Is This The Year You Should Itemize Your Deductions on Your IRS Tax Return

It’s now February, and tax day is just around the corner … but far enough away to allow you time to explore your options and minimize your tax exposure. While preparing your tax return the goal is always to legally minimize your tax debt and hopefully increase your tax refund. At its simplest, your tax debt is determined by your taxable income after deductible expenses.

Focusing on the deductible expenses side of the tax equation, according to the Internal Revenue Service (IRS), most taxpayers claim the standard deduction. Is this the year that you should itemize your deductions? My most common response to legal questions is apt; it depends. The analysis requires a determination of which is greater, the standard deduction or itemized allowable deductions?

What is the Standard Deduction?

The standard deduction is a preset amount that reduces the amount of income on which you are taxed. The standard deduction amount depends on your filing status, whether you are 65 or older, or blind, and whether an exemption can be claimed for you by another taxpayer. The standard deduction is generally adjusted annually based on inflation.

The standard deduction amounts for tax year 2012 are $5,950 for single filers and married couples filing separately, $8,700 for head of household filers, and $11,900 for married couples filing jointly and qualifying widow(er). If you are 65 or older, or legally blind you may receive an increased deduction per qualifying status. The additional standard deduction amounts for tax year 2012 are $1,450 for taxpayers who file single or head of household, and $1,150 for those filing married filing jointly, married filing separately, or qualifying widow(er).

Should You Itemize Your Deductions?

Now the hard part: is the standard deduction amount greater than the amount that may be claimed if you were to itemize your allowed expenses? If the standard deduction is greater, use the standard deduction. Determining what expenses you had throughout the year that may be itemized and deducted, is usually difficult because you need to maintain accurate records and the list of the various allowed deductions are exhaustive and riddled with exceptions, exemptions and limitations. Once you have a grasp of the type of deductions that may be claimed, you may find that your actual expenses, when itemized, far exceed the standard deduction provided by the government. This is why it truly pays to prepare your tax return early and not procrastinate so you have time to accurately determine the expenses you may itemize.

The types of expenses that may be itemized are typically a social economic incentivizing type of expenses. Generally, and subject to many exceptions and limitations, expenses paid for or associated with medical care, mortgage interest, student loan interest, taxes, education, charity, job search, relocation, earning income, and investments, may at times be itemized and could potentially reduce your taxes. Once tallied and accounted for, if the total amount spent on the qualified deductions, subject to the applicable exceptions and limitations, are more than your standard deduction, this may be the tax year you save on your taxes by itemizing your deductions; so don’t procrastinate and do your homework … or file an extension.

Tax Relief via the Earned Income Tax Credit (EITC)

The Earned Income Tax Credit (EITC) is a refundable tax credit you may be able to take advantage of this tax season to get the tax relief you need. Since the EITC is refundable, this means taxpayers may get money back, even if they have no tax withheld. However, to get the credit, taxpayers need to file a tax return and specifically claim the EITC, even if they don’t have a filing requirement.

Recent changes to the EITC make the credit available to more taxpayers than in years past. Eligibility for the EITC varies based on income and family size. Households with three or more qualifying children will receive a 2012 tax credit of $5,891 if their Adjusted Gross Income (AGI) is less than $45,060 when filing individually or $50,270 when married filing jointly. The equivalent credit for tax year 2011 was $5,751 for individuals with an annual AGI less than $43,998 or $49,078 when married filing jointly.

On the other end of the EITC spectrum, for tax year 2012, households with no qualifying children will receive a $475 tax credit if their AGI is less than $13,980 when filing individually or $19,190 when filing married filing jointly. Similar middle tier credit adjustments are available for taxpayers claiming one or two qualifying children.

Eligibility for the EITC is very fact specific as to eligibility requirements and prone to errors. Even if someone else prepares your tax return, a taxpayer is still responsible for the accuracy their own tax return. Taxpayers should seek tax advice if they are not sure whether they qualify for the EITC. Common EITC errors identified on the IRS website include:

  • Claiming a child who is not a qualifying child.
  • Filing as single or head of household when actually married.
  • Reporting incorrect income or expense amounts.
  • Missing or incorrect Social Security numbers for self, spouse or qualifying children.

While claiming the EITC will get you immediate tax relief, avoiding these common tax errors will give you stress relief.


It's Tax Season (Sort of)

So with the Super Bowl over, and pitchers and catchers reporting next week, these are the signs that tax season is in full swing, right? Wrong; depending on your situation. You still may not be able to file your 2012 tax return and get your refund, or resolve your tax debt.  Based on the last-minute shenanigans in Washington D.C. to avoid falling of the fiscal cliff, the Internal Revenue Service (IRS) is still preparing their systems to accept the remaining tax forms affected by the American Taxpayer Relief Act (ATRA) enacted by Congress on January 2, 2013.

The Internal Revenue Service announced today that taxpayers will be able to start filing two major tax forms next week covering education credits and depreciation. Beginning Sunday, February 10, 2013, the IRS will start processing tax returns that contain Form 4562, Depreciation and Amortization. Then, on Thursday, February 14, 2013, the IRS plans to start processing Form 8863, Education Credits. With these updates, almost all taxpayers may start filing their tax returns for 2012. These forms affected the largest groups of taxpayers who weren’t able to file following the abbreviated January 30, 2013, opening of the 2013 tax season.

However, more updates are still required to accommodate all taxpayers and tax forms. The remaining forms affected by the January 2013 legislation are anticipated to be accepted during the first week of March 2013.  A specific date will be announced later by the IRS. So, don’t delay, if you can help it, to get your taxes completed.


Your 2012 and 2013 Federal Tax Returns Are At Risk!

Today, National Taxpayer Advocate Nina E. Olson reported to Congress the issues that the Taxpayer Advocate Service (TAS) will focus on during the upcoming fiscal year. Olson, expressed particular concern, among other issues, about the taxpayer impact of expired and expiring tax provisions.

“The continual enactment of significant tax law and extender provisions late in the year has led to IRS delays in handling millions of taxpayers’ returns and caused many taxpayers to underclaim benefits because they did not know what the law was … Because of the magnitude of these challenges and the uncertainty about such a large number of important provisions, the 2013 filing season is already at risk. The 2013 filing season is likely to pose problems for many (if not most) taxpayers and the IRS if Congress does not address the many provisions that have already expired or soon will.” Wrote Olson.

You may be asking, “How does this affect me?” Well, if Congress doesn’t act soon you may need to hire an experienced tax attorney to fight for tax relief. As my Federal Income Tax professor repeatedly ordered in law school: “Read on, read on, read on…”.

The following provisions are among the tax provisions that expired at the end of 2011:

  • The so-called “Alternative Minimum Tax patch.” As result, an estimated 27 million more taxpayers are subject to the Alternative Minimum Tax this year.
  • The deduction for state and local sales taxes.  About 11 million taxpayers claimed this deduction last year.
  • The deduction for mortgage insurance premiums.  About four million taxpayers recently claimed this deduction.
  • A provision allowing persons over age 70-1/2 to make tax-free withdrawals from their Individual Retirement Accounts (IRAs) to make charitable contributions.

According to the IRS website, Congress is likely to extend many of these and other expired provisions retroactive to January 1, 2012, but neither taxpayers nor the IRS know for sure what will happen and taxpayers, therefore, cannot make educated tax planning decisions now.

In addition to the provisions that expired at the end of tax year 2011, an even larger number of provisions are set to expire at the end of 2012. Such rules include the Bush-era cuts in marginal tax rates, reduced tax rates on dividends and long-term capital gains, various marriage penalty relief provisions, certain components of the child tax credit, the earned income tax credit, and the adoption credit, and the moratoria on the phase-outs of itemized deductions and personal exemptions.