As nearly everyone who> has ever filed a 1040 form knows by now, Washington ended the year by sending a bunch of goodies to America's taxpayers: a two-year extension of lower tax rates, a one-year break on Social Security taxes and yet another short-term "fix" to the dreaded alternative minimum tax.
But don't let that lull you into complacency. Tax experts are already warning that the good news only goes so far. Over the next two years, new rules and Washington's failure to find a long-term fix for old problems means that it will still be easy to trip up on taxes. Taxpayers who buy and sell stock can expect more-detailed forms to help calculate capital gains and losses, a change that shifts more responsibility to brokers. At the same time, people looking to get money back from Uncle Sam for going green might have to lower their expectations.
Overall, experts say, the year-end tax deal helped individuals by extending an assortment of breaks, including tax credits for adoption and for the care of children under 13, and relief from the so-called marriage penalty. Of course, critics of the deal note that the price of all this is steep, since it adds to the nation's already hefty $14 trillion debt. What's more, Congress and the president settled things only for two years, at best. Before you know it, they'll be arguing again about what taxes to raise, what taxes to lower and what to leave alone just in time for the 2012 presidential election. "That kind of uncertainty is challenging," says Carol Kroch, a managing director at wealth-management firm Wilmington Trust.
Here are some changes that could take unsuspecting taxpayers by surprise.
A crucial ingredient in figuring out gains and losses that must be reported at tax time, "cost basis" is the original price of the shares, adjusted for things like commissions, fees and stock splits. In the past, brokers reported to customers and the Internal Revenue Service proceeds from stock sales in a given year, but it was up to investors to figure their gains and losses. Starting this year, brokers have to report the cost basis of individual stocks, a move that "shifts the math work from customers, who may not have the skills, to the brokers," says Stevie Conlon, senior director and tax counsel at Wolters Kluwer Financial Services. But investors are still left with a decision when they buy and sell shares of a company in different batches, or "lots": which to identify as being sold first. Selling a batch purchased at a higher price can mean a lower tax. And once you get a handle on the new rules for stocks, get ready for more: Starting in 2012, brokers have to report cost basis for mutual funds and exchange-traded funds.
The tax deal extended energy credits for home improvements such as insulation but the credits are much less generous. Now homeowners can claim only up to a $500 lifetime credit instead of last year's $1,500, and they face new limits on some projects, like $200 for replacing windows barely enough to cover the cost of one double-paned window.
There's no standard deduction for property taxes this year, so you'll have to itemize to get the deduction, says Melissa Labant, technical manager at the American Institute of CPAs. People who don't have enough deductions to itemize will be out of luck.
A provision for people who are 70 or older to donate up to $100,000 to charity each year from their IRA is back. (There's no deduction for the contribution, but it doesn't count as income.) But don't move too fast: Accountants say it's still better for some donors to give appreciated assets outside the IRA and take the full deduction for the contribution.
Alternative minimum tax:
While the December tax deal saved an estimated 21 million Americans from forking over this tax, the break is only for 2010 and 2011. That means lawmakers will probably be hashing it out again some time before the year is out. On the bright side, tax experts say the aggravation of dealing with the AMT, year in and year out, could finally spur a move for a permanent solution.