Question: What new tax laws should people be aware of for 2012?
Answer: In 2012 the changes were mainly due to inflation adjustments. The value of each personal exemption increased to $3,800 from $3,700 in 2011. The new standard deduction is $11,900 for married couples filing a joint return, up $300 from $11,600 in 2011; $5,950 for single people, up $150 from 2011; and $8,700 for heads of household, up $200.
For an estate of any person dying during 2012, the basic exclusion from the estate tax amount is $5,120,000. And the annual exclusion for gifts remains at $13,000.
Q: What end-of-the-year tax tips can you offer people to help reduce their taxable income on their 2012 return?
A: The best way to save on taxes would be to contribute the maximum to a 401(k) or similar plan at work. The self-employed have their own plans to set up like an SEP, 401(k) solo, and simple IRA plan. Furthermore, if you can contribute to a regular IRA or Roth, these are great tax benefits.
If Congress fails to take action as the year-end approaches, investors who are considering selling appreciated stocks in 2013 should give consideration to selling in 2012 to take advantage of the lower rate, assuming that they have held the asset for longer than one year. This year it may be advisable to pay tax on large capital gains on stock because the capital gain rates will probably go higher for the higher-income people.
For a joint return with adjusted gross income higher than $250,000, the capital gain rate and the rate on investment gain will probably go up. The capital gain rate could go to 20 percent from 15 percent, and there would be a 3.8 percent Medicare tax on net investment income. It is hard to plan for these events because we do not know what the rates will be next year yet.
You can give to charity stock that (you got at) no cost or a low cost and deduct the amount that it is worth. So if I gave 100 shares of Exxon-Mobil stock that has a zero cost to me, I can deduct on Schedule A the value of the stock on the date of the gift. If the stock is worth $8,900, I can get a deduction for $8,900 and pay no capital gain. Of course, I have to itemize my deductions on Schedule A to benefit.
Q: What are the most common errors or omissions that people make when preparing their taxes or collecting information for a tax preparer?
A: The most common errors are using incorrect Social Security numbers for dependents. Or if the dependent has already filed and claimed themselves on the tax return, then when the parents file their returns claiming the child, the return is rejected. We usually end up filing amended returns for the dependent and the parents.
Another reason for receiving a notice from the IRS or having to amend a tax return is not providing the preparer with all of the 1099 forms showing interest, dividend income, self-employment income and sale-of-stock income.
One of the most common errors is not e-filing and not having a direct deposit of any refund. There is instant feedback from the IRS on the receipt of the e-filing of a return. And the refund is faster with the direct deposit. Another error is not mailing the check and not mailing the return itself.
Q: Generally speaking, how much should people without extraordinary items expect to pay to have their taxes done by a preparer?
A: It depends on the number of forms and the number of states to file. For an itemized return, the fees would generally start at $150 for a federal and Hawaii return.
Q: Is it OK for a person to estimate income or expenses on their taxes?
A: Generally, the IRS does not accept estimates. For income, you must keep a written record of all income. For expenses, you must be able to verify that the amounts deducted are paid in the current year and backed up with a receipt of payment. If you are estimating the value of an item given to Goodwill, there are guidelines on how much you can deduct —like a percent of cost or what you could sell the item for in a garage sale.
Q: What red flags does the IRS look for on a tax return?
A: The IRS will always check W-2 forms and 1099 income to be sure it is reported on the tax return. If any income amounts are not reported on the tax return filed, then the IRS will send a bill or a letter asking why there is a difference.
The IRS will also check form 1098 (mortgage interest paid) to see if the amount deducted for interest paid matches the amount on the form. If there is no match, then they will send a bill or a letter asking why there is a difference.
We have clients receive letters from the IRS if their brokers have reported on 1099-B that there were stocks sold and then not reported on their tax returns.
Other red flags would be charitable contributions that are high, like more than $10,000. Or medical bills that exceed $10,000. Or if the mortgage interest is high and the IRS thinks that the loan balance on the mortgage is more than $1 million. You cannot deduct mortgage interest on a balance that exceeds $1 million. You can deduct the interest on a mortgage up to $1 million, but not the interest on the amount over the $1 million.
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Interviewed by Dave Segal
