It looks like 2013 is off to a good start. With the passing of The American Taxpayer Relief Act of 2012 on New Year's Day, Americans not only avoided going over the "fiscal cliff" but we may also end up seeing more money in our pockets.
The Relief Act includes a permanent patch of the Alternative Minimum Tax (AMT) and the permanent reduction of tax rates, as well as the reinstatement of various tax deductions--the Educator Expense Deduction, the Tuition and Fees Deduction, and state sales taxes in lieu of state income taxes, among others.
Here's a breakdown of the Relief Act and how it will impact the size of your wallet:
The Alternative Minimum Tax (AMT). The AMT patch was permanently extended, which means 34 million middle-income families can celebrate the New Year with an average of $3,700 back in their wallets. Under current law, the AMT typically hits taxpayers who have a household income of more than $75,000 and are married with more than two children.
The Educator Expense Deduction. Millions of teachers spend their own money to purchase school supplies. Teachers now can claim up to $250 of classroom expenses for supplies, materials, books, and software.
Tuition and Fees Deduction. College students in need of monetary relief can once again deduct education expenses related to schooling, including tuition, books, and other supplies up to $4,000.
Mortgage Debt Relief. With the crash of the housing market, millions of people lost their homes to foreclosure or were forced to short sale their properties. Previously, if mortgage debt was canceled or forgiven after 2012, homeowners would be required to pay taxes on the canceled or forgiven debt. Under the new law, up to $2 million of forgiven debt is eligible to be excluded from income in 2013.
Energy Tax Breaks Homeowners who made qualified energy-efficient improvements to their homes in 2012 will still be able to claim the Residential Energy Property Credit. This credit could mean as much as $500--continuing to give homeowners more green for going green.
Reduction in Individual Income Tax Rates. Ninety-eight percent of Americans will continue to see lower tax rates as a result of the permanently extended Bush Tax Cuts. Tax rates will remain at 10, 25, 28, and 33 percent on incomes below $400,000 if single ($450,000 married filing jointly). The top rate goes from 35 to 39.6 percent only for the highest earners. Dividends and capital gains top tax rate goes from 20 to 15 percent for those with income greater than $400,000 ($450,000 if filing jointly).
Tax Relief for Families and Children
-- Child Tax Credit. You will continue to be able to qualify for a $1,000 tax credit for each dependent child you are able to claim under the age of 17.
-- Earned Income Tax Credit (EITC). If you have three children and are married, you can still receive a maximum tax credit worth more than $5,700.
-- Dependent Care Credit. Increased dependent care credits remain in place that allow you to claim up to $2,100 of your eligible dependent care cost for two or more dependents.
Given all the ways The American Tax Relief Act of 2012 is helping you keep more of your hard-earned money, what do you plan to do with it?
Lisa Greene-Lewis is a CPA and TurboTax Tax Expert. She has more than 15 years of experience in tax preparation, including positions as a public auditor, controller, and operations manager. For up-to-date tax tips and tax news, go to the TurboTax Blog.