Last week we talked about some of the highlights of the recently enacted 2012 American Taxpayer Relief Act. In addition to “permanently” extending the Bush-era tax cuts for most taxpayers, revising tax rates on ordinary and capital gain income for high-income individuals, modifying the estate tax, providing permanent relief from the AMT, and imposing limits on the deductions and exemptions of high-income individuals, the Act extends a host of important tax breaks for individuals.
Many of the “traditional” tax extenders are extended for two years, retroactively to 2012 and through the end of 2013. Today we will discuss a few of the more common ones. The new law extends the following items for the period indicated beyond their prior termination date:
Teacher Expense Deduction. The deduction for certain expenses of elementary and secondary school teachers, which expired at the end of 201, is now revived for 2012 and continued through 2013. If you are an “eligible educator”, which includes kindergarten through 12th grade teachers, instructors, counselors, principals, or aides in any elementary or secondary school, you are allowed an above-the-line deduction of up to $250 for your out-of-pocket expenses you paid in connection with books, supplies (other than nonathletic supplies for courses of instruction in health or physical education), computer equipment (including related software and services), other equipment, and supplementary materials used in the classroom.
Home Mortgage Forgiveness Exclusion. The exclusion for discharge of qualified principal residence indebtedness, which applied for discharges before January 1, 2013, is extended for one year and is now continued to apply for discharges before January 1, 2014. The general rule is that if someone forgives a debt that you owe, you have taxable cancellation of debt income. This general rule is suspended for a discharge of your “qualified principal residence indebtedness”. Your debt that is discharged must have been used to acquire, construct, or substantially improve your principal residence, or to refinance your debt (but only up to the amount refinanced), and must have been secured by your residence.
IRA Charitable Contribution. The provision for tax-free distributions from individual retirement plans for charitable purposes, which expired at the end of 2011, is now revived for 2012 and continued through 2013. Because 2012 has already passed, a special rule permits you to treat distributions you have taken in December 2012 as tax-free if you transfer those amounts to charities before February 2013. Another special election rule permits you to make a direct transfer from your IRA to a charity in January 2013 and have it be treated as a tax-free distribution on December 31, 2012.
Qualified Tuition Deduction. The above-the-line deduction for qualified tuition and related expenses, which expired at the end of 2011, is also revived for 2012 and continued through 2013. You are allowed an above-the-line deduction for “qualified tuition and related expenses” for higher education. These expenses include tuition and fees for the enrollment or attendance by you, your spouse or a qualified dependent at an eligible institution. The maximum deduction is $4,000 if your modified adjusted gross income (“AGI”) doesn’t exceed $65,000 ($130,000 for a joint return). The limit is $2,000 when your modified AGI exceeds $65,000 ($130,000 for a joint return), but doesn’t exceed $80,000 ($160,000 for a joint return). If your modified AGI is higher, no deduction is allowed.
Sales Tax Deduction. The option to deduct state and local general sales taxes, which expired at the end of 2011, is also revived for 2012 and continues through 2013. If the sales taxes you paid in a given year are more than the state and local income taxes you paid, you can elect to take an itemized deduction for state and local general sales taxes instead of an itemized deduction for state and local income taxes.
Mortgage Insurance Premium Deduction. The treatment of mortgage insurance premiums as qualified residence interest, which expired at the end of 2011 continues for 2012 through 2013. Premiums you pay or accrue during the tax year for qualified mortgage insurance in connection with certain home acquisition indebtedness for your principle residence are treated as qualified residence interest, and so are deductible.
These are just a few of the more common tax provisions which have been extended and that you may be able to utilize. Please consult with a qualified tax advisor to determine if you may be able to use these or any other tax benefits.
By: Matthew M. Wallace, CPA, JD
Published edited January 20, 2013 in The Times Herald newspaper, Port Huron, Michigan as: New act reinstates and extends many tax breaks