Tax season has officially begun, later than usual because lawmakers only this year passed legislation to address expired tax cuts. The IRS needed time to update its forms and systems.
Not a problem for procrastinators, but a problem for others used to the tax season starting in mid-January.
“It is very painful and very inconvenient” for early filers counting on refunds to pay off holiday credit card bills or other debt, said Mark Steber, chief tax officer for Jackson Hewitt Tax Service. Many tax preparers, including Jackson Hewitt, prepared electronic returns ahead of last week’s opening date.
If you prepare your own return, you can expect this tax season to look much like last year. Despite all the tax drama in Washington late last year, Congress ended up extending most of the expiring tax cuts and making few changes.
“I have never seen a year with fewer changes than this,” said Jeff Pretsfelder, a senior tax analyst at Thomson Reuters. “It’s a very odd sort of thing.”
Still, there are a few new twists and some tips on how to lower tax bills and protect your refund. Consider:
BEEF UP SAVINGS: You have until the April 15 tax deadline to contribute to an IRA for 2012. The maximum contribution is $5,000, or $6,000 for those age 50 and up.
Contributions to a traditional IRA are fully tax-deductible if you don’t have a retirement plan at work. If you do, you can deduct all or some of your contributions if your adjusted gross income for 2012 is under $68,000 for singles and $112,000 for married joint filers.
There’s no tax deduction for contributing to a Roth IRA, but withdrawals are tax-free in retirement. Full or partial contributions can be made to a Roth for 2012 if income is under $125,000 for singles or $183,000 for joint filers.
Families within certain income limits also have until the tax deadline to make a 2012 contribution of up to $2,000 to a Coverdell Education Savings Account for a child. There’s no tax deduction, but withdrawals from this investment account can be tax free if used for education expenses from kindergarten to college.
ADOPTION EXPENSES: A credit for adoption expenses has been made less generous for 2012, thanks to abuse of the tax break, said Thomson Reuters’ Pretsfelder. Parents, depending on their income, can claim a credit of up to $12,650 per child in 2012, or $710 less than the year before. And the credit is no longer refundable.
A credit reduces your tax liability dollar for dollar. But a refundable credit means that you can get the credit as a refund if you don’t owe any taxes.
TRAVEL EXPENSES: It used to be that even if you were on business, you couldn’t deduct expenses paid for lodging near where you live, Pretsfelder said. Starting in 2012, local lodging is deductible for business travelers — provided it’s not extravagant. That would include cases in which workers on the job couldn’t get home because of a snowstorm, he said.
WITHHOLDING ADJUSTMENTS: Don’t reduce your tax withholdings from your paycheck to make up for the loss this year of the 2 percent payroll tax holiday, said Jackie Perlman, principal researcher for the H&R Block Tax Institute. You might owe taxes next year if withholdings fall short, she said.
But married couples might want to adjust withholdings to have more money taken out of their paycheck for an entirely different reason, she said. The health care law imposes a 0.9 percent levy on wages above $200,000 for singles and $250,000 for joint filers starting this year.
Employers will start withholding that tax as soon as workers’ income reaches $200,000, she said. But a two-income couple making, say, $150,000 each won’t have the tax withheld, and could end up with a big tax bill next year for this lack of withholding. Having more taken out of paychecks this year will prevent that, she said.
FILE EARLY: Increasingly, identity thieves file fake tax returns using pilfered Social Security numbers. They inflate deductions to generate big refunds that are then directly deposited in their bank accounts. When legitimate taxpayers file, their returns are rejected and they must undergo a lengthy process to prove their identity to get their refund.
The figures are staggering. For the first 10 months of last year, 1.2 million cases of potential identity theft were detected, according to the treasury inspector general for tax administration.
One way to protect yourself is file before a thief can.
Not everyone will be able to file early, though.
“Depending on your return, the IRS may not be ready to process it,” said Barbara Weltman, author of J.K. Lasser’s “1,001 Deductions & Tax Breaks.”
That’s because 30 forms still are undergoing programming and testing with the IRS. If you need to file one of them, you may have to wait until late February or in March to file, she said. Many of these forms are for businesses, but some, such as the residential energy credit and adoption expense credit, apply to individuals.
WHEN WILL REFUNDS ARRIVE? Despite the delayed start, the IRS said it will process refunds at the same speed. Nine out of 10 taxpayers can expect their refunds in fewer than 21 days, the agency said.
The IRS also updated its online “Where’s My Refund” tool to provide more details. Electronic filers can get confirmation that the IRS received a return within 24 hours, or four weeks for those filing a paper return. After that, filers can check the tool to find out when the refund was approved and the actual date it was sent.
Source: MCT Information Services