Did you know there were some unexpected tax benefits hidden in the recent American Taxpayer Relief Act of 2012 (ATRA)? Included in the "extender" provisions for 2012 were two little-known benefits: the qualified charitable distribution from an IRA and the exclusion from income for employer provided mass transit and parking benefit. Let's look at them in more detail.
Mass Transit and Parking Benefit
Throughout the 2012 calendar year, employees were only able to exclude up to $125 in transit pass costs paid, which were paid by the employer or a tax-exempt payroll deduction plan (a cafeteria plan). The ATRA increased the amount retroactively to $240 per year.
There is definitely a benefit here. If the employer continued to provide, or allow, the same amount of benefit as in previous years, the taxpayer may be due a refund for excess Social Security and Medicare taxes paid. Taxpayers who are eligible for the full $240 a month have an increased amount of exempt pay of $1,380 for the year. While any additional federal or state income tax withholding is included on the tax return, the IRS doesn't permit this over withholding to be claimed on the tax return, so any excess Social Security or Medicare taxes paid must be refunded through the employer. Taxpayers could have a refund of up to $77.97 due to the excess payment.
Charitable Distribution from an IRA
The other hidden benefit is the qualified charitable distribution for taxpayers age 70 ½ or older who are withdrawing from their IRA.
To understand the benefit let's look at one of the important IRA rules. Taxpayers who are 70 ½ or older must withdraw a minimum amount from their total IRAs each year based on their age and the approved life expectancy tables. The minimum required distributions are generally taxable.
The qualified charitable distribution rule allows a taxpayer to make a direct contribution to a qualified charity from their IRA tax-free and consider the distribution as all or part of their annual minimum required distribution. This allows taxpayers the opportunity to meet their requirements tax-free and help others in need at the same time.
Due to the retroactive extension of the tax provision, the IRS has some special considerations in place for taxpayers who wish to benefit from this provision this year.
For regular IRA distribution after Nov. 30, 2012 and before Jan. 1, 2013, eligible taxpayers may contribute an equal amount to charity before February 1, 2013 and qualify for the special treatment. In addition, charitable distributions made after December 31, 2012 and before February 1, 2013 may be deemed eligible 2012 charitable distributions.
So what is the big deal? Well the big deal is this: these two examples of tax benefits embody all that is tax burden management. Neither of the above is a big benefit, nor does either one affect "millions of taxpayers." However, if they impact you and you know about them, you will have more money in your pocket after you take advantage of them. Finally where there are these two tax benefits, there are literally hundreds of others -- if you know about them and take them on your tax return. So follow the tax laws and understand what benefits exist and more importantly when they apply to you -- take them. If you are unsure or don't want to spend the time on each and every law and deduction, then find someone who does know and keep more of your money.