Answers to this year’s trickiest questions
The April 15 tax-filing deadline is fast approaching, but many Americans still are struggling to interpret the latest IRS rules and fill out the latest tax forms. The tax code isn’t just complex, it’s also amended frequently, making it hard to keep up. In fact, the government still was tinkering with the tax code in January 2013 in ways that affect our 2012 taxes.
Among the questions taxpayers are asking this year…
Q: The amount my employer spends on my health insurance benefits is listed on my W-2 form this year—do I really have to pay income tax on these costs?
A: No, not this year. Those costs are not taxable, and you don’t have to report this figure anywhere on your tax return. The government is requiring employers to report employee health insurance costs on W-2s this year simply because it is trying to gather health-care-cost data as part of the Affordable Care Act.
Q: I read that income tax and capital gains tax rates are increasing for high earners, but they seem to be the same as before. What’s going on?
A: The much-publicized rate increases enacted this January apply to income and capital gains you receive in 2013—they have nothing to do with the 2012 tax forms you are filling out now.
Q: I lost my job. Are my job-search expenses deductible, even though I haven’t found a new job yet?
A: The law hasn’t changed, but tax preparers have been hearing a lot of job-search questions lately. Job-search expenses are deductible even if the job search has not yet been successful—but only if you itemize your deductions…if you’re searching for a job in your current occupation (as opposed to changing careers)…and to the extent that these expenses exceed 2% of your adjusted gross income. If you qualify, report your job-search expenses as “miscellaneous itemized deductions” on line 21 of Schedule A. Deductible expenses include travel costs to job interviews and job fairs (including 55.5 cents per mile for the use of your vehicle), fees paid to recruiters and the cost of printing and mailing résumés and other job-search materials such as letters. Clothing and haircuts obtained for job interviews are not deductible.
Q: It looks like I’m going to have to pay more in taxes than I expected this year because of the Alternative Minimum Tax (AMT). Any advice for reducing this tax hit?
A: Taxpayers affected by the AMT—a tax designed to prevent higher earners from using deductions to avoid paying significant income taxes—should double-check whether they’re eligible for nonrefundable tax credits. These credits cannot be claimed by filers who do not owe taxes. They include the Lifetime Learning Credit (see below), Dependent Care Credit and Child Care Credit. Congress has made permanent the rules allowing taxpayers to use nonrefundable credits to offset the AMT.
Q: Is the American Opportunity Tax Credit gone or not? Are there any tax credits available to help me with college costs?
A: Good news—the American Opportunity Tax Credit (AOTC) hasn’t disappeared after all. More than a few taxpayers think it’s gone because it has been scheduled to expire twice in the past three years, but it recently was extended through at least 2017. The AOTC is a dollar-for-dollar credit that can reduce your tax bill by up to $2,500 per year per eligible student.
The AOTC can be used only for the first four years of college or other post-secondary education. The student must be enrolled in school at least half time.
The Lifetime Learning Credit is a college credit that is an alternative to the AOTC. It’s worth a little less than the AOTC—only up to $2,000 per household per year…it’s not refundable…and it phases out at lower income levels—starting at $104,000 for married couples or $52,000 for singles. Unlike the AOTC, it’s not restricted to students in their first four years of postsecondary education—it requires only that a student be enrolled in one or more courses.
Q: I’m a teacher. I read that I wouldn’t be able to deduct the cost of classroom supplies that I paid for out of pocket in 2012, but I see “Educator Expenses” listed on my 2012 federal income tax form. Can I take this deduction?
A: Teachers can deduct up to $250 for classroom supplies paid for out of pocket (up to $500 if married to another teacher who has these expenses). You don’t even need to itemize to take advantage—just enter the cost of these classroom supplies on line 23 of Form 1040.
This deduction has been a source of confusion for many teachers this year because it actually expired at the end of the 2011 tax year. The government revived it in January 2013 and retroactively applied it to the 2012 tax year.
To qualify, you must be a K-12 teacher, aide, instructor, counselor or principal who worked at least 900 hours.
Q: Is there anything important I might be forgetting this year?
A: If you converted a traditional IRA to a Roth IRA in 2010, you might have elected to split the resulting income taxes between 2011 and 2012 under a special rule in place that year. Now, three years later, some taxpayers will no doubt forget that they owe the second half of that income tax bill.
Q: I’m self-employed. Can I deduct the premiums I paid for my family’s health insurance?
A: Yes, assuming that you and your spouse weren’t eligible to participate in an employer-subsidized health plan. You don’t have to itemize—just report your premiums on line 29 of Form 1040. Given the high cost of health insurance, this deduction could trim $10,000 to $20,000 from your adjusted gross income. (There are limits on how much you can deduct based, in part, on your self-employed income.) For details, go to www.IRS.gov, and search for “Health Insurance Tax Breaks for the Self-Employed.”
This health insurance deduction also has been expanded. Now, in addition to deducting the cost of health and/or dental insurance premiums for themselves, their spouses and dependents, people who are self-employed can deduct the cost of insuring their nondependent adult children, as long as those children were under age 27 at the end of 2012.