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Informed Investor: Few changes when filing 2012 income taxes

The American Taxpayer Relief Act of 2012 retained several tax deductions that expired as of Dec. 31, 2011. This week’s “Informed Investor” discusses these renewed deductions and changes in IRS forms, and looks at some filing instructions and tips for employees as they prepare their 2012 federal income tax returns due April 16.

The American Taxpayer Relief Act of 2012—signed into law Jan. 2, 2013—retained for 2012 several tax credits and deductions that had expired as of Dec. 31, 2011. As a result, most federal employees with the same amount of income and deductions during 2012 compared to 2011 should most likely not see any significant increase in their 2012 federal tax liabilities. This column discusses three important deductions renewed for 2012 and some changes to tax filing forms.

For employees who had the same amount of taxable income in 2012 compared to 2011, their "marginal" tax brackets—the tax rate they pay on the "last dollar" of income they earn—also should not change. But as a percentage of their total income, their "effective" tax rate is less than their "marginal" tax rate.

The following tax deductions were renewed for 2012: (1) the state and local sales tax deduction included as part of one’s itemized deductions; for residents of states with no state and local income taxes but with state and local sales taxes—this includes Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming—this is a benefit; (2) an adjustment to income deduction for college tuition and fees paid during 2012. Maximum deduction is $4,000; but this deduction may be unavailable or reduced for individuals with adjusted gross incomes exceeding $80,000; (3) dor individuals who are teachers in elementary or secondary schools, amounts paid for classroom expenses such as books may be deducted as an adjustment to income. Maximum deduction is $250.

Additionally, more than 60 million individuals will enjoy relief from the alternative minimum tax (AMT) this filing season, a result of this year’s tax law's retroactive and permanent AMT patch.

Some tips when preparing 2012 tax returns

 For those individuals who converted traditional IRAs to Roth IRAs during 2010 and who elected at that time to pay the tax due on conversion in equal installments during 2011 and 2012, the second installment is due with the filing of 2012 income taxes. This is particularly important for individuals who are using a different tax professional to prepare their 2012 tax returns. The new preparer may not be aware of the fact that a Roth IRA conversion was performed during 2010 and the two-year installment option is being used to pay the tax due.

 Individuals who sold investment properties such as rental homes or apartments during 2012 and who opted for the installment sale purchase with the buyer may want to elect out of the installment sale rules before the filing deadline and pay the entire tax due when they file their 2012 taxes. This is because installment sale treatment requires that some of the seller’s capital gain income be taxed in future years as payments are collected from the purchaser. The problem is that the capital gain tax rate may increase in future years.

 The American Taxpayer Relief Act of 2012 imposes a long-term capital gain tax rate of 20 percent on married individuals filing jointly with taxable incomes above $450,000 and single individuals with taxable incomes over $400,000. The capital gains tax rate during 2012 was 15 percent. In addition, a 3.8 percent Medicare surtax will be imposed on net investment income—this includes capital gain income—starting on Jan. 1, 2013, for individuals with modified adjusted gross incomes exceeding $250,000 (married filing jointly) and $200,000 (single). The 3.8 percent Medicare surtax is in addition to the other tax paid on investment income.

Some changes to IRS forms

 There have been some changes to IRS forms for 2012. One change is that mutual fund dividends containing tax-exempt interest are now shown on an individual’s Form 1099-DIV. Before 2012, this tax-exempt interest income was reported on Form 1099-INT.

 The cost of government-sponsored health insurance coverage offered through the Federal Employees Health Benefits (FEHB) program is reported on an employee’s W-2 in Box 12. The total of the federal government’s premium contributions are the employee portion of FEHB premiums appears in Box 12 with the cryptic code “DD”. Note that on the back of an employee’s W-2 there is an explanation that the amount reported in Box 12 is nontaxable income.

 Form 1099-B which is sent by brokerages to investors who sold securities such as stocks and bonds, continues to expand in size. There are new boxes for ticker symbols and the amount of securities sold and the list of “covered” securities has expanded for 2012. Starting in 2012, covered securities include stock acquired in regulated investment companies such as mutual funds and exchanges—traded funds and stock shares acquired through dividend reinvestment plans. Equities acquired in 2011 or later are also covered securities.

 1099-B's do not have to be sent to individuals until Feb. 15. Many brokerages are requesting extensions for furnishing the form to investors. Investors should also beware that brokerages may correct their 1099-B’s after sending them out. Individual investors are therefore encouraged to hold off filing their taxes until they receive corrected 1099-Bs from their brokerages. Corrected 1099s could be mailed as late as early April, two weeks before the filing deadline.

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