There typically aren’t many moves clients can make to save taxes after the year has ended. But when Washington failed to deal with the tax portion of the December 31 fiscal cliff, a plethora of post hoc opportunities were born. The American Taxpayer Relief Act, signed into law on January 2, 2013, brought back for 2012 numerous tax breaks that had expired 367 days earlier.
As a result, clients can now itemize state and local sales tax, rather than income tax, on their 2012 returns. They may also take above-the-line deductions for college tuition (the maximum is $4,000) and for classroom expenses of up to $250 if they teach elementary or high school. But they might have to search for documentation since they weren’t expecting to deduct these items.
More than 60 million taxpayers will enjoy relief from the alternative minimum tax this filing season, thanks to the new law’s retroactive (and now permanent) AMT patch. For 2012, clients get an AMT exemption of $78,750 if they file jointly or $50,600 if they’re single.
The taxpayer relief act has revived an old rule on giving, once again allowing clients age 70 and a half or older to make tax-free payments to charity of up to $100,000 from their traditional individual retirement accounts. Because qualified charitable distributions didn’t come back on the books until after 2012 ended, Congress had to come up with the kind of tortuous rules the U.S. tax code has become famous for.
“If the client took a distribution from their traditional IRA in December 2012 and gave cash to charity in January 2013, the cash charitable gift can be treated as a direct distribution from the IRA for 2012,” says Mark Luscombe, the principal federal tax analyst at CCH Inc., a business-information source in Riverwoods, Ill.
This may be a particularly appealing strategy for clients who expect to earn more than $300,000 if filing jointly, or $250,000 if single, in 2013. For these clients, charitable contributions and certain other itemized deductions will be reduced beginning in ’13 when the taxpayer relief act brings back to life the so-called “Pease limitation,” which has been reposing in repeal since 2010.
An option for clients who made a qualified charitable distribution in January 2013 is to treat the distribution as if it were made in 2012, Luscombe adds. Details about how to report this on 2012 returns were not available as of this writing.
For business owners, breaks such as the research and development tax credit have been reinstated retroactively. And the new law allows $500,000 of Section 179 “first-year” depreciation deductions for 2012, says CPA Jodi Robinson, a managing director in the Kansas City office of accounting firm CBIZ MHM. This write-off would have been capped at $139,000 without the taxpayer relief act’s enactment.
All the after-the-last-minute changes will delay tax season for some filers, the Internal Revenue Service announced on January 8. Affected taxpayers include those claiming depreciation, general business credits or residential energy credits. Watch the “News & Events” section of www.IRS.gov for the latest announcements.
Tips For 2012
An item that could get neglected, particularly if the client has a new tax preparer, is the second half of a 2010 Roth conversion, Robinson says. Advisors must remind affected clients and their accountants to report this income.
Clients who profitably sold businesses or other property in 2012 and agreed to take payments in the future from the purchaser may want to elect out of the installment-sale rules, says CPA Mike Robbins, the director of tax at Rehmann, an accounting, consulting and wealth management firm in the Midwest and Florida. Installment-sale treatment requires some of the client’s capital gain to be taxed in future years as payments are collected, Robbins says. Trouble is, the taxes on high earners are going up starting in 2013.
The taxpayer relief act imposes a long-term gains rate of 20% on joint filers with incomes above $450,000 and single taxpayers above $400,000. The figure was only 15% in 2012.
In addition, says Robbins, a 3.8% Medicare surtax can hit some gains beginning in 2013. This will depend on the clients’ income (whether it is above $250,000 for couples or $200,000 for singles) as well as other factors.
Electing now to forgo installment-sale treatment pulls all the gain into tax-cheap 2012.
A Change Of Forms
Revisions to IRS forms can confuse client and preparer alike. One change is that mutual fund dividends containing tax-exempt interest are now shown on the client’s Form 1099-DIV. In the past, Form 1099-INT reported this income.
Employer-sponsored health-coverage costs may appear on some, but not all, of the W-2 forms clients receive.
Businesses that filed fewer than 250 W-2s last year need not report these costs on their workers’ W-2s, though they can if they wish to. When reported, the total of the employer- and employee-paid portions of health coverage appears in Box 12 with the cryptic code “DD.” The back of the client’s W-2 indicates, in bold, that the amount is not taxable. Not yet, you say?
Form 1099-B, sent by brokers to investors who sold securities during the year, continues to expand in both size and reach. There are new boxes for ticker symbols and the amount of securities sold, and the list of covered securities has grown.
Covered securities are those whose cost basis must be reported by the broker on the 1099-B, says Paul Banker, a vice president at Minnetonka, Minn.-based Convey, a tax-software firm that financial-services companies use for Form 1099 preparation. Beginning with 2012, covered securities include stock acquired in regulated investment companies, such as mutual funds and exchange-traded funds, as well as shares acquired through dividend reinvestment plans. Equities acquired in 2011 or later are also covered securities, says Banker.
Cost-basis reporting by brokers is optional when clients sell noncovered securities. That’s why certain information may not be provided for some transactions listed on the 1099-B. This omission might puzzle clients, and you can help by explaining it to them.
Banker says clients may not get their 1099s right away. He expects some brokers to request extensions beyond the February 15 deadline for furnishing the form to investors.
But you’ve got to wait for corrected 1099s anyway, says Robinson, the Kansas City CPA. “Remind your clients that corrected 1099s can come as late as early April.”