Valuable tax breaks are set to expire at year's end. While Congress might act to extend some or to re-instate others, the savviest consumers, tax experts say, will exploit them now. The list of soon-to-vanish breaks includes these eight:
|Higher Education Expenses:|
After 2011, the above-the-line deduction for qualified higher education expenses won't be available, so you'd better claim it now. Taxpayers with adjusted gross incomes of up to $65,000 for singles and $130,000 for couples can claim the maximum deduction: $4,000. The deduction applies to fees and tuition paid by students enrolled in an institution of higher learning during 2011 or during the first three months of 2012.
|Mortgage Insurance Premiums:|
Before year's end, homeowners with joint adjusted gross incomes of less than $109,000 can deduct the cost of their mortgage insurance. Afterwards, they can't.
Under a program that expires Jan. 1, parents of adopted children can claim a credit against their federal income tax of up to $13,360 for each adopted child (for qualified expenses), even if the credit is more than the amount of tax owed, says tax expert Barbara Weltman. If the expenses have been paid for by an employer, they can exclude up to $13,360 form their gross income. Next year, however, there will be a smaller credit, none of which will be refundable. Weltman is contributing editor of J.K. Lasser's 'Your Income Tax 2012'.
Planning to buy a big-ticket item? Buy it now, if you're somebody who doesn't have to pay state and local income taxes (a retired public employee, for instance). Up to now, such people have had the option of deducting sales taxes to reduce their federal income tax. After the new year, however, they won't.
Are you a K-12 teacher, instructor, principal or aide? Have you worked in a school for at least 900 hours during the school year? If so, you can claim an above-the-line deduction of up to $250 for any expenses you have paid out of pocket for books, computer equipment, supplies or supplementary materials used in the classroom. Next year, however, you won't be able to: The deduction vanishes.
|Energy Efficiency Upgrades:|
Taxpayers who improve their home's energy efficiency can claim a credit of 10 percent for the cost, up to a maximum of $500. You can, for example, add insulation to your attic, install insulated windows or buy an energy-efficient air conditioner or furnace. You should retain the receipts and any certification by the manufacturer that your property meets the requirements for the credit. Be advised: This is a one-time deal: If you claim credit for an upgrade this year, you won't be able to claim it next.
People 701/2 years old (or older) can get a special break for charitable giving, but only if they act before the break expires Dec. 31. Senior donors who have a traditional IRA (or other tax-deferred retirement plan) can give their distribution -- up to $100,000 -- to a qualified charity, excluding it from income. By so doing, they will have satisfied their distribution requirement without owing taxes. The move is especially advantageous, tax experts say, for seniors who don't itemize.
This break, which expires annually, was created by Congress to save taxpayers from having to pay the Alternative Minimum Tax (AMT), a flat 28 percent rate imposed on high-earners. The AMT dates back to the Nixon era, when the Treasury Department, to its horror, discovered that many of the wealthy were paying nothing.
Under the AMT, anyone earning more than a set amount was forbidden from claiming certain deductions and was potentially subject to the 28 percent rate. Problem is, there was no provision made for adjusting that set amount for inflation. As a result, decades of inflation have put more and more people of relatively modest means into the 28 percent bracket.
Rather than change the law and peg the AMT's threshold to inflation, Congress has opted every year to raise the threshold. This re-adjusted amount is the so-called patch, the latest of which is now due to expire at the end of December. It's $72,450 for a married couple filing jointly, and $47,450 for a single filer.
To determine what the threshold means to you, says CPA James Smith, managing director of Smith, Jackson, Boyer & Bovard in Dallas, start with your net taxable income after itemized deductions. Then add back certain permitted deductions, including state and local taxes and other items listed on IRS Form 6251. If the resulting number exceeds the patch's number, everything above it will be subject to the AMT's 28 percent.
Smith says Congress almost certainly will enact a new patch for next year, because to do otherwise could be politically suicidal: the threshold would automatically drop to what it was in the 1960s, catapulting millions of Americans into the higher bracket, not a good move in an election year.
What can you do to avoid the AMT? In the long run, Smith says, nothing. But if your calculations show that you're in danger of exceeding the patch this year, you can take steps to defer the tax bite to the next.
You could, for instance, defer payment of some of your state or city taxes until next year: your property taxes, say. Likewise, you could defer income until next year. Doing either could keep you below the threshold.
But you'll almost certainly be subject to the AMT next year. "You can run," Smith said, "but you can't hide."