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4 great tax tips for this year’s return

When you’re hunting for tax savings on your 2012 returns, comb through the way you paid your taxes in the past. You might have missed an easy write-off that’s waving its hand and shouting, “look at me!” For example:

1. Should you still be itemizing your deductions?

Itemizing is the clear, money-saving choice for people with big mortgages or who live in a state with high income taxes. But if you live in a low- or no-tax state, and refinanced to a low mortgage interest rate last year, you might be better off with the new standard deduction for 2012. It’s $11,900 for married couples filing jointly.

Homeowners nearing the end of their mortgage debt should check this option, too.

2. Are you using the right filing status? 

You’d be surprised at the number of taxpayers who get this wrong. Here, I’m speaking especially to single parents, caregivers and widows or widowers. You’re the people most likely to make a costly mistake.

I’ll start with single parents (especially newly single parents). A common error is to list yourself as “single” on your tax returns. In fact, you are a “head of household,” which is a big tax saving all by itself. You get a lower tax rate and a larger standard deduction then if you had filed as a single.

You’re considered a head of household if you were unmarried at the end of 2012, have an unmarried child, stepchild or other qualifying relative under 19 who lives with you for more than half the year (not counting temporary absences) and you pay more than half the cost of maintaining the home. The child can be under 24, if he or she is a full-time student. (A married child has to be your tax dependent.)

You’re also a head of household if you were married, with a child at home, but lived separately from your spouse for the last six months of 2012 and are filing a separate tax return. (If your spouse will agree, however, it’s generally cheaper to file a joint return. The “married” status gets the lowest tax rates of all, and the highest standard deduction. That is, unless you’re a same-sex married couple, which still is not recognized under federal tax law.)

Earlier, I mentioned caregivers. You might be a head of household, for tax purposes, if you’re single and caring for a dependent parent or other close relative, even if he or she doesn’t live with you. The relative cannot have a gross income over $3,800, and you must be paying more than half of his or her support.

Here’s a tip for people who faced the sorrow of losing a spouse and haven’t remarried. If your husband or wife died in 2012, you can still file your tax return as “married.” You can also file as married if he or she died in 2010 or 2011, as long as you have a dependent child or stepchild who lived with you all last year and you paid more than half the cost of maintaining the home.

3. Did your spouse file a joint return that hid some of income and then skip out?

If you innocently signed the return and the IRS hit you for a back tax bill, you now have more ways to save yourself. A change in the 2012 tax rules makes it easier to claim the status of “innocent spouse,” not responsible for your significant other’s cheating ways.

Normally, you’re liable for the unpaid tax, plus interest and penalties, even if you’ve divorced. To escape, you have to show that you didn’t know about the hidden income and had no reason to know.

That hasn’t been easy to establish.

You’re supposed to check the tax form before signing. “I trusted him or her” is no excuse. You also might be held liable if tax evasion gave you a markedly higher standard of living.

But the IRS takes other circumstances into consideration.

Starting in 2012, it might let you off if you show you had no control over the family finances or risked abuse if you asked for it. This will be a great help in bullying or super-traditional marriages.

If the proper amount of tax was reported but  without your knowledge  your spouse didn’t pay, you can file for what’s called “equitable relief.”

4. Did you sell any taxable stocks or mutual fund shares in 2012?

A new reporting rule might save you from accidentally overpaying your tax.

In the past, your broker or fund reported only the proceeds of the sale to the IRS. Now, it’s also showing what you paid for stocks bought on or after January 1, 2011, and for most mutual funds and exchange traded funds bought in 2012. In 2014, bonds will be added to the list.

To honest taxpayers, these new 1099-B reports are a boon. Some of you accidentally paid your taxes on the total proceeds minus what you paid for the shares. But you overpaid, if you reinvested dividends and capital gains distributions in a mutual fund or dividend reinvestment plan. Your true cost (known as “cost basis”) is the original price, plus those reinvested dividends and gains, plus any sales commissions or transaction fees. Subtracting the true costs reduces your reported gain, which lowers your tax.

Many mutual funds have been disclosing your cost basis right along. This new rule picks up the stragglers. As a side benefit, tax cheaters won’t be able to underreport their gains. For the first time, these reports are going to the IRS, which will be able to see the truth.

Because nothing in taxes is easy, funds and brokers might not report your cost basis on shares you bought prior to the new cost-reporting dates.  You’ll still have to figure that out yourself.

Final note: No tax story can include all the definitions and exceptions attached to specific items in the tax code. Use this column as a guide, but  please  check the details at, Publication 17.


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