Every year the tax codes change and last year was no different. The real questions, as we close in on April 15th, are: What are the significant changes that will have an effect on how I prepare my returns for 2012; and, what planning should I be doing now for the current calendar year.
The biggest news, which we’re hoping our clients have heard about at this point, is 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 retained 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 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 other 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. And while taxpayers can take the deduction on Form 8917, there is a credit for education expense on Form 8863. The credits are generally better than the deduction. To view the limits and who can claim them for the American opportunity credit and lifetime learning credit, click here.

  • People who live in states where there is no income tax are allowed to deduct sales taxes they paid over the past year. Taxpayers in any state can deduct the higher of state income taxes or sales taxes paid. Taxpayers that live in a state that has an income tax can still benefit from taking the sales tax deduction, when they purchase large items such as a car.

  • 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.

  • 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.

On the other hand, certain filers will be hit a bit harder this year.

  • 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 it 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 (to a Roth IRA) and then defer the taxes. Half of those taxes were due last year, the second half this year.

  • While 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, but they are able to generally receive a better credit claimed on Form 8910. To view the qualifications and limits of that credit, click here.

And for 2013?

  • 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 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 American Opportunity Tax Credit was extended for another five years. This gives families up to a $2,500 credit on the first $4,000 spent on books, tuition and other “qualifying educational expenses” for up to four years if they have a child in college.

  • Section 179:  For tax years beginning in 2012, the IRS has set the Section 179 depreciation amount at $139,000, with the total asset purchase phase-out beginning at $560,000 and completely phasing out at $699,000.  This means that the Section 179 deduction is reduced dollar-for-dollar for every additional $1 of assets purchased, up to $699,000.  Both new and used purchases qualifies for Section 179.  The California Section 179 has a maximum amount of $25,000 and a $200,000 placed-in-service threshold.  Section 179 limits are based upon a taxpayer’s fiscal year and generally cannot exceed taxable income for the year (before the deduction). The Section 179 limit for 2012 is $500k and phased out begins at $2,000,000 and fully phases out at $2,500,000. Also, the bonus 50% depreciation on new fixed assets purchased has been extended for 2012 and 2013
  • The American Taxpayer Relief Act provides for both a retroactive reinstatement of the research tax credit for 2012 and a one-year extension of the credit through Dec. 31, 2013. The requirements and rate of the tax credit remain unchanged.