Every year seems to bring new headaches when filing taxes, with some deductions expiring and others being added. The changes help keep accountants employed.
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Whether you're hiring a professional or doing your taxes yourself -- either on paper or through a computer program -- it's a good idea to know about the tax code changes so you can claim everything you're entitled to and get your tax refund fast.
The Bush tax cuts, for example, expire at the end of this year, making filing taxes this year relatively easy when compared with all of the changes coming next year. Here are some of the changes to be aware of and how they'll affect your tax filings for the 2011 tax year:
The expiration of the Bush tax cuts could lead to higher tax rates next year, so converting an old IRA to a Roth IRA in 2012 could be a smart move if you expect to have a higher tax rate in retirement than you do now. Contributions in pretax dollars to a traditional IRA are deductible now, and withdrawals are taxable. With a Roth, the taxes are paid upfront and you won't owe income taxes on withdrawals when you retire.
Conversions from a traditional IRA to a Roth can lead to a high tax bill, with taxes on 2011 conversions due now. For people who used the special tax break in 2010 that allowed a conversion and the tax payments to be spread over two years, the second half of those taxes are due on tax filing day this year. Converting to a Roth this year will lead to paying no more than 35% on the rollover, which could be higher in 2013 when the Bush tax cuts expire.
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Tax breaks expire at the end of this year for homeowners who have their mortgage reduced through restructuring, the bank agreed to a short sale, or they lost their home to foreclosure. The relief is typically considered income because the debt doesn't have to be repaid, but a tax break that was put into place during the real estate crisis allowed up to $2 million in forgiven debt from income. Homeowners who sell their primary residence at a loss, however, can't take the deduction.
This is one area that may get easier next year after some deductions expire. The American opportunity tax credit runs out this year. It provides a $2,500 credit per student for undergraduate work for one student per family in a tax year. Using a credit instead of a deduction is generally more valuable because a credit directly cuts taxes and a deduction only cuts how much money is taxed.
Other education tax breaks to consider are up to $4,000 in deductions for tuition and fees (which expired at the end of 2011), and $2,000 per return for the lifetime learning credit.
Now is the time to move up some medical expenses if you can to qualify for a lower threshold for health care expenses in 2012. To deduct healthcare costs, expenses must exceed 7.5% of your adjusted gross income, or AGI. That's one good thing you can say about rising healthcare costs -- they may be large enough to qualify you for a tax deduction.
Allowable medical expenses include doctors' and dentists' bills, prescriptions, glasses, hearing aids, wheelchairs, transportation to doctors' appointments, nursing home fees and some insurance costs.
In 2013 the AGI threshold jumps to 10%, so moving any medical procedures up to this year could save you money on your taxes next year.
Planning ahead for tax law changes and preparing your taxes isn't as fun as going on vacation, but think of it as a way to save for your dream vacation. The more tax deductions and credits you can plan for now, the bigger tax refund you might get next year to spend on a vacation.
Tax laws are complex. Consult with a qualified tax advisor before filing your taxes in 2012.
The original article can be found at MoneyBlueBook.com:
Going, going, gone: Tax breaks set to expire in 2012