CHICAGO--()--Grant Thornton LLP knows that tax season is more difficult than usual this year, with the sweeping tax changes that took effect in 2013. In response, we’ve created tax tips on what’s new for your 2012 return, what you can still do to affect your tax bill, ways to avoid filing season hassles and how to plan for 2013.
“But filing season shouldn’t just be about last year. Congress gave us scores of tax changes for 2013 that you need to plan for now, and the earlier you start, the better you’ll feel about your return this time next year.”
“It’s important to avoid filing season hassles on your 2012 return and, believe it or not, it’s not too late to lower your tax bill by contributing to an IRA,” said David Walser, managing director in Grant Thornton’s Washington National Tax Office. “But filing season shouldn’t just be about last year. Congress gave us scores of tax changes for 2013 that you need to plan for now, and the earlier you start, the better you’ll feel about your return this time next year.”
What’s new for your 2012 return?
What’s changed since this time last year? You need to know before you start your 2012 return:
- The IRS is targeting underreporting of business earnings – The IRS has launched a new compliance effort based on a recent law change that gives the IRS more information on what business owners earn each year. Banks and credit card companies must now report how much your business receives in payment card receipts to the IRS on Form 1099-K. Business owners will receive mismatch or other notices from the IRS if they underreport their gross receipts.
- Payroll tax deduction – The employee portion of the Social Security tax remained at 4.2 percent in 2012, down from the regular rate of 6.2 percent. This lower rate applied up to the Social Security wage limit of $110,100, and employers reduced withholding accordingly. If you’re self-employed, your self-employment taxes were also lowered from 15.3 to 13.3 percent on income subject to Social Security. But this reduction expired and is no longer in effect for 2013.
- Pay your IRA conversion tax – If you converted from a traditional individual retirement account (IRA) to a Roth IRA in 2010, a special provision allowed you to pay the tax on the conversion in equal installments in 2011 and 2012. Don’t forget to pay this tax on your 2012 return if you converted in 2010.
What can I do to change what goes on my 2012 return?
Even though the books closed on 2012 more than two months ago, there are still actions you can take to reduce your tax bill, such as contributing to an IRA or converting to a Roth account.
- Contribute to an IRA – You can still get an above-the-line deduction on your 2012 return by contributing to an IRA now. You can make contributions that are deductible on your 2011 return any time before the April 15, 2013, filing deadline — and even set up the account now if you don’t have one. Contribution limits for 2012 are $5,000 plus a $1,000 catch-up for those 50 and older. If you were an active participant in your employer’s retirement plan, contributions to an IRA offer deductions only at income levels below $112,000 for joint filers and $68,000 for singles.
- Reconsider a Roth IRA rollover – The $100,000 income limit on rollovers from an IRA or 401(k) to a Roth IRA disappeared in 2010. This type of rollover allows you to pay tax on the conversion in exchange for no taxes in the future (if withdrawals are made properly). Many people made conversions last year. If the value of the assets decreased, you have until your extended filing deadline to reverse the conversion. That way you may be able to perform a conversion later and pay less tax.
How do I avoid filing season hassles?
Keep these tax tips in mind when preparing this year’s return so you can avoid common filing mistakes.
- Get your charitable house in order – A charitable cash contribution must be documented to be deductible. The charity should give you a written acknowledgement of your donation before you file your return. If you claim a charitable deduction of more than $500 in donated property, you must attach Form 8283. If you are claiming a deduction of $250 or more for a car donation, you will need a contemporaneous written acknowledgement from the charity that includes a description of the car. Remember, you cannot deduct donations to individuals, social clubs, political groups or foreign organizations.
- Consider filing electronically – Filing electronically will speed up your refund and can save you from simple mistakes. Before the IRS accepts an electronic return, it checks for several common errors. The IRS gives you the chance to correct the problems before it accepts and processes your electronic return.
- Check your numbers twice – Avoid math errors and make sure to get your Social Security numbers right. IRS computers automatically match all Social Security numbers and check for simple math mistakes. If you wrote down the wrong Social Security number for one of your dependents, the IRS will disallow a deduction for the dependent, recalculate the return and usually send you a brand new tax bill. Millions of returns also generate math error notices that often come as unwelcome surprises to unsuspecting taxpayers. These problems can be a hassle to unwind.
- Don’t miss the deadline for filing an extension – The filing deadline is April 15, 2013. Don’t bury your head in the sand if you’re not going be able to file your return by then. Filing for an automatic extension with Form 4868 is painless and will spare you penalties for missing the deadline. But remember, extending the filing deadline does not extend the time for making a contribution to an IRA, and it does not extend the time for payment of any tax due. By the filing deadline, you must have paid at least 90 percent of your 2012 tax liability through withholding, estimated payments and any payment made with your extension.
What should I start thinking about for 2013?
Don’t forget about taxes as soon as you file your return. It’s the perfect time to start planning for 2013 so you’ll be in better shape at this time next year.
- Understand the 2013 tax increases – Lawmakers extended most of the Bush-era tax cuts in January, but increased taxes on high-income taxpayers. The top rate on ordinary income increases to 39.6 percent on income over $400,000 for single filers and $450,000 for joint filers. The top rate on capital gains and dividends also increases from 15 to 20 percent above these thresholds. And this doesn’t include the reinstatement of phaseouts on itemized deductions and personal exemptions, or the new Medicare taxes. Make sure you understand how these tax changes will affect your income so you can invest and plan your activities accordingly.
- Plan for new Medicare taxes – Two new Medicare taxes originally enacted as part of the 2010 health care reform bill took effect in 2013. First, the rate on the individual share of Medicare tax on earned income will increase from 1.45 to 2.45 percent for earned income exceeding $200,000 for single filers and $250,000 for joint filers. In addition, a new 3.8 percent Medicare tax will be imposed on investment income once adjusted gross income exceeds $200,000 for singles and $250,000 for joint filers. The tax applies to investment income like capital gains, dividends, interest, rents, royalties and business income if it’s from a passive activity. Estimated tax rules apply to these taxes, so make sure you understand the rules and plan accordingly.
- Expense business investments – Congress extended a provision at the last minute that allows your business to deduct half the cost of eligible equipment placed in service in 2013, while the other half will be depreciated using normal rules. To qualify for this “bonus depreciation,” the property you place in service must be new and generally have a useful life of 20 years or less under the modified accelerated cost recovery system (MACRS).
- Take advantage of gifting opportunities – Lawmakers enacted new permanent transfer tax rules in 2013, creating an estate and gift tax exemption of $5 million and a top rate of 40 percent. The exemption is adjusted for inflation and is $5.25 million in 2013. Don’t miss the opportunity to leverage these historically high exemptions and low tax rates. Interest rates are also at historic lows, making this the perfect time for many gifting strategies. These rates won’t last and have already started to tick up as the economy improves. Act now, and keep in mind that many estate planning techniques can enhance your gifts – including grantor retained annuity trusts, family limited partnerships, charitable lead trusts and sales to family trusts.
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