Tax Prep: Don't Miss These Juicy Credits and Deductions

By Jill Schlesinger, CBS MoneyWatch 

(CBSMoneyWatch) The IRS expects that 75 percent of all 2012 returns will be entitled to a refund, so if you haven't started preparing your taxes yet, do it: There's no reason to wait for April 15 to roll around to get that money back from Uncle Sam. And remember: If you do not file your return by the due date, you may have to pay penalties and interest. Even if you can't meet the deadline, you can file for an extension, which will give you until October 15 to file your 2012 tax returns.

Here are some updates before you start to prepare:

-- New for tax year 2012, the IRS is providing taxpayers whose incomes are $57,000 or less with "Free File",  available through IRS.gov, where a number of tax software companies make their products available for free. Additionally, some states are offering similar options. Electronic e-filing is available to all taxpayers, regardless of income.

-- Mailing your return: If you are filing a paper return, you may be mailing it to a different address this year because the IRS has changed the filing location for several areas. See Where To File for a list of IRS addresses.

-- Exemption amount: $3800 from $3,700 in 2011

-- Standard deduction: For married couples filing a joint return, the standard deduction is $11,900 for 2012. For single individuals and married couples filing separate returns, it is $5,950 and for heads of household it increases by $200 to $8,700 for 2012.

-- Tax-bracket thresholds increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $70,700, up from $69,000 in 2011.

-- Estate and gift tax: The exclusion amount for 2012 is $5,120,000. The exclusion for gifts to a spouse who is not a citizen of the United States increases to $139,000 for 2012.

-- Itemized deductions and personal exemptions: The itemized deduction limitation and personal exemption phase-out rules were repealed for 2011 and 2012, which means taxpayers can deduct the full amount of their itemized deductions and personal exemptions in 2012. These limitations ($250,000 for individuals and $300,000 for joint filers) will go back into effect for tax year 2013

Get the Credit(s) You Deserve:

Tax credits are the best tax deal going, because they reduce your taxes dollar for dollar, instead of being calculated based on your tax bracket.

The Earned Income Tax Credit (EITC) is a refundable credit for low- and moderate- income workers and working families. The 2012 income limit for the EITC is under $50,270 for joint filers and under $45,060 for singles and the maximum credit is $5,891. The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children. Use Schedule 8812 to figure your additional child tax credit for 2012. (Details are in IRS Publication 596.)

The Child Tax Credit is up to $1,000 for each qualifying child who was under the age of 17 at the end of 2012. This credit can be claimed in addition to the credit for child and dependent care expenses, but phases out for married couples that earn more than $110,000 and single filers who earn more than $75,000. In an IRS-esque move, taxpayers should use Schedule 8812 (instead of Form 8812) to figure the additional child tax credit. (Details are in IRS Publication 972.)

The Child and Dependent Care Credit is available if you pay someone to care for a dependent under age 13, so that you can work or look for a job. The credit is 20 to 35 percent of your child-care expenses up to $6,000 -- the size of your credit depends on your income. This credit will be reduced significantly next year. (Details are in IRS Publication 503.)

The Retirement Savings Contributions Credit is designed to help low- and moderate-income workers save for retirement. Individuals with incomes of up to $28,750, head of households with $43,125 and married couples with joint incomes of up to $57,500 may qualify for a credit of up to $1,000 per person. (Details are in Form 8880)

Energy and Appliance Tax Credit If you made any energy-efficiency improvements to your home in 2012, you may be eligible for a tax credit of 10 percent for the cost, up to a maximum of $500. Approved improvements include new windows, insulation, high efficiency furnaces, water heaters and air conditioning, among many. Be sure to keep your receipts and manufacturer certification. (See which Energy Star items qualify for the tax deduction and useIRS Form 5695)

The Adoption Tax Credit in 2012 has reverted to being nonrefundable, with a maximum amount (dollar limitation) of $12,650 per child from $13,360 in 2011. The income limit on the adoption credit is based on your modified adjusted gross income (MAGI). For tax year 2012, the MAGI phase out begins at $189,710 and ends at $229,710. (IRS Topic 607)

College Costs

The American Opportunity Tax Credit: For tax year 2012, students can claim a $2,500 "higher education tax credit" for the first four years of college. The credit is based on 100 percent of the first $2,000 of tuition and related expenses, including books, paid during the tax year, plus 25 percent of the next $2,000 of tuition and related expenses paid during the tax year (subject to income phase-outs starting at $80,000 for singles and $160,000 for joint filers).

Lifetime learning credit: The modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $104,000 for joint filers, up from $102,000, and $52,000 for singles and heads of household, up from $51,000.

Tuition and fee deductions: Every family can deduct up to $4,000 of college tuition and fees in 2012, subject to income limitations. If your modified AGI is between $65,001 and $80,000 for singles or between $130,001 and $160,000 for joint filers, you are entitled to a reduced deduction of up to $2,000. (IRS Publication 970)

Student loan interest deduction: The $2,500 maximum deduction for interest paid on student loans begins to phase out for a married taxpayers filing a joint returns at $125,000 and phases out completely at $155,000, an increase of $5,000 from the phase out limits for tax year 2011. For single taxpayers, the phase out ranges remain at the 2011 levels.

Itemized Deductions: Nearly two out of three taxpayers take the standard deduction rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes. Some of those folks are leaving money on the table. If your deductible expenses exceed the 2012 standard deduction limits above, be sure you itemize and grab these write-offs.

Miscellaneous deductions: These are deductible if they total more than 2 percent of your adjusted gross income. They include tax-preparation fees, job-hunting expenses, business car expenses, and professional dues.

Sales tax: You can deduct sales tax paid in 2012 if the amount was greater than the state and local income taxes you paid. In other words, you get to choose: Write off your sales taxes or write off your income taxes. If you didn't keep your sales-tax receipts, use the IRS's sales tax deduction estimator. Even if you claim the sales tax amount from the IRS tables, you can add in tax paid on vehicles or boats purchased during the year, except to the extent the sales tax rate on them is more than the general sales tax rate. If you live in a state with a high income tax, like California or New York, you will probably be better off claiming your state and local income taxes rather than sales taxes. If you live in a state with no income tax, like Florida, Texas, or Washington, be sure to take the sales tax deduction when you itemize.

Medical expenses: This one is hard to claim, because the bar is so high to qualify. You can only deduct the portion of your 2012 medical expenses that exceed 7.5 percent of your adjusted gross income.

Mileage: Deducting miles driven for work or other purposes can be a huge tax break and save you significant money. The 2012 rate for business use of your car remains 55.5 cents a mile; medical and moving is 23 cents per mile; and charitable use is 14 cents per mile

Mortgage insurance deduction: Borrowers with AGI's up to $100,000 may be able to treat qualified mortgage insurance as home mortgage interest, which means that 100 percent of 2011 premiums may be deductible. The insurance contract had to be issued after 2006 and deductions are phased out in 10 percent increments for homeowners with AGI's between $100,001 and $109,000. (IRS Publication 936)

Classroom deduction for teachers: K-12 educators who work at least 900 hours during the school year can claim an above-the-line deduction of up to $250 ($500 if married filing joint and both spouses are educators, but not more than $250 each) for any unreimbursed expenses (books, supplies, computer equipment (including related software and services), other equipment, and supplementary materials) used in the classroom. (IRS Topic 458)

IRA/Roth Conversion

When you contribute to an individual retirement account, you help fund a future goal while lowering your current tax bill. In other words, socking cash in an IRA is like saving with help from your Uncle Sam.

You have until tax filing to contribute up the lesser of your taxable compensation for the year or $5,000 to a 2012 IRA ($6,000 if you are 50 or older). If you are self-employed, have a Keogh or SEP-IRA, and have filed for an extension to October 15, you can wait until then to put 2012 money into those accounts.

Even if you're covered by a retirement plan at work, you can deduct some or all of your IRA contribution. The 2012 IRA limits for modified AGI as follows:

-- More than $92,000 but less than $112,000 for a married couple filing a joint return or a qualifying widow(er)

-- More than $58,000 but less than $68,000 for a single individual or head of household, or

-- Less than $10,000 for a married individual filing a separate return.

For married couples filing a joint return, in which the spouse who makes the IRA contribution is not an active participant in an employer-sponsored retirement plan but the other spouse is a participant, the deduction is phased out if the couple's income is between $173,000 and $183,000, up from $169,000 and $179,000 in 2012.

Charitable donations from IRA's: Taxpayers aged 70 1/2 or older can make direct tax-free transfers of up to $100,000 from IRAs to qualified charities. The transfers can satisfy minimum required distributions without increasing adjusted gross income.

Roth IRAs

Roth IRAs allow taxpayers to invest money for future retirement needs. Unlike a traditional IRA, there is no current tax deduction available for contributions to a Roth and all funds within the Roth IRA compound tax-free and all withdrawals from the account are also tax-free. To qualify to contribute to a Roth, your income must fall within the Modified Adjusted Gross Income (MAGI) limits. The 2012 limit for 2012 is $173,000 to $183,000 for married couples filing jointly, up from $169,000 to $179,000. For single taxpayers, the income phase-out range is $110,000 to $125,000, up from $107,000 to $122,000 in 2011.

Roth conversion: If you converted or rolled over an amount to a Roth IRA in 2010 and did not elect to report the taxable amount on your 2010 return, you generally must report half of it on your 2011 return and the rest on your 2012 return. (See Publication 575 for details.)