Tax Tips for Your 2012 Return
Haven't filed your taxes yet? Chances are you fall into one of two categories: You owe the IRS money, or you've managed to find a lot of things to do before tackling the paperwork, such as regrouting the bathroom tile.
See Also: The Most-Overlooked Tax Deductions
In either case, April 15 is fast approaching, so it's time to gather your W-2s, your 1099s and the rest of your tax documents and get to work. Although dealing with the tax code remains a formidable task — the IRS's national taxpayer advocate, Nina Olson, estimates that Americans spend more than six billion hours a year preparing their taxes — not a lot changed in 2012. Unless your income rose or declined significantly, your tax rate probably remained the same as in 2011. (The new top rate for high-income taxpayers doesn't apply for 2012; it takes effect this year. And under the new tax law, you probably won't have to worry about the dreaded alternative minimum tax, unless you've had to pay it in the past. In that case, you're probably still out of luck.)
Here's what you do have to worry about: overlooking deductions, credits or other tax breaks so you end up paying more than you owe. Even worse, in your haste to meet the April 15 deadline, you're more likely to make mistakes that could get you in trouble with the IRS.
Mind the boomerang breaks. Congress resurrected several tax breaks that expired at the end of 2011. Among them: a $500 tax credit for energy-efficient home improvements, such as new windows, doors and skylights. Be advised, though, that $500 is the lifetime maximum, so if you claimed $500 in energy-efficient credits before 2012, you can't do so again. The old restrictions for specific projects remain — for example, the most you can claim for new energy-efficient windows is $200. (A separate credit that covers up to 30% of the cost of installing renewable-energy equipment, such as solar panels, has no limit and is available through 2016.)
The new law also revived the state and local sales-tax deduction for 2012 and 2013. The provision gives you the option of deducting state income taxes or state and local sales taxes. That's an easy choice for taxpayers in the nine states with no income tax. But in some instances, even taxpayers in states with an income tax could get a bigger tax break by deducting sales taxes, particularly if they made some big purchases in 2012. The IRS provides tables and an online calculator to show how much residents of various states can deduct, based on state and local tax rates. But if you bought a big-ticket item, such as a boat or a car, you can add the sales tax for that purchase to the total.
Tally up your medical bills. In general, you can't deduct unreimbursed medical expenses until they exceed 7.5% of your adjusted gross income (in 2013, this threshold will rise to 10% for taxpayers younger than 65). That dissuades a lot of people from even considering this deduction. But if you had a lot of unreimbursed medical expenses last year or your income took a hit, it's worth pulling out your receipts and adding up your expenses, says Bob Meighan, lead CPA at the American Tax & Financial Center at TurboTax. During the economic downturn, he says, “we saw many people claim the deduction because their pay was reduced or their jobs were eliminated, and they still had continuing medical bills.”
In 2010, individuals with adjusted gross income of $50,000 to $100,000 who took advantage of this tax break deducted an average of $7,312, according to tax publisher CCH. And that's after reducing out-of-pocket costs by 7.5% of their AGI.
A long list of medical and dental expenses that might not have been reimbursed by your health insurance plan or flexible spending account are deductible, including payments for doctors and dentists, hospital fees, prescription medications and medical supplies. The cost of transportation to your doctor's office is deductible; the 2012 standard mileage rate is 23 cents per mile plus the cost of parking and tolls. As you struggle to get over the 7.5% threshold, remember that you can deduct medical expenses you paid for a child younger than 27, even if he or she is not a dependent.
Use the roof over your head to lower your tax bill. Most homeowners are well aware that interest on their mortgage and the local property taxes they pay are deductible. But there are other tax breaks related to your home you may not know about.
The new law revived a provision that allows taxpayers to write off mortgage insurance premiums. Lenders typically require home buyers to pay for mortgage insurance if they put down less than 20% of the home's cost. To claim the full deduction, your 2012 adjusted gross income must be $100,000 or less. That cutoff applies whether you're single or married and file jointly; for married couples who file separately, it phases out beginning at $50,000.
If you lost your home to foreclosure in 2012, sold it for less than the balance of the loan or had the terms of your loan modified, there may be relief for you, too. Ordinarily, when a debt is forgiven, the canceled debt is considered taxable income. Through 2012, though, up to $2 million of debt discharged on a mortgage for a principal residence is tax-free. And if you were unable to complete a short sale or loan modification by December 31, don't panic: The law extended mortgage-debt forgiveness through 2013.