We’re more than halfway through the year, and it’s not too early to begin tax planning. Starting now gives you time to tweak your tax strategies for the year if you’re off track.
Higher-income Americans should take special notice this year because of rule changes in the American Taxpayer Relief Act of 2012.
For one thing, the law raised the top income tax bracket from 35 percent to 39.6 percent. For some, the tax rate on long-term capital gains and dividends rose from 15 percent to 20 percent.
Both changes affect single taxpayers with taxable income over $400,000 and joint filers with income over $450,000.
The higher rates are already in effect, and affected taxpayers should be paying estimated taxes based on those rates, said Mark Luscombe, principal tax analyst at CCH Tax & Accounting North America, which publishes information for tax professionals.
Taxpayers at certain income thresholds also face limits on personal exemptions and itemized deductions and may face new Medicare surtaxes.
If your income isn’t subject to withholding, you will have to pay estimated taxes. This includes income from self-employment, interest, dividends, alimony, rent and gains from the sale of assets, prizes and awards. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension or other income isn’t enough.
If you don’t pay enough through withholding or estimated tax payments, you may be charged a penalty. If you don’t pay enough by the due date of each payment period you may be charged a penalty even if you are due a refund when you file your tax return.
If you are filing as a sole proprietor, partner, S corporation shareholder or self-employed individual, you should use IRS Form 1040-ES, Estimated Tax for Individuals to figure and pay your estimated tax.
Credit for child care
If you paid for child care this summer while the kids were out of school, those expenses may qualify for a tax credit that can save you money on your tax bill.
The Child and Dependent Care Tax Credit is available not only while school’s out for the summer, but also throughout the year. But you must meet certain conditions:
You must pay for care so you — and your spouse if filing jointly — can work or actively look for work. Your spouse meets this test during any month he or she is a full-time student, or physically or mentally incapable of self-care.
You must have earned income, such as wages and self-employment. If you’re married and filing jointly, your spouse must also have earned income. There’s an exception to this rule for a spouse who is a full-time student or who is physically or mentally incapable of self-care.
You may qualify for the credit whether you pay for care at home, at a day care facility outside the home or at a day camp.
However, expenses for overnight camps or summer school tutoring don’t qualify. You can’t include the cost of care provided by your spouse or a person you can claim as your dependent.
Be sure to keep your receipts and records to use when you file your tax return next year. Make sure to note the name, address and Social Security number or employer identification number of the care provider. You must report this information to claim the credit.
Investment losses
Look at any investments that have cost you money and consider selling them before the end of the year to offset investment profits. To parlay capital losses into tax savings, you have to sell your investment and take the loss.
If you incur losses from the sale of investments, you may subtract those losses from your capital gains, which are profits on the sale of investments.
If your capital losses exceed your capital gains, you can deduct only up to $3,000 of those losses in a tax year against ordinary income. Any excess will be carried over until it can be offset against future capital gains or be deducted as a loss against ordinary income, with a limit of $3,000 a year.
Be careful not to go overboard in “harvesting” your investment losses. Make sure you’re not making an investment decision based solely on a tax basis.
Beware of Medicare taxes
This year, higher-income taxpayers may need to factor in more Medicare taxes in tax planning.
Not only will the Medicare tax increase on earned income above certain levels, but a new tax will also be imposed on certain investment income.
The Medicare tax has been 2.9 percent on earned income for the self-employed and 1.45 percent for employees, whose employers pay the other 1.45 percent.
Under the new law, both the self-employed and employees owe an additional 0.9 percent on earnings above $200,000 for singles and $250,000 for joint filers.
Also, if your investment income tops certain thresholds, you may owe a 3.8 percent Medicare tax on the excess.
Home office deduction
The home office deduction has been one of the most complicated tax breaks to figure out. But the Internal Revenue Service wants to make it easier for small business owners to keep records and claim the deduction.
So starting this year, you may use a simplified option when figuring out the deduction.
For example, the simplified method gives you a standard deduction of $5 per square foot of your home used for business, up to 300 square feet. The deduction is capped at $1,500 per year.
With the regular method used to determine the deduction, you have to keep records of such expenses as utilities, rent, mortgage payments and real estate taxes.
How do you determine which method is better for you?
“If a taxpayer typically has a larger home office deduction than the simplified method would allow, they should continue to use actual expenses,” Luscombe said. “Otherwise, the simplified method might be more beneficial.”
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