Do you hear it? That sigh of relief is from millions of taxpayers around the country, relieved that they don't have to file their tax returns for another year. With the tax deadline now here, many Americans are enjoying their tax refunds, putting them to use to pay bills, buy something special or add those dollars to their savings. That's the good news. The bad news? Well, this moment of elation may be short-lived.
In fact, you can probably spend the remainder of 2012 preparing for some major tax law changes expected to be passed into law later this year. If passed, these changes may be made retroactive to 2012. These changes could also delay the tax filing season, or, if no changes are made, significantly lower many taxpayer's refund amounts in the 2013 tax season. So, there is a lot to watch for over the remainder of the year.
While new issues will likely arise in the coming months, here is what we know currently -- and what taxpayers should plan for:
The Surge of the Alternative Minimum Tax
Every year a number of tax breaks expire, are retroactively reinstated, and, in many cases, few people notice. In fact, several money-saving tax breaks expired on Dec. 31, 2011, and one of those concerned the exemption amounts attached to the dreaded Alternative Minimum Tax (AMT), a feature of the tax code that is often a big and unfortunate surprise to many taxpayers.
Four million taxpayers paid AMT in 2011, and more than 31 million are expected to see their tax liabilities rise in 2012 if Congress does not extend the AMT 'patch' and make the extension retroactive to the beginning of the year. The AMT is a complex and separate tax system on top of the regular tax system. In short, this is an additional tax originally created in 1969 to target high income households that typically qualified for numerous tax benefits. These benefits allowed them to owe substantially less money under the tax code at that time. The AMT is calculated by using a separate set of rules that disallow many deductions and exemptions used in computing traditional tax liability, including state income tax or second mortgages, and because the taxable rate is not subject to inflation, over the last several decades more and more middle class taxpayers have been subject to it.
Not only will more people be subject to AMT in the 2012 year, but some common credits, including the Child and Dependent Care Credit and the Saver's Credit, will no longer be allowed against the AMT.
Additional Benefits Set to Expire
In addition to the AMT changes, there are other tax deductions and credits that expired on Dec. 31, 2011 that are no longer available to claim on a 2012 tax return. These include the:
- State and Local Sales Tax Deduction -- allowed for taxpayers who have little or no state and local income taxes when itemizing deductions;
- Educator Expense Deduction -- 250 deduction per educator for eligible K-12 educators for their out-of-pocket, un-reimbursed classroom expenses;
- Tuition and Fees Deduction -- deduction of up to 4,000 for qualified tuition and related expenses that you pay for yourself, your spouse, or a dependent;
- Non-Business Residential Property Credit -- the 500 credit for homeowners who make energy-saving and green-energy home improvement; and,
- Mortgage Insurance Premium Deduction -- the IRS allows you to treat your mortgage insurance as an additional, itemized mortgage interest deduction.
Remember the delay in the 2011 tax filing season due to late tax law passage and implementation? If Congress passes late tax law changes in 2012, or even after the end of the calendar year, the start of the 2013 tax season could be delayed. If Congress does not pass any changes, then taxes may go up for millions of Americans and that would be bad as well. Either way, we have a dynamic year of potential tax law changes to watch for, and you can be certain that tax law change proposals will come forth from various congressional factions. You can also be certain that the 2012 presidential election is likely to bog down any early agreement on tax law changes. Between the tax law changes and the political elections, it's a perfect storm for confusion.
So, what can you do?
For starters, continue to save and organize your receipts for your contributions, job-related expenses and large ticket expenses, such as home improvements or a new vehicle. You'll need these when filing a 2012 tax return.
Second, do not underestimate the complexity of the tax code. In my opinion, after nearly 30 years in the tax business, complexity is the price we pay for fairness today. If you are not 100 percent confident that you understand how any upcoming changes relate to you, invest in the time to find a knowledgeable, reliable tax resource to navigate you through a successful filing -- one that ideally involves more dollars in your pocket, if you are eligible. Start to build that relationship now, so come January 2013, it will be smooth sailing.
Finally, stay informed throughout the year. Pay attention to the news and what your elected officials are saying about taxes. This is a BIG year for elections, and taxpayers' collective votes will impact your return. While politics may not be of interest to everyone, your hard earned money is -- and the results of this year's election could impact your wallet next year.