What’s New for 2012

For an update on tax developments and a free download of the e-Supplement to this book, visit us online at www.jklasser.com .

Tax News for 2012

Item— Highlight—
“Extenders” legislation delayed Numerous tax breaks that expired at the end of 2011 had still not been extended to 2012 when this book went to press, with legislation on hold until Congress returns to a lame duck session following the 2012 elections.
   For individuals, affected tax breaks include the state sales tax deduction in lieu of state income taxes (16.3), above-the-line deductions for tuition/fees (33.12) and educator expenses (12.2), tax-free transfers from IRAs to charities by those age 70½ or older (8.8), the deduction for mortgage insurance premium (15.6), parity for transit passes/van pooling fringe benefits with parking benefits (3.8), the exclusion for cancelled principal residence indebtedness (11.8), and the credit for home insulation and other energy improvements (25.19). Extension legislation is likely to include many, but not all, of these personal tax breaks.
   Business tax breaks awaiting extension include the research tax credit and several employment-related credits (40.26), and first-year expensing and the 15-year recovery for leasehold, restaurant, and retail improvements (42.14).
   AMT relief will be part of the legislation. When this book went to press, Congress had not yet passed a “patch” for the 2012 AMT exemptions. Without the patch, the exemptions will drop drastically (23.1). An extension of prior law is also needed to allow all nonrefundable personal credits for 2012 to be claimed against the AMT as well as regular income tax liability (23.5).
   Assuming that extension legislation is enacted, it could be for 2012 only, or it may cover two years through 2013. See the e-Supplement at jklasser.com for a legislation update.
IRS mileage allowance The IRS standard business mileage rate for 2012 is 55.5 cents a mile (43.1).
   The rate for medical expense (17.9) and moving expense (12.3) deductions is 23 cents a mile.
   For charitable volunteers (14.4), the mileage rate is 14 cents a mile.
Self-employment tax and deduction for portion of self-employment tax; Social Security wage base For 2012, as for 2011, there is a 2% reduction in the tax rate on the employee portion of Social Security. The rate is 4.2% on wages up to $110,100, making the maximum 2012 employee Social Security liability $4,624.20 (4.2% x $110,100).
   Self-employment tax of 13.3% applies to earnings of up to $110,100 after the earnings are reduced by 7.65% on Schedule SE. The 13.3% rate equals 10.4% for Social Security (4.2% employee share and 6.2% employer share) plus 2.9% for Medicare. The 2.9% Medicare rate applies to all taxable earnings exceeding $110,100 (45.3–45.4). A deduction for the employer-equivalent portion of the self-employment tax is allowed as an above-the-line deduction on Form 1040, see 45.3–45.4.
Standard deductions The standard deduction for 2012 is (13.1) is $11,900 for married persons filing jointly or qualifying widow(er)s, $8,700 for heads of households, or $5,950 for single taxpayers or married filing separately. The additional standard deduction (13.3) for being 65 or older or blind is $1,450 if single or head of household ($2,900 if 65 and blind). If married filing jointly, the additional standard deduction is $1,150 if one spouse is 65 or older or blind, $2,300 if both spouses are at least 65 (or one is 65 and blind).
Tax rate brackets and preferential rates for capital gains/qualified dividends The 0% and 15% rates on long-term capital gains (5.3) and qualified dividends (4.2) apply through 2012 (5.3), but Congress will not decide whether to extend these rates to all or some taxpayers for 2013 until after the 2012 elections.
   The 10%, 15%, 25%, 28%, 33% and 35% brackets for 2012 ordinary income reflect an inflation adjustment (1.2).
IRA and Roth IRA contribution phaseout For 2012, the contribution limit for traditional IRAs (8.2) and Roth IRAs (8.20) remains $5,000, or $6,000 for those age 50 or older.
   The deduction limit for 2012 contributions to a traditional IRA is phased out (8.4) for active plan participants with modified AGI (MAGI) between $58,000 and $68,000 for a single person or head of household, or between $92,000 and $112,000 for married persons filing jointly. The phaseout range is $173,000-$183,000 for a spouse who is not an active plan participant and who files jointly with a spouse who is an active plan participant.
   The 2012 Roth IRA contribution limit is phased out (8.20) for a single person or head of household with MAGI between $110,000 and $125,000, and for married persons filing jointly with MAGI between $173,000 and $183,000.
Broker reporting of basis on Form 1099-B. Broker reporting of cost basis on Form 1099-B has been expanded to include sales of mutual fund shares acquired after 2011 (5.8, 32.9), as well as to sales of shares acquired after 2011 in most ETFs and DRIPs.
Bonus depreciation and first-year expensing for qualified business investments First-year expensing (42.3) is allowed for qualifying property up to a limit of $139,000, and the limit is reduced if the total cost of qualifying property placed in service during 2012 is over $560,000 (42.3). However, after the 2012 elections, Congress will consider proposals to increase the 2012 expensing limit; see the e-Supplement at jklasser.com.
   For qualified property purchased new and placed in service in 2012, bonus first-year depreciation at a rate of 50% is allowed (42.20).
Vehicle depreciation limit If a new car is placed in service in 2012 and used over 50% for business, bonus depreciation allows an $11,160 first-year depreciation limit. The limit is $3,160 if bonus depreciation is not allowed (43.4). For a light truck or van, the limit is $11,360 if bonus depreciation applies and $3,360 without the bonus (43.5). The limits are reduced for personal use.
Safe harbor rule if 100% bonus depreciation was claimed If 100% bonus depreciation was claimed to increase the first-year depreciation deduction for a vehicle placed in service after September 8, 2010, and before 2012, an IRS safe harbor must be used starting with the second year in order to claim any deductions for years two through six of the recovery period (43.5).
Alternative minimum tax (AMT) exemption for 2012 When this book went to press, Congress had not yet passed a “patch” for the 2012 AMT exemptions. Without the patch, the exemptions would drop drastically (23.1). An extension of prior law is also needed to allow all nonrefundable personal credits for 2012 to be claimed against the AMT as well as the regular tax (23.3).
   See the e-Supplment at jklasser.com for a legislation update.
Home energy credit There will not be a 2012 tax credit for energy efficient home energy improvements (storm windows, insulation, furnaces, and water heaters) unless Congress includes it in the “extenders” legislation that is expected following the 2012 elections (25.19).
Material participation tests for limited partners The IRS proposed new rules for determining whether a partner should be treated as a limited partner for purposes of applying the material participation tests under the passive loss rules (10.11).
Standards for claiming equitable innocent spouse relief New IRS equitable relief guidelines make it easier for victimized spouses to avoid liability on a joint return if they lacked financial control over the family finances or were subjected to physical or psychological abuse by the other spouse (1.9).
Reporting 50% of 2010 Roth IRA conversion If you converted a traditional IRA to a Roth IRA in 2010, and you chose on the 2010 Form 8606 to report half of the 2010 conversion income in 2011 and half in 2012, the remaining half of the conversion income must be reported as a taxable IRA distribution for 2012 (8.21).
Eligibility for saver’s credit The adjusted gross income brackets for the 10%, 20%, and 50% credits are increased for 2012. No credit is allowed when AGI reaches $28,750 for single taxpayers, $43,125 for heads of households, and $57,500 for married persons filing jointly (25.15).
Adoption credit reduced; no longer refundable The maximum adoption credit for 2012 is $12,650 (down from $13,360 in 2011) and is no longer refundable (25.13).
Higher deduction limits for long-term care premiums The maximum amount of age-based long-term care premiums that can be included as deductible medical expenses for 2012 (subject to the 7.5% of AGI floor) is $350 if you are age 40 or younger at the end of 2012; $660 for those age 41 through 50; $1,310 for those age 51 through 60; $3,500 for those age 61 through 70; and $4,370 for those over age 70 (17.15).
Repayment of first-time homebuyer credit The first-time homebuyer credit is no longer allowed. However, credits claimed in 2008 must be repaid under the 15-year schedule that began in 2010. Unless an exception applies, full repayment of a 2008 credit is required on a 2012 return if the home for which the credit was claimed was sold in 2012 or the home was no longer used as a residence. Repayment is also required for credits claimed after 2008 if the home is not used as a principal residence for at least 36 months (25.21).
Credit for certain electric vehicles no longer available The credit for electric motorcycles and qualifying three-wheel and low-speed four-wheel electric vehicles expired at the end of 2011 but an extension for certain vehicles might be included in the extenders package to be considered by Congress (25.20).
Foreign earned income and housing exclusions The maximum foreign earned income exclusion for 2012 is $95,100 (36.1). The maximum housing exclusion is generally $13,314, but the IRS may increase the exclusion for high cost localities (36.4).
Penalties for not reporting offshore accounts Taxpayers with interests in foreign bank accounts or other foreign financial accounts or assets may have to file Form TD F 90-22.1 (FBAR) or Form 8938, or possibly even both forms. Substantial penalties may apply if a required form is not filed (48.7).
Annual exclusion for gifts For 2012 gift tax purposes, the per-donee exclusion for gifts of present interests is unchanged at $13,000 (39.2).
Estate tax For 2012 gift tax and estate tax purposes, the basic exclusion amount is $5,120,000. The top tax rate remains 35% (39.4, 39.9). However, less favorable rules will apply after 2012 unless Congress enacts new legislation. See the e-Supplement at jklasser.com for an update.
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