2011 Tax Updates
Dear Client,
2011 had been predicted to be a quiet year in federal tax news – as it landed between major tax legislation in 2010 and expected tax reform in 2012 - but the year brought many significant tax developments from the Obama Administration, Congress, the Treasury Department, the IRS and the courts.
The following tax incentives that expired on December 31, 2011, unless extended by Congress retroactively during 2012, including some that were new with EGTRRA (2001) and others that were introduced when the Tax Relief Act of 2010 was enacted include:
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Deduction for state and local sales taxes in lieu of state and local income taxes.
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Tax-free IRA distributions to charity.
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Increased (to 100%) exclusion for sales of qualified small business stock.
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Higher education tuition deduction.
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Teacher’s classroom expense deduction.
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Mortgage premium insurance deduction.
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Plug-in conversion credit for vehicles converted from standard to plug-in electric drive motor vehicles.
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Residential energy property credit for qualified energy efficient improvements and expenditures.
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Increased AMT exemption amounts for individuals, for 2011 the amounts were $48,450 for single individuals and $74,450 for married filing joint.
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Nonrefundable tax credit offset of your entire regular and AMT tax liability.
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Transit benefits parity.
Individual income tax provisions that were extended through 2012 by the Tax Relief Act of 2010 include:
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Reduced marginal tax rates of 10, 15, 25, 28, 33, and 35 percent.
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Lower rates of zero- and 15-percent for capital gains, dividends and certain property held for more than five years.
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Marriage penalty relief for taxpayers filing joint returns.
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Repeal of exemption and itemized deduction phase-outs.
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Various education-related incentives including: (1) exclusion from income and employment taxes for employer-provided education assistance; (2) exclusion from income for National Health Service Corps Scholarship and Armed Forces Scholarship programs; (3) student loan interest deduction; (4) Coverdell Education Savings Accounts contribution limit and related provisions; and (5) American Opportunity Tax Credit (AOTC).
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Amendments made to the child tax credit by EGTRRA, including the increased credit amount of $1,000 per qualifying child.
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Child and dependent care credit enhancements, including the increased maximum credit percentage of 35 percent, higher income limits, and increased maximum amount of qualifying expenses.
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Increased maximum amount of the earned income tax credit and broader AGI phase-out ranges for taxpayers with three or more qualifying children.
On December 31, 2011 President Obama signed the Temporary Payroll Tax Cut Constitution Act of 2011. The new law continues the 2011 employee-side payroll tax cut (4.2%) for the first two months of 2012. It also included a recapture provision for individuals who receive more than $18,350 during the two month period.
The Social Security wage base increases from $106,800 for 2011 to $110,100 for 2012.
The maximum dollar limit amount for the adoption credit and the adoption assistance program was increased to $13,360 for 2011. This limitation decreases to $12,650 in 2012 and for tax years after 2012, the maximum dollar amount limit drops to $5,000 with no inflation adjustment ($6,000 for children with special needs).
Regulations governing basis and sales reporting by securities brokers were finalized early in 2011. You may not know that you have the right to choose the method that is used to determine your stock or other security's basis. If your broker uses the average basis method, you may affirmatively elect that method also. However, you may change from that method to another at any time during the year; for example, you may choose to specifically identify stock on a sale-by-sale basis. Alternatively, you may authorize your broker to select a basis determination method for you as allowed under general agency principles. The basis determination rules can be complicated, but they provide you with some flexibility in determining the gain or loss when you sell your securities.
If you made a contribution to your retirement plan before year-end, you can generally deduct at least a portion of the contribution amount to reduce your taxable income. An additional “catch-up” contribution is allowed for an individual who is over age 50 by the end of the tax year. Although Roth IRA contributions are not deductible because they are made after-tax, their earnings are tax-free.
Also remember, that if you made a Roth IRA conversion in 2010 and chose to recognize the income ratably over two years, you must report half of the total amount in 2012.
With 2011 behind us and many changes due in 2012, now is an ideal time to review your tax situation and evaluate strategies that may help minimize your tax bill. While tax planning can often be timely and complex for many taxpayers, our office is here to assist you with this daunting task. If you have any questions please contact our office.
Best Regards,
Tim Vance Trudy Clark Lindsey Vance
Vance Tax & Financial Services, Inc.
