Key Tax Elections on 2012 Returns

In 2012 we elected the president of the United States and other government officials. But 2012 may also be an “election year” for your federal tax return. Here are several choices that can make a big tax difference on the tax return you must file by April 15.

State sales tax: In lieu of deducting state income tax, you can elect to write off the state sales tax you paid during the year. This optional tax deduction, which had technically expired after 2011, was extended by the American Taxpayer Relief Act (ATRA) through 2013, retroactive to the 2012 tax year. If you choose the state sales tax deduction, you can write off your actual expenses based on receipts or use the approved IRS table (plus amounts for certain “big-ticket items” such as cars and boats).

Section 179 deductions: Under ATRA, small-business owners (including self-employed individuals) can elect to currently deduct the cost of assets placed in service in 2012, up to a maximum of $500,000. Before ATRA, the limit was scheduled to be $139,000. The deduction is subject to a lofty phaseout threshold of $2 million. Note: Business assets placed in service may also be eligible for 50% bonus depreciation. Any remaining assets are deductible under the regular depreciation rules.

Higher education: If you qualify, you can take one of two tax credits for higher education or the tuition deduction, but you can’t take both. Consider this:

  • The maximum American Opportunity credit is $2,500 per student. For 2012, this credit phases out between $80,000 and $90,000 of modified adjusted gross income (MAGI) for single filers; $160,000 and $180,000 of MAGI for joint filers.
  • The maximum Lifetime Learning credit is $2,000 per taxpayer. For 2012, this credit phases out between $52,000 and $62,000 of MAGI for single filers; $104,000 and $124,000 for joint filers.
  • The tuition deduction, which is claimed “above the line,” is $4,000 if your MAGI is $130,000 or less and $2,000 for a MAGI up to $160,000. Though this credit had expired after 2011, it was extended through 2013 by ATRA, retroactive to the 2012 tax year.

Investment interest deductions: Normally, you can deduct investment interest expenses up to the amount of your “net investment income” for the year. For this purpose, net investment income does not include capital gains. However, you can choose to include capital gains in the total as long as you forego the favorable capital gains rate on all your eligible gains. The maximum tax rate for long-term capital gains in 2012 is 15%. (ATRA increases this percentage to 20% in 2013 for certain high-income taxpayers.)

Filing status: Normally, a married couple will benefit from filing a joint return, despite the existence of the so-called “marriage penalty.” But that’s not always true. In some cases, you may fare better overall by filing separate returns. For instance, a married couple may save tax dollars by filing separate returns if one spouse has an unusually large portion of the couple’s medical and dental expenses, miscellaneous expenses or casualty losses. In this case, filing separately may make sense, due to certain deduction “floors.” Caveat: Filing separately may cost you other tax benefits, so consider all aspects.

This is a brief description of just five of the choices you might face on your 2012 tax return. Consult your Lohman Company tax professional to derive the maximum tax benefits at tax return time.