Thanks to the American Taxpayer Relief Act of 2012 (ATRA), a slew of expiring tax breaks for individuals have been extended, many of them retroactive to Jan. 1, 2012. By taking advantage of these changes and other existing loopholes in the tax law, you can save yourself hundreds or even thousands of tax dollars on your 2012 return.
In a year in which we elected the president of the United States, 33 senators and all 465 members of the House of Representatives, the most important “ballots” may not have been filled yet.
Strategy: Make this an “election year.” The choices you make on your 2012 federal tax return can have a major impact on your overall tax liability. In fact, your tax return elections could make the difference between a sizable refund and paying more money to Uncle Sam.
Here are five prime candidates.
1. Compare in-state taxes. Instead of deducting state income tax as usual, you can elect to write off the state and local general sales taxes you paid last year if that provides a bigger deduction. This optional tax deduction expired after 2011, but was extended through 2013 by ATRA, retroactive to the 2012 tax year. The sales tax deduction is based on actual receipts or you can use a state-specific table and add in extra amounts for certain “big-ticket items” like cars and boats.
Tip: For residents of states with high, such as New York and California, you’re usually better off deducting state income taxes (plus local income tax in New York City).
2. Study tax breaks for higher education. Generally, you may claim one of the tax credits for qualified higher education expenses or an above-the-line deduction for qualified tuition and fees—but not both. Under ATRA, the popular American Opportunity Tax Credit, worth a maximum of $2,500 per student, has been extended for five years. (The maximum Lifetime Learning credit is $2,000 per taxpayer.)
Tip: Both credits and the tuition deduction phase out for high-income taxpayers.
3. Max out deductions for business property. ATRA also rescues generous six-figure write-offs under. If your small business placed qualified property in service during 2012, you can now elect to currently deduct up to $500,000 of the cost. That’s a cool half-million! The deduction phases out for costs exceeding an annual dollar amount, but the threshold for 2012 is a sky-high $2 million.
Tip: Qualified business property may also be eligible for 50% bonus depreciation. And if there’s any remainder, it’s deductible under the regular.
4. Forgo favorable capital gain treatment? Generally, you can deduct investment interest expenses up to the amount of your “net investment income” for the year. For this purpose, net investment income doesn’t include long-term capital gains.
However, you can elect to include long-term capital gains in the total—and thereby increase your investment interest deduction—if you forgo the favorable capital gains rate on your eligible gains. The maximum tax rate for long-term capital gains in 2012 is 15%. (In 2013 ATRA increases the maximum rate to 20% for certain high-income taxpayers.)
5. Go your separate ways? Despite the impact of the “marriage penalty,” a married couple will usually benefit from filing a joint tax return, but not always. In certain limited cases, you may do better overall by filing separate returns.
For instance, a married couple may save tax by filing separate returns if one spouse has a disproportionate portion of the couple’s medical and dental expenses, miscellaneous expenses or casualty losses, due to “floors” that limit these deductions.
Tip: Filing separately may cost you other tax benefits, so look at the entire tax picture.
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