Making the most of 2012 education credits

The American Opportunity credit (up to $2,500 per year per student for qualifying expenses for the first four years of postsecondary education) and the Lifetime Learning credit (up to $2,000 per tax return for postsecondary education expenses beyond the first four years) reduce taxes dollar-for-dollar. Both a credit and a tax-free Section 529 plan or Coverdell Education Savings Account distribution can be taken as long as expenses paid with the distribution aren’t used to claim the credit.
 
But income-based phaseouts apply to these credits. If you don’t qualify because your income is too high, your child might. However, you must forgo your dependency exemption ($3,800 for 2012) for the child — and the child can’t take the exemption.
 
If your family incurred postsecondary education expenses in 2012, please contact us to determine how you can make the most of these credits.

IRS makes deducting home office expenses easier

On Jan. 15, the IRS announced a new simplified home office deduction, which is available beginning with 2013 income tax returns (not the 2012 returns generally due April 15, 2013).

Normally, if your home office qualifies, you can deduct a portion of your mortgage interest, property taxes, insurance, utilities and certain other expenses. Further, you can take a deduction for the depreciation allocable to the portion of your home used for the office. You can also deduct direct expenses, such as a business-only phone line and office supplies. However, the deduction generally requires completion of a 43-line form (Form 8829), often along with complex calculations.

The new simplified deduction is $5 per square foot for up to 300 square feet of home office space. So the maximum annual deduction is $1,500. If you choose this option, you can’t deduct depreciation for this portion of your home. But you can take itemized deductions for otherwise allowable mortgage interest and property taxes without allocating them between personal and business use.

Newly revived “charitable IRA rollovers”: Time is running out for 2012 tax savings

The American Taxpayer Relief Act of 2012 (ATRA) revives for 2012 and 2013 the opportunity to make tax-free IRA distributions (up to $100,000 per year) for charitable purposes. If you’re age 70½ or older, you can make a direct contribution from your IRA to a qualified charitable organization without owing any income tax on the distribution. This “charitable IRA rollover” can be used to satisfy required minimum distributions. 

To help taxpayers take advantage of the 2012 revival, ATRA allows a charitable rollover made in January 2013 to be treated for tax purposes as if it had been made Dec. 31, 2012. And if you took an IRA distribution in December 2012 and contribute it to charity in January 2013, the “direct contribution” requirement is waived; you can contribute the distribution to a qualified charity in January 2013 and treat it as a 2012 direct contribution, provided the other requirements are met.

American Taxpayer Relief Act of 2012

On Jan. 2, Congress passed the American Tax Relief Act to address the fiscal cliff. The act makes permanent 2012 income tax rates for most taxpayers, as well as alternative minimum tax relief. It also extends many other breaks for individuals and businesses. However, the fiscal cliff deal does result in some tax increases; here are three of the most significant:


1. Payroll taxes. The act doesn't extend payroll tax relief. So taxpayers with earned income will see a Social Security tax rate increase of two percentage points in 2013.


2. Income taxes. Beginning in 2013, taxpayers with taxable income that exceeds $400,000 (singles), $425,000 (heads of households) or $450,000 (married filing jointly) will face a marginal tax rate of 39.6% (up from 35%) and a long-term capital gains rate of 20% (up from 15%).
 
3. Estate taxes. While the $5 million (indexed for inflation) estate tax exemption has been made permanent, the top estate tax rate increases from 35% to 40% beginning in 2013.

For more information about the details of the legislation, here are several good resources and articles:

Journal of Accountancy article from 1/1/13 very good, concise summary

CCH Tax Briefing 11 pages, very detailed

ATRA Extended Provisions Detailed List from our fellow BDO Alliance firm Skoda Minotti's blog

Forbes article: Fiscal Cliff Tax Deal: What Does It Mean for Small Business?

As always, feel free to contact me at 803-753-5244 or tperricelli@scottandco.com with any questions about this legislation.