contribute up to $5,000 to a traditional individual retirement account ? $6,000 for people age 50 and older ? and reduce their income by that amount. If you haven't made a contribution yet, there's still time. You have until April 15, the tax filing deadline.

Be aware, however. Many deductions and credits phase out at higher incomes.

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Dozens of credits and deductions that affect 2012 taxes had been due to expire at the end of 2011, but were extended as part of the legislation that restored the Bush-era tax cuts for most taxpayers.

The measure breathed new life into deductions for state and local sales taxes and an array of education-related credits and deductions. Not to mention the lack of an AMT patch.

"There was broad bipartisan agreement it had to be fixed," Steber said.

Originally set up to make sure millionaires were paying taxes, the AMT was ensnaring increasing numbers of middle-class taxpayers. To avoid that, the tax has been adjusted for inflation every year, but the last patch expired at the end of 2011. Without a new one, Miller said in a letter to Congress last fall, about 33 million taxpayers would have to pay the AMT in 2012, up from about 4 million in 2011.

Congress, as part of the fiscal cliff bill, passed a permanent fix for the AMT. Going forward, it will be indexed according to inflation.

For 2012, the AMT exemption is $50,600 for unmarried individuals and $78,750 for joint filers.

"It's just not that they passed the threshold amount and indexed it for inflation," said Kathy Pickering, executive director of H&R Block's Tax institute. "The other nugget in there is that the nonrefundable credits are allowed."

That means filers subject to the AMT may still be able to use these credits, as long as their income doesn't exceed the phaseout limits.

The fiscal cliff bill signed by Obama also extends the $1,000 per child tax credit, the expanded earned income tax credit and the credit for adopting a child.

Several education-related credits and deductions also were extended in the legislation.

The American Opportunity Tax Credit can be worth up to $2,500 for college tuition. The credit, which can be claimed for each of the first four years of college, was extended through 2017. Elementary and secondary school teachers will still be able to deduct up to $250 of their out-of-pocket expenses for the classroom.

And taxpayers will have the choice of deducting state and local sales taxes instead of state and local income taxes. This is especially important to residents of states like Florida, which doesn't have an income tax.

Knowing what tax credits and benefits you're eligible for is key. No one wants to pay more than is required in taxes.

"You certainly want to understand the tax law," Steber said. "Look to life changes" like retirement, losing a job, getting married, having a child or an elderly parent moving in as events that can affect your taxes.

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For people in the Northeast, Superstorm Sandy certainly was a life-changing event. State officials have estimated the total damage at more than $80 billion, most of it in New York, New Jersey and Connecticut.

Tax law allows victims in federally declared disaster areas to file casualty claims in the year the incident happened or file an amended return for the previous year.

If they don't have all the material they need yet to file 2012 returns, they can amend their 2011 return now to include the casualty losses.

"It's one of the unique things about those disaster areas," Pickering said.

That's just one of the reasons people file amended returns.

Amended returns are often filed when taxpayers discover discrepancies in the income that was reported. Sometimes they receive a 1099 form late or a corrected one after they filed their returns. Or they may discover that they didn't take a deduction or credit to which they were entitled.

Some people are reluctant to file amended returns out of fear that they might be audited.

Mark Luscombe, principal tax analyst for CCH, said the IRS closely guards statistics on what type of returns invite audits.

"An amended return would not necessarily be an invitation for an audit," he said.

"It depends what's contained in there," said Greg Rosica, a partner at Ernst & Young. "If it's a very large refund it could get a different level of review."

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Online:

Internal Revenue Service: www.irs.gov

Source: http://news.yahoo.com/expiring-credits-deductions-extended-congress-165609891.html

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