What You Need to Know As Tax Time Rolls Around

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Every year the tax code changes, at least slightly, and last year was no exception. Here are the most significant recent developments that should figure into your thinking as you prepare your 2012 tax returns and begin to think about tax planning for the current calendar year. 

The biggest tax-related news affecting filers today was the passage of the American Taxpayer Relief Act at the beginning of this year. In addition to changing how the Alternative Minimum Tax is calculated on 2012 taxes, it preserved the status quo for a number of temporary tax breaks, extending some retroactively and others into the 2013 tax year.

Marginal tax brackets also rose a little bit, so even if you made a couple thousand dollars more last year, you’ll probably owe the same percentage as you did last year.

Deductions for 2012

The standard deduction for those who don’t itemize rose by $150 for single filers and $300 for joint filers — to $5,950 if you’re filing solo and $11,900 if you’re filing with your spouse. And the amount you get to deduct for both you and your dependents increased by $100 to $3,800.

In addition, several specific deductions were added, increased, or preserved:

  • Joint filers who earn up to $130,000 can get a deduction of up to $4,000 on qualifying college tuition and fees; those who earn up to $160,000 can deduct up to $2,000.
  • People who live in states where there is no income tax are allowed to deduct sales taxes they paid over the past year.
  • Homeowners paying private mortgage insurance may deduct the amount of those payments on their 2012 taxes. Because this is a two-year extension, PMI can be deducted when tax time rolls around next year, too.
  • Teachers: A deduction of up to $250 in out-of-pocket classroom expenses expired — but was retroactively extended for filing year 2012.
  • Business travelers who pay their own way may be able to deduct the cost of hotel stays, provided that their lodging expenses meet certain criteria. “For example, an employer may require its employees to stay at a local hotel for the bona fide purpose of facilitating training or team building,” the IRS says.

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On the other hand, certain filers will be hit a bit harder this year, notes Jeffrey Pretsfelder, a senior tax analyst at Thomson Reuters.

  • The adoption credit fell from $13,360 to $12,650 for 2012. The credit also is no longer refundable, so you won’t get the extra back if you don’t owe any taxes. But you can carry the credit forward and apply it to your 2013 taxes.
  • In 2010, Congress declared a one-time deal that let people roll over or convert IRA funds and then defer the taxes. Half of those taxes were due last year, the second half this year.
  • People who bought electric cars can no longer claim the “qualified plug-in vehicle credit” of 10% of the cost of the vehicle, up to a maximum of $2,500.

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What to Look for in 2013

Several recent changes will come into play around this time next year, when you file your 2013 taxes, says Bob Meighan, lead CPA at TurboTax’s American Tax & Financial Center.

  • If you had a home sold in a short sale or foreclosed on, you won’t have to pay taxes on the debt your lender forgave, thanks to an extension of the Mortgage Forgiveness Debt Relief Act. (It was supposed to expire at the end of 2012.) The exemption of mortgage debt only applies to a person’s primary residence, not summer homes or investment properties.
  • The Child Tax Credit, which gives families up to $1,000 per child, was extended for another five years. A temporary extension the Earned Income Tax Credit that helped larger families was extended for another five years. Now, families with three or more kids may be eligible for a larger credit (the amount varies based on household income as well as how many children a family has.)
  • The American Opportunity Tax Credit was extended it for another five years. This break, which was introduced in 2009, gives families up to a $2,500 credit on the first $4,000 spent on tuition, books and other “qualifying educational expenses” for up to four years if they have a kid in college.