What You Must Know About 2012 Tax Challenges
2012 presidential election summons the close of all tax benefits introduced by George Bush. This would usher in an unavoidable clash because of the new tax rules, many deductions and unchanged tax rates.
It is indeed tough to prepare a perfect tax return sheet amidst changing rules and implementation of stringent penalties. Therefore in this article we are to take a look at how to tackle the most common filing challenges
Newly implemented Capital profit rules
Worried about how to calculate taxes on you invested income this year? Heres the key rule: bought stocks after Jan 1, 2011 then you are not eligible to count your cost basis or the tax exempt investment amount. Your broker will help you calculate the amount as per your preferred method. Mostly brokers send notice of FIFO; First-in and First-out which reports your selling off older shares. Before filing or tax return analyze 1099 and ask your broker to mend all errors. Talking about 1099, Roman Ciosek, wealth management assistant at HighTower’s Strata is advising customers to slow down in their tax filing process. According to Ciosek there will be a number of amendments on the 1099s. However if you have sold your earlier shares whether willingly or because your broker advised you then you cannot alter your cost-basis.
$1billion in unclaimed tax refunds
Apart from what is discussed above, everything more or less remains in place. You can jolly well counterbalance your gains with losses. While doing so first take into account the long term (considered over a year) profits on assests that incurred tax at or over 15% and balance them with your long term losses; then balance short term gains taxed as minimum income with short term losses. Having calculated the long term accounts and the short term income separately, now you are required to match your long term records to the short term report. If your loss margin is high considering deducting a little near to $3000 from your income. This way you will be able to manage all taxable amount the next year as well.
How to plan: when you proceed with tax filing you can choose to toggle between accounting ways. Your common options are “last-in”, “first-out” & “Specific share identification”.
Before using FIFO it is a better idea to select particular stocks / shares that you want to sell. This is more appropriate when you have pitched in at over-time stock selling program and have derived your biggest profit out of the initial batch. On the other hand if you have great many capital losses with which you can counterbalance your capital profits then 2012 is a good year to enjoy good number of tax benefits.
This calculation will be same when accounting for mutual funds, dividend-reinvestment plans, exchange-traded funds and 2013 bonds. If you haven’t received any mails yet from your broker’s company, then wait till you get your options to choose a particular method of calculating your tax amount. Don’t treat the paper work casually.
Filing challenge: If you have plans to finance Roth IRA for 2011, then better have it done before April 17, 2012. IRA is a tax deductible scheme which will provide you a tax concession on your investment, but will calculate taxes on withdrawal of money from this traditional plan. Roth requires you/other liable people to pay upfront taxes. This is one reason why the Roth is considered good investment idea for long-term by most tax-payers.
The changes were introduced in 2010 that everyone could convert their IRA to Roth irrespective of income group. This is indeed facilitating unless you have an exorbitant tax bill. However to calculate tax-return for 2012 you have to abide by the conversions introduced in 2011.
IRS warns of ‘dirty dozen’ tax scams
To tide over your 2010 tax payments if it took you two years then you are required to clear all due amounts this filing season 2012. The time is ticking already and you have only until the filing day to undo 2011 alterations.
How to plan: open or reinvest in IRA for 2012 and also transfer an existing IRA into Roth. Such conversion will help you trim down higher tax rate during your retirement days (than what you have to pay now). For those that were planning to go ahead with conversion plans this is the right time to take the call. If the conversion is done before the Bush tax laws expire then you won’t be required to pay more than 35% on the upturn, which by the year end can go up much higher than what is anticipated.
Home selling: Not a very good idea
Filing challenge: If you are happy to have earned much after selling off your house then wait, your profit might as well come under taxable charges. For single home sellers anything above $250,000 will be taxable. For married couples the same rule applies on a marginal amount of $500,000.
Wondering what happens if you sell your house at an under-rated price? You will be considered unlucky, simply because you can’t file for tax-return on the initial amount / cost of your residence. However if you lent your house out on a mortgage and the contract period was cut short by reconstruction/ restoration purpose then you might as well get a tax-break. Such deals are also applicable on conditions such as short-notice sale or when losing your home to foreclosure. This type of tax-breaks means liberation from paying due debts.
Should you buy a home in 2012?
How to plan: This tax-break plan closes this year 2012. So in case you want a tax break, then better not waste time.
Education tax cuts
Filing challenge: the American government though has been lenient with educational grants; however some important scholarships are schemed as tax-cut loans. Sorting these educational tax cuts is difficult. Some of the variety of schemes are the lifetime learning credit taxable over $2,000 per return, the American opportunity credit tax-free till $2,500 per undergraduate student, the tuition and fees deduction $4,000 max for a single student per family. However you can only file one application for education tax cut per year.
Get help to solve your tax doubts
According to Justine Ransome, national tax officer at Grant Thornton the American opportunity credit is the biggest money saver scheme. Taxes are sorted as per income brackets/slabs; but American Opportunity Credit provides the highest tax-cut, $180,000 for married couples and half the amount for singles.
How to plan: Bad luck the American opportunity credit expires this year but well you will have various simpler choices the following year.
Health care write-offs
Filing challenge: health care costs will be deductible at higher rates. This means that you can file for only those that surpasses 7.5% of you Adjusted Gross Income. But it seems likely that increasing medical costs can wrap the matter neat and tidy. Allison Shipley, PricewaterhouseCoopers’ principal of personal financial services opines that if a person’s income is drastically reduced and the medical expenses increases on the other hand, then the individual can produce all medical expense bills and enjoy tax-cuts.
It’s saving time:
Heres what the tax-cut expenses include: general physician and dentist’s bills , doctors prescription, medications, specs, hearing kits, wheel-chairs, patient’s transportation, consultation fees, care-giver charges and a few insurance costs.