Remember Roth IRA conversion taxes
Anyone, regardless of income, can convert a traditional individual retirement account to a Roth IRA. But when that option first became available in 2010, a special feature that year allowed individuals who converted to a Roth IRA to spread the taxes due on converted amounts equally over the 2011 and 2012 tax years. That means your first Roth conversion tax bill will be included on your 2011 return filed in 2012. Make sure you have that cash on hand, and plan now for the 2012 conversion bill.
Claim your American Opportunity
The American Opportunity Tax Credit was a centerpiece of the 2009 stimulus bill. The new education tax break expanded the existing Hope Credit, providing 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.
Pay attention to Form 1099-K
If you get a Form 1099-K in 2012, don’t toss it. The new form records payments received in 2011 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 is finally taking effect for the 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.
Be ready for 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. That amount will show up on the 1099 forms you receive in 2012 for 2011 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.
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.
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 costs to you or your gift recipients.
The information offered about is intended for educational purposes only. Consult with your tax advisor before following any of the author’s advice.