With potentially significant tax law changes on the horizon for the new year, University of Maine associate professor Steven Colburn, who teaches accounting and oversees a community taxpayer assistance program with students, offers end-of-the-year advice for taxpayers.
Colburn says several things can be done before Dec. 31 to minimize the tax bite for 2012. His suggestions include:
1. Accelerate long-term capital gains into 2012. “If you were thinking of selling stock in 2013, consider selling it in 2012, instead,” he says. “Currently, the top tax rate for long-term capital gains — that is for gains on capital assets held more than one year — is 15 percent. That rate will likely increase for 2013.”
2. Pay for medical expenses in 2012. For 2012, taxpayers must reduce unreimbursed medical expenses by 7.5 percent of their adjusted gross income (AGI) before deducting them. “For 2013, that percentage will increase to 10 percent, unless you are 65 or older,” he says. “AGI is your income minus certain deductions. So, if your AGI for 2012 is $50,000, your unreimbursed medical expenses would have to exceed $3,750 ($50,000 x .075) before you may deduct them. For 2013 with a $50,000 AGI, medical expenses will have to exceed $5,000 ($50,000 x .10) before being deductible.”
3. For 2012, the standard deduction for a single person is $5,950 and $11,900 for a married couple filing jointly. If the total of all of itemized deductions — medical, property taxes, state income taxes, charitable contributions, etc. — is less than the standard deduction, the standard deduction would be the better choice.
4. Pre-pay charitable contributions and property taxes so you can itemize. Some taxpayers don’t have quite enough itemized deductions in any one year to make it worthwhile for them to itemize, so they take the standard deduction each year. “However, by bunching certain payments in one year, you may qualify to itemize one year and take the standard deduction for the next year,” Colburn says. “For example, if you have the cash, instead of waiting until February 2013 to pay your property taxes, you could pre-pay them in December 2012. You could also pay some or all of the charitable contributions that you normally would pay in 2013 in December 2012, instead. That could increase your total itemized deductions for 2012 above the standard deductions amounts mentioned earlier.”
5. The maximum contribution to Coverdell Education Savings Accounts drops from $2,000 per child in 2012 to $500 in 2013. Anyone planning to contribute to these plans should try to max out their contributions for 2012.
6. Mortgage debt forgiven in 2013 will be treated as taxable income. Under the Mortgage Debt Relief Act of 2007, taxpayers who have had mortgage debt reduced or forgiven by a lender were able to exclude that forgiven debt from their gross income. The provision is set to expire Dec. 31, 2012. So, a homeowner who is currently negotiating with a lender to get a mortgage debt reduced or forgiven needs to complete that process by Dec. 31, or pay a tax on any such debt forgiven in 2013.
7. Be alert for last-minute tax changes. Congress and the president are still negotiating changes to the tax law. It’s possible that last-minute changes could affect tax bills for 2012 and for 2013.
Contact Steve Colburn, 207.581.1982; George Manlove, 207.581.3756 or firstname.lastname@example.org