January 22, 2013

Significant changes in store for this year's tax season

The fiscal cliff deal took care of some longstanding tax hassles, and preserved key credits and deductions for most.

The Associated Press

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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 your 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.

The fiscal cliff legislation also extended tax law provisions allowing people 70½ or older to transfer tax-free up to $100,000 from their IRAs to eligible charities. If they do it by Jan. 31, they can claim the deduction on their 2012 tax returns.

Dozens of credits and deductions that impact 2012 taxes had been due to expire at the end of 2011, but were extended as part of the legislation that restored the Bush 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.

Then there is the AMT patch.

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

Originally set up to make sure millionaires were paying taxes, increasing numbers of middle-class taxpayers are now being caught up in the AMT. 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 not just 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.

Note, however, that many deductions and credits phase out at higher incomes.

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 don't have an income tax.

Be sure you know what tax credits and benefits you're eligible for. No one wants to pay more than is required.

"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 having an elderly parent move in.

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