You Can Start Filing Tax Returns Today

Today the IRS finally starts accepting 2012 individual tax return filings.  It is January 30, 2013.

Why so late? You recall that Congress passed, and the President signed, a tax bill on January 1, 2013. This tax bill was retroactive to 2012. While the IRS tried to anticipate what would be in the bill, to do so exactly is nearly impossible. The IRS in turn separated the tax changes into two categories: those affecting the most people and the balance of the changes. It has programmed those changes with the widest effect, and this first category of taxpayers can begin filing today.

So if you claim state sales tax (because your state does not have an income tax), claim an education deduction or claim schoolteacher expenses, you can begin filing today.

What if you claim depreciation, own and rent a duplex or have a kid in college and claim an education tax credit (rather than a deduction)? You are in the second group and have to wait until late February or March. Your tax preparer can prepare your tax return, but he/she cannot send it to the IRS until then.

Here is the list of tax changes and forms included in the second category, if you wish to labor through them:

• Form 3800 General Business Credit
• Form 4136 Credit for Federal Tax Paid on Fuels
• Form 4562 Depreciation and Amortization (Including Information on Listed Property)
• Form 5074 Allocation of Individual Income Tax to Guam or the Commonwealth of the Northern Mariana Islands
• Form 5471 Information Return of U.S. Persons With Respect to Certain Foreign Corporations
• Form 5695 Residential Energy Credits
• Form 5735 American Samoa Economic Development Credit 
• Form 5884 Work Opportunity Credit
• Form 6478 Credit for Alcohol Used as Fuel
• Form 6765 Credit for Increasing Research Activities
• Form 8396 Mortgage Interest Credit
• Form 8582 Passive Activity Loss Limitations
• Form 8820 Orphan Drug Credit
• Form 8834 Qualified Plug-in Electric and Electric Vehicle Credit
• Form 8839 Qualified Adoption Expenses
• Form 8844 Empowerment Zone and Renewal Community Employment Credit
• Form 8845 Indian Employment Credit
• Form 8859 District of Columbia First-Time Homebuyer Credit
• Form 8864 Biodiesel and Renewable Diesel Fuels Credit
• Form 8874 New Markets Credits
• Form 8900 Qualified Railroad Track Maintenance Credit
• Form 8903 Domestic Production Activities Deduction
• Form 8908 Energy Efficient Home Credit
• Form 8909 Energy Efficient Appliance Credit
• Form 8910 Alternative Motor Vehicle Credit
• Form 8911 Alternative Fuel Vehicle Refueling Property Credit
• Form 8912 Credit to Holders of Tax Credit Bonds
• Form 8923 Mine Rescue Team Training Credit
• Form 8932 Credit for Employer Differential Wage Payments
• Form 8936 Qualified Plug-in Electric Drive Motor Vehicle Credit

There is some rhyme or reason to what the IRS is doing. Category two changes require more extensive programming. In addition, those tax attributes tend to appear on more complicated returns. These returns – as a rule of thumb – are prepared later in the filing season or are extended.

2012 Loophole on Age 70 ½ IRA Charity Contributions

I had a call last week on what the rules are for the 70 ½ IRA owner making a direct distribution to a charity.

You may recall that – if you are a certain age – you can make distributions – up to a limit - from an IRA directly to a charity. The age is 70 ½ and the limit is $100,000. Why would you do this? There are several reasons:

(1) The first, of course, is that you are charitably inclined and have the means to do so.

(2) Second, the distribution counts toward your minimum required distribution (MRD). You have to pull the money out anyway.

(3) Third, you get to omit the distribution from income.

(a) This doesn't increase your adjusted gross income, which could have bad side effects (such as raising your Medicare premiums).

(4) Fourth, there is no charitable deduction.

(a) Which is OK, as you leave-off both the income and the deduction. In fact, you are ahead in a state that does not allow for itemized deductions.

What is the issue here? The issue is that the IRA/charity option was one of those tax law provisions extended with the most recent tax bill - the one signed in January 2013. People may have intended to make a direct distribution to charity but did not do so, waiting for clarification on 2012 tax law.

There is a surprise in the tax bill. You can still write a check by January 31, 2013 to a charity and have it count toward 2012. Let's say that you took out $26,000 from your IRA in December and made contributions of $10,000 before year-end. You can write checks for the balance ($16,000) and recast the entire $26,000 as a direct distribution in 2012.

2013 becomes 2012? I am thinking time travel, and that makes me think of....

What if you distributed in 2012? There are two possibilities:

(1)   You distributed directly to the charity

This is the best answer. You leave both the income and deduction off your return.

(2)   You distributed to yourself

            Oh oh. There are again two possibilities:

(1)   You distributed to yourself in December

                                   

As long as you write a check to charity by January 31, the IRS will consider this a direct distribution in 2012.

(2)   You distributed to yourself before December

There is nothing you can do. You will have income and a corresponding deduction. Hopefully there will be no harm, no foul. In Ohio, however, there is harm, as Ohio does not allow for itemized deductions.

There will be yet another consideration in 2013. Remember the new ObamaCare taxes (the 0.9% Medicare and the 3.8% investment income)? Those kick-in at $200,000 or $250,000 of income, depending on whether one is single or married. Now you have a very real reason to leave that IRA distribution off your income for 2013. You DO NOT WANT your adjusted gross income to hit that $200,000 or $250,000 stripe.

What Are The New Individual Income Taxes?

Congress has given us a new tax bill – the American Taxpayer Relief Act of 2012. It was passed by the Senate at approximately 2 a.m. on January 1 and ….. Actually, that fact alone tells you about the quality of this tax bill.

Let’s take a look at some individual tax measures.

(1)   The 2% social security tax reduction is gone. Everybody with a paycheck will immediately see their take-home pay go down.

(2)   The previous tax rates of 10/15/25/28/33/35 percent still exist, but ….

a.      There is a new 39.6% tax rate.

NOTE: The new rate starts at $400,000 for singles and $450,000 for marrieds.

(3)   The qualified dividends and capital gains rates do not change UNLESS…

a.      … you make more than $400,000 for singles and $450,000 for marrieds.

b.      If this is you, your NEW qualified dividends and capital gains tax rate will be 20%.

OBSERVATION:  Let’s be fair: 20% is not a bad tax rate.

You may have noticed that the above three changes pivot on $400,000/$450,000.

QUESTION: Can we rely on this throughout the new law?  

ANSWER: Silly you. Of course not.

(4)   Phaseout of your personal exemptions

Tax pros call this the “PEP,” and it is the brilliant idea to reduce (if not eliminate) your exemptions for yourself, your spouse, your kids and anyone else – once you go past a certain income.

QUESTION: What is that income level?

ANSWER: $250,000 for singles and $300,000 for marrieds.

(5)   Phaseout of your itemized deductions

You have the same reasoning as (4), but this time we are talking about reducing your itemized deductions. These are your mortgage, real estate taxes, contributions and so on.

QUESTION: What is that income level?

ANSWER:  $250,000 for singles and $300,000 for marrieds.

(6)   Alternative Minimum tax

Congress reset the exemption amounts to $50,600 for singles and $78,750 for marrieds – about in line with 2011.

This is good news because – if Congress did nothing – the exemption amounts were scheduled to decrease drastically. This would have pulled millions more people into the AMT, even with the same income as 2011 and would have made for some stressful client conversations.

Congress has also linked the AMT exemption and phaseout levels to an inflation factor. Finally and thank goodness.

Frankly, in my opinion the AMT may be the most important thing Congress did with individual taxes in this legislation.

(7)   Coverdell IRAs

a.      Remain at $2,000 rather than reverting to $500

b.      As an FYI, these are the “education” IRAs

(8)   Employer provided education

a.      The exclusion from income is renewed at $5,250.

NOTE: This will make a Tax Guy’s wife happy as she returns for her Master’s.

(9)   Student loan interest

a.      Remains deductible up to $2,500

(10)  The American Opportunity tax credit     

a.      Is renewed up to $2,500

NOTE: Good news for a Tax Guy with a daughter in college

(11)    The $250 supplies deduction for elementary and secondary school teachers

a.      Is renewed

(12)    Mortgage debt exclusion from income

a.      Up to $2 million is renewed but for 2013 ONLY

(13)    The sales tax deduction in lieu of income tax deduction

a.      Is renewed

b.      Good news if you live in Florida, which does not have an income tax

(14)    Above-the-line deduction for higher education

a.      Up to $4,000 – if you can meet the income limits

(15)    Child credit

a.      Stays at $1,000 per child rather than dropping to $500

Let’s go back a moment to the 39.6% tax rate (income of $400,000/450,000) and the PEP/Pease (income of $250,000/300,000).  In addition to this spaghetti, there are two NEW taxes in 2013. They are NOT in this bill because they already existed and were waiting to hatch, like something in the movie Aliens. They are ADDITIONAL taxes on top of the above. They are:

(1)   If your income goes above $200,000 for singles and $250,000 for marrieds, there will be a new 3.8% tax rate on your interest, dividends, capital gains and investment income of that type. This was courtesy of ObamaCare.

(2)   If your income goes above $200,000 for singles and $250,000 for marrieds, there will be a new 0.9% tax on your salary for additional Medicare. This too is courtesy of ObamaCare.

Did you see what Congress did here? Look at the income thresholds on some of these taxes:

               $200,000/$250,000

               $250,000/$300,000

               $400,000/$450,000

Try remembering all that and doing the math in your head whenever you get a client phone call.

Notice what the “true” top federal tax rate is: 39.6% plus 3.8% plus 0.9% plus 1.2% (approximate PEP/Pease effect) equaling 45.5%. This is Congress' thing now: sneaking taxes on you through the back door.

We will go over the business tax provisions with another blog.