Who Should File a 2012 Tax Return?

If you received income during 2012, you may need to file a tax return in 2013. The amount of your income, your filing status, your age and the type of income you received will determine whether you’re required to file. Even if you are not required to file a tax return, you may still want to file. You may get a refund if you’ve had too much federal income tax withheld from your pay or qualify for certain tax credits.  You can find income tax filing requirements on IRS.gov. The instructions for Forms 1040, 1040A or 1040EZ also list filing requirements. The Interactive Tax Assistant tool, also available on the IRS website, is another helpful resource. The ITA tool answers many of your tax law questions including whether you need to file a return.

Even if you’ve determined that you don’t need to file a tax return this year, you may still want to file. Here are five reasons why:

1. Federal Income Tax Withheld.  If your employer withheld federal income tax from your pay, if you made estimated tax payments, or if you had a prior year overpayment applied to this year’s tax, you could be due a refund. File a return to claim any excess tax you paid during the year.

2. Earned Income Tax Credit.  If you worked but earned less than $50,270 last year, you may qualify for EITC. EITC is a refundable tax credit; which means if you qualify you could receive EITC as a tax refund. Families with qualifying children may qualify to get up to $5,891 dollars. You can’t get the credit unless you file a return and claim it. Use the EITC Assistant to find out if you qualify.

3. Additional Child Tax Credit.  If you have at least one qualifying child and you don’t get the full amount of the Child Tax Credit, you may qualify for this additional refundable credit. You must file and use new Schedule 8812, Child Tax Credit, to claim the credit.

4. American Opportunity Credit.  If you or someone you support is a student, you might be eligible for this credit. Students in their first four years of postsecondary education may qualify for as much as $2,500 through this partially refundable credit. Even those who owe no tax can get up to $1,000 of the credit as cash back for each eligible student. You must file Form 8863, Education Credits, and submit it with your tax return to claim the credit.

5. Health Coverage Tax Credit.  If you’re receiving Trade Adjustment Assistance, Reemployment Trade Adjustment Assistance, Alternative Trade Adjustment Assistance or pension benefit payments from the Pension Benefit Guaranty Corporation, you may be eligible for a 2012 Health Coverage Tax Credit. Spouses and dependents may also be eligible. If you’re eligible, you can receive a 72.5 percent tax credit on payments you made for qualified health insurance premiums.

IRS To Accept Returns Claiming Education Credits by Mid-February

 As preparations continue for the Jan. 30 opening of the 2013 filing season for most taxpayers, the Internal Revenue Service announced today that processing of tax returns claiming education credits will begin by the middle of February.  Taxpayers using Form 8863, Education Credits, can begin filing their tax returns after the IRS updates its processing systems. Form 8863 is used to claim two higher education credits -- the American Opportunity Tax Credit and the Lifetime Learning Credit. The IRS emphasized that the delayed start will have no impact on taxpayers claiming other education-related tax benefits, such as the tuition and fees deduction and the student loan interest deduction. People otherwise able to file and claiming these benefits can start filing Jan. 30.

As it does every year, the IRS reviews and tests its systems in advance of the opening of the tax season to protect taxpayers from processing errors and refund delays. The IRS discovered during testing that programming modifications are needed to accurately process Forms 8863.  Filers who are otherwise able to file but use the Form 8863 will be able to file by mid-February. No action needs to be taken by the taxpayer or their tax professional.  Typically through the mid-February period, about 3 million tax returns include Form 8863, less than a quarter of those filed during the year. The IRS remains on track to open the tax season on Jan. 30 for most taxpayers. The Jan. 30 opening includes people claiming the student loan interest deduction on the Form 1040 series or the higher education tuition or fees on Form 8917, Tuition and Fees Deduction. Forms that will be able to be filed later are listed on IRS.gov.  Contact ExactCPA if you have any questions.

IRS estimates it takes the average taxpayer 24 hours to complete a Form 1040

Kay Bell for Bankrate writes: Are you prepared to spend almost a full day filling out your tax return? And we're talking a 24-hour period, not a standard eight-hour work day. That's the Internal Revenue Service's estimate of how long it will take the average taxpayer to complete Form 1040.  Sure, that includes the time it takes to pull together and sort through all your necessary tax receipts and records, learn about the Form1040, decipher its instructions, copy the completed form and send it in. But even discounting these ancillary duties, the IRS figures it still will take more than five hours just to fill out this most-popular income tax return.


And if you have additional schedules or tax credits to file, you might be measuring your tax time by the calendar instead of the clock.  Don't want to spend that much time with your 1040? Then tax-preparation software may be the answer. These packages promise to save you time and money by putting tax law and the forms you need at your fingertips. And some tax-prep devotees contend they can even save your sanity during tax season.  If you decide this year to join the millions who do taxes on a computer instead of paper, here are some ways to make the process go more smoothly.

Determine your needs

Not too long ago, there were only a few choices when it came to doing your taxes by computer. But nowadays, a new tax-prep package seems to appear daily between Jan. 1 and the filing deadline. That means you must do some homework before you pick a program.
First, evaluate your personal situation. Are your taxes relatively simple or do you have a lot of considerations, such as a freelance job on the side, that could add to or cut your tax bill and filing requirements? Not exactly sure? Then look for a program with lots of explanations that walk you through the process step by step.  If, however, you're an old hand at tax filing but want the software calculators that double-check your math, look for a package that lets you easily skip over sections.  And don't forget the technical requirements. Make sure your computer can handle the software: that it has enough memory, the proper operating system, etc. Nothing's more frustrating than getting a product home and finding out you can't use it.

Comparison shop

Once you've decided what you need from a tax-prep package, shop around. Don't waste any potential tax savings by overpaying upfront. Look not only at the software's base price, but also at any costs for options and upgrades.
Is the cost of electronically sending your federal return to the IRS included? Do you have state forms to file? Are they and their e-filing with your state part of the package or is there an extra fee?  Will the product let you complete more than one return, say the joint one you file with your wife as well as your son's 1040EZ?  Does the program provide assistance by phone, chat or e-mail to help answer any tax questions you might have? If so, is it available 24/7? You're likely to be working on your return on weekends or after usual business hours.  Be sure that as you evaluate the costs of different packages, you examine comparable options.

Start at the beginning

You've loaded the perfect program onto your computer and are ready to knock out that pesky return. Stop! Read the introduction.

Tax Preparation Tools Make Life Easier For Equity Investors

By Paul Katzeff, Investor's Business Daily writes: Active traders used to dread tax season, and not just because of the money they owed the government.  Moving in and out of the market, cutting losses, pyramiding your positions and taking solid profits added up to a lot of trades each year. And getting all that data organized for the IRS wasn't easy.   But now the best brokerages make downloading your transactions into tax prep programs nearly effortless.

"This is a virtual necessity for investors," said Jim Buza, vice president of advice and guidance products for Fidelity Investments. "It saves a potentially huge amount of work. And automating the process cuts opportunities for errors."   Investors should check to see if a brokerage they're thinking of using downloads to the tax-prep program they use.   Very active traders should make sure the brokerage they're considering offers a high-volume record-keeping program such as GainsKeeper or TradeLog.

Other resources include extensive tax education and information you can use in preparing your own return. Information is strongest in some areas related to the mutual funds and retirement accounts that many of the brokerages have long focused on.   Fidelity Investments' page on "Answers to Your Top Tax Questions" features links to explanations of contribution deadlines for individual retirement accounts for the 2012 tax year and of the contribution limits for 2013.

Taxing Queries

That same Fidelity site starts with the basics. It answers questions such as:

When will shareholders receive tax forms from the firm? Those forms range from the 1099-DIV for dividends, to the 5498 for contributions, conversions, re-characterizations and rollovers to an individual retirement account.   Fidelity.com — cited in the Best Online Brokers survey — also reviews new regulations that affect your tax filing. And the site has a link to a page that lets you view year-end distributions from your Fidelity funds.  Yet another link leads to a discussion of how you can convert a traditional IRA to a Roth, or vice versa.   Type "taxes" in TD Ameritrade's (AMTD) search window, and a live-chat window opens. A list of links to the brokerage's posting on tax-related topics also appears.

Charles Schwab's (SCHW) Rodney Prezeau, senior vice president of client experience, reminds investors: "We are not a tax provider. We train our financial consultants and portfolio consultants to be aware of tax-efficient investing ."  If you are self-employed and are trying to decide whether to open a solo 401(k) plan, Simple IRA, SEP IRA, profit-sharing plan or money-purchase plan, you can check out E-Trade's chart comparing all of their features.  Tax strategy plays a role in deciding whether to buy bonds and which type. Many brokerages offer information about the pros and cons of fixed income securities and approaches, like bond ladders. Several, including E-Trade and Fidelity, also let you trade bonds.   Cost-basis information is widespread.Scottrade explains the new federal rules and their starting dates for stocks, mutual funds, ETFs, options, bonds and other securities. The brokerage also describes how the rules are reflected in changes to cost-basis tax documents it provides to customers.

In And Out

Schwab explains the pros and cons of cost-basis methods such as first in, first out (known as FIFO) and last in, last out (LILO). FIFO is often the default method used by brokerages.

Why the reminder? When you make money investing in stocks and want to sell part of a position, your gut instinct might be to sell the oldest shares first, aiming for the lower tax rate on long-term capital gains. But older shares might have cost much less than newer ones, resulting in a bigger cap gain.   Fidelity and USAA provide links at their tax centers that may let you buy TurboTax tax-prep software at a discount.   USAA also posts a list of 13 often-overlooked tax deductions.  Investors in Vanguard's municipal-bond funds can find a state-by-state breakdown of their tax liability at the fund giant's tax center.