2012 Tax Code Changes

By Marvin Rotenberg, IRA Technical Expert

Numerous tax changes are in store for individuals in 2012. It’s very difficult, however, to write with any degree of certainty about those affecting your income taxes because Congress has shown a tendency to make retroactive changes at any point in time.

A number of income tax provisions that affected individual tax payers expired at the end of 2011. Some examples of these include:

• the option for individuals to deduct state and local sales taxes instead of state and local income taxes on their federal return

• certain deductions for higher education expenses

 • an allowance for school teachers to deduct up to $250 annually in out-of-pocket classroom expenses

The end of 2011 also closed the curtain on U. S. Saving Bonds being issued in paper form. Saving Bonds, which dated back to 1935, now will be available in electronic form only. While paper Saving Bonds are no longer are available for purchase, many banks and credit unions will continue to redeem them upon request.

The alternative minimum tax could be larger in 2012 because Congress has not extended the usual temporary relief.

Another provision that expired on December 31, 2011 and was near and dear to our hearts was the “Qualified Charitable Distribution” (QCD), which allowed seniors age 70 ½ and older to transfer up to $100,000 annually (including their required minimum distribution for the year) from their Individual Retirement Accounts (IRAs) to qualifying charities without having to report the distributions as taxable income.

If you have made one or more QCDs before, or were thinking about doing so in the future, you might want to hold off on taking any distributions from your IRA early in 2012. This provision has been reinstated twice after the start of a new tax year, and if for some reason it is instituted again this year you will be able to use it and pay no income tax on the amount going to charity. However, once payments have been made from your IRA to you, they are not eligible to be used for a QCD. A QCD would have to be made using other funds in your IRA, which generally would be less efficient for you.

Given the political gridlock in Washington and the fact that 2012 is an election year, tax uncertainty could linger for months. Stayed tuned to The Slott Report for further developments.