2012 Individual Estimates Affected by Expiring Tax Provisions

I filing this years returns, I consistantly notice our 2012 estimates being much higher.  April 17, 2012 is the due date for affected calendar year taxpayers to make their first installment of 2012 estimated tax. There aren’t any changes in the estimated tax rules themselves for 2012. However, there are a number of new, changed and expired provisions that will affect some individuals’ estimated tax computations for 2012. Ive have outlined the tax provisions that may affect these estimates, but the short answer is that our estimates will be higher this year.  Consequently, your 2012 tax liability will be higher unless Congress addresses these expiring provisions.

Individuals who have income that is not subject to withholding (for example, earnings from self-employment, interest, dividends, rents, alimony, etc.) must pay estimated tax or face a penalty. In addition, taxpayers who do not elect voluntary withholding on certain types of income, such as unemployment compensation and the taxable part of social security payments, also may have to pay estimated tax on those items or face a penalty. So far for 2012, thepenalty is 1 1/2% of the unpaid balance.  Based on these rules it might be easier and cheaper to just pay the penalty.

For 2012 estimated tax, in general, a taxpayer must pay 25% of a “required annual payment” by Apr. 17, 2012, June 15, 2012, Sept. 17, 2012 and Jan. 15, 2013 to avoid an underpayment penalty.

The required annual payment for most taxpayers is the lower of 90% of the tax shown on the 2012 return or 100% of the tax shown on the 2011 return, even if filed late (“prior year exception”). However, a taxpayer (other than a farmer or fisherman) whose adjusted gross income on his 2011 return is over $150,000 (over $75,000 if married filing separately) must pay the lower of 90% of his 2012 tax or 110% of his 2011 tax. The prior year exception does not apply for a taxpayer who did not file a 2011 return or filed a 2011 return that did not cover 12 months.

There’s no underpayment penalty if the tax shown on the return (after withholding) is less than $1,000. Estimated tax does not have to be paid for 2012 if the taxpayer was a U.S. citizen or resident alien for all of 2011 and had no tax liability for the full 12-month 2011 tax year.

A taxpayer who, after Mar. 31, 2012, has a large change in income, deductions, additional taxes, or credits that requires him to start making estimated tax payments should use the annualized income installment method. While the due dates will not change, the payment amounts will vary based on the taxpayer’s income, deductions, additional taxes, and credits for the months ending before each payment due date. As a result, this method may allow the taxpayer to skip or lower the amount due for one or more payments. A taxpayer who uses the annualized method should be sure to file Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, with his 2012 tax return to indicate to IRS how he has computed his payments, even if no penalty is owed.

In calculating 2012 estimated tax, an individual should consider the following changed provisions:

  • Reduced expensing. For a tax year beginning in 2012, the maximum Code Sec. 179 expensing election is $139,000, with a $560,000 investment-based ceiling (down from $500,000/$2 million last year). Additionally, for a tax year beginning after 2011, expensing can no longer be claimed for qualified real property.
  • Alternative minimum tax (AMT) exemption amount decreased. The AMT exemption amount is decreased to $33,750 ($45,000 if married filing jointly or a qualifying widow(er); $22,500 if married filing separately)…. Certain credits not allowed against the AMT. The credit for child and dependent care expenses, credit for the elderly or the disabled, education credits, mortgage interest credit, and carryforwards of the District of Columbia first-time homebuyer credit are not allowed against the AMT and a new tax liability limit applies. For most people, this limit is regular tax minus any tentative minimum tax.  We expect COngress to change this provision before year end.
  • Increased standard deductions. The basic standard deduction amounts have increased for most categories of taxpayers for 2012
  • Standard mileage rates. The rate for business use of a vehicle remains at 55.5¢ a mile. The rate for use of a vehicle to get medical care or move is decreased to 23¢ a mile. The rate of 14¢ a mile for charitable use is unchanged.
  • Personal exemption increased. For tax years beginning in 2012, the personal exemption amount is increased to $3,800
  • Income limits for excluding education savings bond interest increased. In order to exclude interest, the taxpayer’s modified adjusted gross income (MAGI) must be less than $87,850 ($139,250 if married filing jointly or a qualifying widow(er)).
  • Lifetime learning credit income limits increased. In order to claim a lifetime learning credit, the taxpayer’s MAGI must be less than $62,000 ($124,000 if married filing jointly)
  • Adoption credit and exclusion. The maximum adoption credit is $12,650 and the credit is no longer refundable. The maximum amount of adoption assistance that can be excluded from gross income is $12,650. The amount of the credit or excludable assistance begins to phase out for taxpayers with MAGI in excess of $189,710 and is completely phased out for taxpayers with MAGI of $229,710
  • Earned income credit. There are increases in the maximum credit, the maximum AGI a taxpayer can have and still get the credit, and the maximum investment income a taxpayer can have and still get the credit.
  • Foreign earned income exclusion. The maximum exclusion has increased to $95,100.
  • Extended health coverage tax credit. The credit for the cost of health insurance is 72.5% and COBRA benefits continue for trade adjustment assistance (TAA) recipients, alternative TAA recipients, reemployment TAA recipients, Pension Benefit Guaranty Corporation pension recipients, and certain of their family members.
  • Reminder on Roth IRAs. If the taxpayer rolled over or converted part or all of another retirement plan to a Roth IRA in 2010, or made an in-plan rollover to a designated Roth account after Sept. 27, 2010, and did not elect to include the resulting taxable amount in income for 2010, he should have reported half of that taxable amount on his 2011 return and must report the other half on his 2012 return.

Expired tax benefits. The following tax items expired or have been repealed and are not available for 2012, unless Congress acts to retroactively extend them:

  • Credit for non-business energy property
  • Plug-in electric vehicle credit
  • Plug-in conversion credit
  • New energy efficient home credit
  • Energy efficient appliance credit
  • Employer wage differential for active duty members of the uniformed services
  • Work opportunity credit (except for certain veterans,
  • Deduction of expenses for schoolteachers
  • Deduction for mortgage insurance premiums
  • Deduction for state and local sales taxes instead of state and local income taxes
  • Tuition and fees deduction
  • Tax-free distribution from retirement accounts for charitable purposes
  • Zero percent capital gains rate for DC Zones assets
  • First-time homebuyer credit.

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