If death tax no longer applies, can I just write my own will?

Until this year, multiyear estate planning has been a major headache for both lawyers and their clients. Even the best lawyer can’t write someone’s will in November when nobody has any idea what the law will be in January! Congress’ passing the American Taxpayer Relief Act of 2012 at the beginning of the year was just that: Relief.

For at least the last two decades, estate tax laws have been constantly changing and subject to “temporary” tax provisions. Even though estate planning is forward-looking, there has been no way to accurately predict what the tax law would be next year, let alone when the maker of the will actually passed away!

For many people of comfortable means, this has meant an annual (and often expensive) trip to their lawyer’s office to prepare unintelligibly complicated estate documents to try to reduce the potential tax bite.

This law has finally brought some certainty to the estate tax laws: In short, for taxpayers worth less than $5 million (and married couples worth under $10 million), the estate tax is a thing of the past. Gone, too, are most of the complicated gyrations married couples had to go through to take advantage of both spouses’ exemptions. Good riddance.

Even better news. Many states with inheritance taxes are phasing them out or have eliminated them completely. Taxpayers in Indiana no longer have to worry and Tennesseans are about to join them! In Illinois, beginning this year, only estates over $4 million are subject to state death taxes.

The results of these federal and state tax simplifications and phaseouts should be incredibly positive. Estate planning should be a lot simpler for most people. The all-too-frequent, tax-driven professional reviews of these plans will come to an end. Without having to consider estate or inheritance tax, probate proceedings should also be simpler and cheaper.

But does this mean you should treat estate planning as a do-it-yourself project?

You are free to write your own will, and many have done so successfully.

Many lawyers do not make money writing wills. In fact many “lose money” and don’t cover their overhead for the time spent. Often, they provide simple estate planning as a service to their clients.

Before you decide to buy will software and go it alone, there are several things you should consider:

Effective estate planning also includes providing for your minor children. Who should rear them if both parents die? Should their guardian have access to the purse strings? If you become disabled and your spouse can’t act, who should make decisions about your welfare? What if there’s a dispute among the family?

What if your spouse remarries? Do your children get “cut out” in favor of the new person’s kids?

How about your IRA and life insurance? Are the beneficiaries up to date? Should you roll over the IRA now to a Roth IRA and avoid a nasty tax problem? Either way, did you choose a beneficiary that would minimize the income tax consequences? (And you thought the tax problems were gone.)

Many do-it-yourself wills (and trusts) have survived the probate process, but have been delayed or subjected to additional legal procedures because their makers didn’t follow certain formalities or weren’t aware of the consequences of those “helpful” terms and phrases they thought “would be a good idea” to include. Remember, you won’t be around to explain what you meant to say.

Any amount these do-it-yourselfers saved by not consulting an attorney was more than consumed by additional probate costs. The law reporters are full of examples of probate cases that “saved” a few hundred dollars and wasted thousands of dollars. (And those are just the cases that went up to the appellate courts!)

An estate can easily be whittled away to nothing if it comes in dispute.

Estate planning remains important. While the estate tax may be gone, the probate process isn’t. The same important considerations apply. You’ve worked a lifetime to accumulate your possessions and you should invest a few dollars in making sure your legacy isn’t wasted.

Can I still get a tax break for insulating my house?

Yes, provided that you hurry. The applicable tax credit expires on December 31, 2013.

It’s difficult in the summer to visualize three feet of snow on the lawn, a slippery sidewalk and a drafty threshold, but in just a few months, they will all be back. It’s much easier to fix your home now instead of when the cold wind is howling. And the year you make home improvements is the year that you’ll reduce your heating bill.

There are three energy credits of interest to homeowners. The first is known as “Qualified Energy Efficiency Improvements” and covers insulation, roofs and windows in existing homes.

The second is “Residential Energy Property Expenditures.” This program covers furnaces, air conditioners, electric heat pumps, water heaters, biomass (wood) fueled stoves and advanced main air-circulating fans in existing homes. Both of these first two programs expire at the end of 2013.

The third program is for “Residential Energy Efficient Property.” This credit is for solar, fuel cell, small wind, and geothermal systems. It expires at the end of 2016.

Let’s first focus on the first two programs. You can take a credit of up to 10 percent of the purchase price paid for these improvements, up to a total cost of $5000 (for a total credit of $500). That’s a maximum for the lifetime of the program. If you’ve taken any of these credits since 2005, you’ll need to subtract the credit(s) you already took from this year’s maximum credit.

Only $200 of this credit can be used for replacement windows.

Specific standards dictate what materials or systems qualify. They must meet the standards set by the 2009 International Energy Conservation Code or, if applicable, Energy Star requirements. For example, a metal roof must have pigmented coatings and asphalt roofs require cooling granules designed to reduce heat gain.

The manufacturer should provide information on whether their products qualify. When in doubt, demand proof that the materials qualify for the credit before you buy. Check the packaging and the manufacturer’s website.

Finally, the third program is a more generous 30 percent credit of the cost of installing solar, small wind, fuel cells, or geothermal systems. This third credit can be used in new as well as existing homes. If you are considering building a new home or a major upgrade, this credit might be of interest to you.

Even with the credit, it may still be more expensive in today’s energy market to invest in these systems. But as energy prices rise, the cost gap may very well narrow. There is also the satisfaction of having taken a positive step toward a better environment.

To claim any of these credits, attach Form 5695, Residential Energy Credits to your return. You should keep the certification or Energy Star label with your tax records, but don’t attach them to your tax return.

Everyone agrees that conserving energy saves money, reduces pollution and is the right thing to do. Yet Congress has passed tax breaks for saving energy several times only to let them expire, and then reinstated them several times. The latest reinstatement came in the extenders bill (American Taxpayer Relief Act of 2012) passed at the beginning of the year.

It remains to be seen if these energy credits will be extended further. Most of the other “temporary” tax breaks in the tax code were made permanent or extended for longer periods this time. The current crop of tax credits is also not as generous as prior versions. A 10 percent tax credit barely covers the sales tax paid on these items.

Fortunately, there are no income limits on using any of these credits. And even if you don’t itemize your deductions, you can still take advantage of them. These credits apply to your main residence and include mobile homes, cooperatives and condominiums. If you live in a duplex and both families chip in for new insulation, each of you can take up to the maximum credit for your share. But you may not use them to improve a rental property or your vacation home.

I thought the “fiscal cliff” only applied to the tax rates after January 1. But the IRS says that I can’t file my 2012 return until at least January 30 and refunds will come even later? Why is my 2012 refund being delayed?

The majority of taxpayers will be able to file starting on January 30. But taxpayers who must file certain forms or schedules will have to wait until mid-February or early March before the IRS will be able to process these returns. These forms include a lot of the business-oriented tax credits. But several of the tardy forms affect mainly individuals, including energy-efficient home credits and qualified adoption expenses.

There are several reasons why the fiscal cliff delayed the tax filing season. A major reason was that not all of the tax provisions that are affected expired on December 31, 2012. Many of them had already expired at the end of 2011.

As a result, these expired provisions affect 2012 tax liabilities for a lot of people. Many tax experts assumed that Congress would extend these provisions retroactively (as they have done in the past). Still, there was a lot of uncertainty, particularly as the end of the year approached.

The IRS is required by law to collect and program their systems on the basis of the law as it is currently in effect. So it can’t legally begin changing its systems to reflect tax changes until the proposals become law. As a result, the IRS was unable to start reprogramming its computers, revise forms, or make other necessary changes until President Obama signed the new tax law on January 2.

These already-expired breaks included relief from the Alternative Minimum Tax, which would have caused many middle class taxpayers to pay significantly higher taxes in 2012. The new tax law extended the relief that had been given in 2011 and earlier years to 2012. In this latest legislation though, that relief has been made permanent. The amount of the relief is also being indexed in future years to account for inflation.

Other retroactively-extended breaks allow teachers to deduct $250 for classroom expenses, reauthorize deductions for residential energy efficiency improvements, and provide the ability to give away IRA proceeds tax-free to charity. They also allow taxpayers to deduct college tuition and many other provisions, including the popular research tax credit for businesses.

For the last several years, American financial planning has been in a shambles because of the uncertainty of the tax laws. Every year, Congress has waited until the last minute to extend popular tax breaks. In some cases, like this year, they waited until beyond the last minute.

Many economists believe that the economy and financial markets suffer when taxes are uncertain. Not knowing what tax rates are going to be next week or even what the current tax law will end up being is unsettling to anyone trying to prepare a budget.

The new law brings some good news. Some of these tax breaks that have been regularly extended on a year-to-year basis have now been made permanent. In addition, the new tax brackets are permanent.

Of course, even “permanent” tax laws evolve, and are always subject to change. But at least now we have fewer provisions that automatically expire on some future date. This brings more certainty in the short and medium term.

There are many provisions of the new tax law will affect the amount of tax you’ll pay. I will have a lot more to say about the provisions of the American Tax Relief Act of 2012 in future columns.

Does this mean the April 15 (and March 15 corporate) filing deadlines will be extended?

So far, the government has made no moves to change the tax deadline. Of course, taxpayers can always request filing extensions.

My best guess is that the tax filing season will be compressed, but will end on schedule in mid-April.

Remember, even if you file for an extension, you still have to pay your taxes by the deadline or you’ll be charged interest and penalties.

What about dropping off my tax information and let them prepare it while I grocery shop?

Some people dread filing a return. So they’ll drop off a W-2 and maybe last year’s return so they don’t have to sit there and wait.

First of all, if your tax return is really that simple, you should file it yourself and save the filing fee. The IRS and many other agencies will help you file and answer your questions for free.

If your return is very complicated, your preparer may have given you an “organizer” to fill out. These can be helpful if you have a lot of stock transactions or other circumstances. That’s fine, because your preparer has all the information necessary for you to pay the least amount of tax possible.

If you are in between (and almost everybody is), you should allow the preparer to interview you to be sure that you get all of the deductions and credits you have coming. The few minutes you spend with the tax preparer can yield a payoff of thousands of dollars per hour for the time you are sitting there!

But if you drop it off (and nobody asks) you could miss mortgage deductions, property tax deductions and a lot more. Even if you don’t itemize, there are a lot of “above-the-line” deductions or credits that you could be taking! Sit back and take a few minutes to be sure you are getting the refund you deserve.

There’s an ad on TV and several places are advertising that you can do your taxes on your last paystub instead of waiting for a W-2? Can I do this?

Absolutely not. Omitting your W-2 is considered filing an incomplete tax return. The IRS recently issued a warning against submitting incomplete tax returns and has made it clear they intend to punish tax preparers who intentionally do it.

The tax chains know all of this and have no intention of actually filing a tax return for you until they have a copy of your W-2. Instead, for a hefty price, they will estimate how much your refund will be and make a loan to you based on your potential refund.

These loans carry steep interest rates.

Every year, there’s a new scam to bring in tax (and particularly loan) customers. January and February witness a great battle among the tax giants (and the do-it-yourself software makers) to bring in as many customers as possible. Their goal is to do whatever it takes to lock you in before you go to their competitors.

So my question to you is, when a tax service works against you, and has such shady practices, why should you trust them to prepare a return for you? Or even give them your financial information?

Tax planners often use a November or December paystub to help a client forecast tax liability, or to figure out if an end-of-the-year charitable contribution or transaction should be made. But that’s very different than selling you a 30-day loan that carries loan-shark interest rates.

There are a few, rare circumstances when you can omit a W-2 from your return:

If, after trying, you can’t get a W-2 from your employer by February 14, and you’ve contacted the IRS for help, the IRS will allow you to file Form 4852, which is a substitute for Form W-2. It asks you to estimate what your wages and withholdings were.

Also, if your W-2 is incorrect and you’ve been unable to get a corrected W-2, you can use Form 4852 with your tax return. Be warned that the Form 4852 instructions make it very clear that the IRS will severely penalize those who misuse this form.

Besides, what’s the rush? Your employer must furnish you a W-2 by January 31. Because of the late tax legislation, you can’t file a return this year until January 30 anyway. Your refund isn’t coming any sooner than mid-February.

And what if you get another 1099 or other tax statement you weren’t expecting? Then you’ll have to pay to file an amended return.

I’ve been hearing about the “fiscal cliff” and frankly, time is running out. I’m getting worried. What should I do before December 31 to protect myself?

Predicting the future is always a dangerous business and I like my crow roasted medium. All of the drama aside, the “fiscal cliff” is simply this year’s version of the annual, end-of-year showdown between the Democrats and Republicans over tax policy.

Last year, it was over Social Security taxes. You might recall that not only did we have a cliffhanger at the end of the year, but Congress initially extended the two-percent tax break for only two months, creating a second cliffhanger at the end of February.

Fiscal cliffs are not a joke. They hurt ordinary people:

Because of tardy tax legislation, the IRS is once-again likely to delay the start of the filing season. It takes time to reprogram the system. Later-filed tax returns mean even later tax refunds. Which means taxpayers can’t spend those tax refunds and stimulate the economy until later.

What if a small business is on the verge of hiring a worker? If an entrepreneur doesn’t know what the tax rates will be, it’s impossible to make a budget. Should a businessperson hire the worker and risk coming up short when it’s time to meet payroll? What sensible entrepreneur wants to take that chance?

Not knowing what tax rate to expect is called tax turbulence. It can be a major drain on the economy. Many economists believe it also hurts the stock market.

Of course, this, too, shall pass. My advice is to Keep Calm and Carry On. Unless you have a very specific situation or have a fairly high income, relax, and take the long-term view.

Meanwhile, here are some specific end-of-year things you should consider:

Next year, health care expenses are only deductible to the extent they exceed ten percent of your adjusted gross income (rather than 7-1/2 percent this year). The rule will remain 7-1/2 percent for those 65 and over. So, if you have a lot of health expenses, try shifting some expenses into 2012 instead of 2013. Refill prescriptions, visit the dentist, etc.

If this year finds you in a lower tax bracket than usual and you can afford it, consider converting your IRA to a Roth IRA before January 1st. It’s always a bit of a guessing game as to when is the best time to make the conversion and pay the tax. Be sure to speak with a professional before you proceed.

Ordinarily, tax planners suggest that you defer income to the next year and prepay expenses in the current year. This allows you to delay paying some taxes for a year. But if tax rates really do go up, this strategy could backfire. Still, unless your income is over $200,000, it’s probably a safe bet to go with the usual strategy: Delay income and accelerate deductions.

If you are in the process of buying or selling real estate or other assets, by all means, listen to and cooperate with the professionals helping you. If the deal needs to be done in 2012, git‘er done! The same goes for estate planning.

Is there any way we can prevent Congress from creating these fiscal cliffs in the future?

Congress often waits until the 11th hour to pass tax legislation in order to convince constituents that “we-tried-as-hard-as-we-could-but-those-wicked-folks-in-the-other-party….” Maybe this is good politics, but it’s terrible economics.

We need to remind Congress what we learned in high school. Our government is a government of compromises. Our system is specifically designed to resist the changes of would-be tyrants. But with a model like ours, it’s vital for legislators to work together. It’s their job: Conduct the peoples’ business—not damage the economy playing politics.

We need to remove the incentives for Congressmen to be dogmatic and uncivil. Let’s inform our individual legislators that we are watching them, and that like 90 percent of other Americans, we aren’t fond of fiscal cliffs.