Individual Tax Updates for 2012

n recent years, as Congress crafted new laws such as housing bills, health care reform and extended tax provisions such as the Bush-era tax cuts, lawmakers were careful to make sure that no major taxes took effect in 2012. During election years candidates do not want to explain to voters heading to the polls why they are facing added taxes.

With the election behind us it is now back to the business of taxation and the impact it will have on individuals, businesses and the economy. With tax provisions expiring and new rates looming on the horizon it is important to review your tax situation for 2012 to ensure you do not miss out on any opportunities.

Some of the areas that are slated to change are listed below.

Roth IRA conversion taxes

If you converted a Traditional IRA to a Roth IRA in 2010, and deferred the tax to 2011 and 2012 your first Roth conversion tax bill was included on your 2011 return filed in 2012. Make sure you have that cash on hand, and plan now for the 2012 conversion bill.

American Opportunity Tax Credit

The education tax break provides a credit of up to $2,500 of the cost of qualified tuition and related expenses, and up to $1,000 of the credit could come back to the taxpayer as a refund.

The American Opportunity Credit was originally supposed to end in 2010, but it was extended through 2012. However, this could be the credit’s last year. Congress is looking for ways to cut the federal deficit, and allowing tax breaks to expire is an easy way to save some dollars. If you have eligible education expenses, be sure to claim the American Opportunity Credit while you can.

Note health care info on W-2

When you get your 2012 W-2, you might notice some new information on the form. Box 12 is where employers will report the cost of your workplace’s group health insurance coverage. This amount is both the amount the business pays as well as the premiums paid via payroll deductions by the workers.

Don’t be alarmed. The amount, which will be designated by the code DD, is not included in your taxable income. It’s informational only, designed to help Uncle Sam confirm taxpayers have coverage. Under the health care reform law, the Affordable Care Act, the data will help to enforce the eventual individual coverage.

Pay attention to Form 1099-K

If you get a Form 1099-K in 2013, don’t toss it. The new form records payments received in 2012 by credit card or through third-party networks such as PayPal. This added income reporting mechanism was created as part of the Housing Assistance Tax Act of 2008 and took effect in 2011 tax year because of concerns that some small businesses do not report all of their income. Previously, the Internal Revenue Service had to take taxpayers’ word that all income was reported because the agency didn’t have access to credit card or online payment details. The 1099-K changes that.

Basis Reporting

Beginning with the 2011 tax year, brokers must report an asset’s basis, the value that is used to determine profit when you sell, to the IRS, on stocks acquired in 2011 or later. That amount will show up on the 1099 forms you receive in 2013 for 2012 stock transactions. Additional basis reporting will be phased in, in 2012 and 2013. You might have heard of this new requirement when your investment managers asked which type of basis reporting you preferred they use. Generally, brokers must report the sale of securities on a first-in, first-out basis unless the customer specifically identifies which securities are to be sold.

Accelerate income

Most tax advisors experts will tell you to pay no tax before its time. However, impending income tax rate changes might make 2012 the exception to that traditional tax adage. The top ordinary income tax bracket in 2012 is 35 percent of annual taxable income. If Congress doesn’t act, the highest tax rate will go to 39.6 percent in 2013. So, if you’re in the top tax bracket, you might want to accelerate income into 2012 and pay taxes at the lower rate.

Cash in winning stocks

Along with higher ordinary income tax rates, there’s a possibility of higher tax rates on investment income. Through 2012, the top federal capital gains tax rate is 15 percent for most taxpayers, and no tax is due from investors in the 10 percent and 15 percent tax brackets. These lower rates apply to assets held for more than a year. If you believe capital gains taxes might go up, 2012 could be a good year to lock in profits on long-term investments.

Plan for the added Medicare tax

Higher-income earners always have a few more tax considerations, and that’s true in 2012. In 2013, a new 3.8 percent Medicare tax is slated for collection on profits from the sale of investment property.This includes capital gains, dividends, interest payments and, for those who own rental property, net rental income. The tax will apply to individuals with a gross income of $200,000 or more or married couples filing jointly with a combined gross income of $250,000 or more. If you’re in the targeted income brackets, talk with your tax and investment advisers about steps you can take this year to prepare for the new tax.

Assess AMT danger

The alternative minimum tax, or AMT, is a continual tax trap for millions of middle-income taxpayers. This parallel tax system was created in 1969 to ensure wealthier taxpayers pay a minimum amount of taxes, primarily by disallowing several common deductions that are claimed under the regular tax system.

But because the AMT is not indexed for inflation, Congress must increase the income levels affected by the alternative tax.

It’s possible that tax reform in 2012 could eliminate the AMT, a longtime goal of many lawmakers. But just in case that doesn’t happen and you fear you might end up paying the alternative tax, talk with your tax adviser about ways you can limit your AMT exposure.

Give gifts

Giving to charity can help reduce an annual tax bill, but if you have a large estate, gifts also are important estate tax tools. Thanks to the resurrection of the estate tax in 2011, the unified gift tax also returned. This means you can give away $5 million during your lifetime without having to pay the 35 percent gift tax.

There’s also an annual amount to note in giving away your estate’s assets while you’re still around to get thanks. In 2012, you can give up to $13,000 each to as many individuals as you wish without any tax reporting requirements to you or your gift recipients.

Evaluate estate tax implications

Speaking of the estate tax, the inevitable meeting of death and taxes will be a hot topic in 2012. If Congress takes no action, the current $5 million estate exclusion will fall to $1 million, and the tax on estates larger than $1 million will be 55 percent on Jan. 1, 2013. If your estate will be larger than $1 million, talk with an estate tax advisor in 2012 about options to reduce any possible larger federal tax bite.