This is a great time to help our clients lower their tax bills or get a larger refund from the IRS.
1) Paperwork - Gather your tax data as soon as possible. For many, the biggest hassle at tax time is getting all of the documentation together. This includes last year’s tax return, this year’s W-2s and 1099s, receipts and so on. Keep all the information that comes in the mail in January, such as W-2s, 1099s and mortgage interest statements. Be careful not to throw out any tax-related documents, even if they don’t look very important. Round up all receipts and canceled checks, such as those from charities; check latest brokerage statements for year-to-date gains or losses, if any, when they arrive; and get medical receipts and insurance reimbursement forms in order. Group similar documents together, put them in different file folders or envelopes so they are organized. If you start organizing your files now, it will be easier to avoid a last-minute rush to our office.
2) AMT – For tax-year 2011, the alternative minimum tax exemption increases to the following levels:
• $74,450 for a married couple filing a joint return and qualifying widows and widowers, up from $72,450 in 2010.
• $37,225 for a married person filing separately, up from $36,225.
• $48,450 for singles and heads of household, up from $47,450.
Taxpayers who are or might be affected by the AMT have additional factors to consider when attempting to reduce the overall tax bill. Certain items of income can trigger an AMT liability such as the exercise of incentive stock options, interest from certain municipal bonds and large, long-term capital gains, qualified dividends and/or cashing out on a 401k. Also, different itemized deductions are subject to different phase-out limits for regular tax purposes as it relates to the AMT.
3) IRA - A traditional IRA offers tax-deferred savings while a Roth IRA offers tax-free savings for retirement. But Roth IRA contributions are limited based on household income. In 2012, those younger than age 50 can contribute a maximum of $5,000 and if you are 50 and older you can contribute up to $6,000. If you are consider rolling over a traditional IRA to a Roth IRA remember that balances in a Roth IRA grow tax free and distributions from Roth accounts are generally not taxable after a five-year holding period. Unlike traditional IRAs, there is no minimum distribution requirement for Roth IRAs. However, conversion comes with a current-year tax bill and must be paid from money outside of the IRA account for the transaction to make sense. Roth conversions/roll over’s can be a very powerful planning tool, but they are not for everyone. Individuals who did Roth conversions in 2010 and elected to spread the tax payment over 2011 and 2012 will have to pay one-half of the tax owed on their 2011 income tax return.
4) Disaster-Related Losses - Affected taxpayers in a federally declared disaster area have the option of claiming disaster-related losses on their federal income tax return for either this year or last year. Claiming the loss on an original or amended return for last year will get the taxpayer an earlier refund, but waiting to claim the loss on this year’s return could result in a greater tax saving depending on other income factors.
5) Homeowners - Pay your property taxes early, make an extra mortgage payment (the interest portion is deductible).
6) Credit Cards Payments - Using a credit card is the same as using cash—the deduction (tax related deductions only) is taken in the year the charge is incurred, not the year the credit card balance is paid off.
7) Marital Status — If you got married last year or are getting married this year keep in mind that taxpayers are considered married for the entire calendar year even if they get married on December 31.
8) Health Care — There were lots of changes in 2011 in health care deductions as a result of the Affordable Care Act Tax Provisions. For instance, the cost of an over-the-counter medicine cannot be reimbursed from a flexible spending account unless it’s for insulin or you have a prescription.
9) Mileage allowance — The standard mileage rate for business use of a car, van, pick-up or panel truck is 51 cents a mile for miles driven during the first six months of 2011 (January through June) and 55.5 cents a mile for the rest of the year, up from 50 cents for 2010.
10) Energy Property Credit - This credit generally equals 10 percent (down from 30 percent the past two years) of what a homeowner spends on eligible energy-saving improvements, up to a maximum tax credit of $500 (down from the $1,500 combined limit that applied for 2009 and 2010). In addition, the energy standards are increased for most property; windows, exterior doors and skylights, for example, must meet Energy Star Program requirements. The cost of energy-efficient windows and skylights, energy-efficient doors, qualifying insulation and certain roofs also qualify for the credit, though the cost of installing these items do not.
11) Health insurance deduction for self-employed people - In 2011, eligible self-employed individuals and S corporation shareholders can use the self-employed health insurance deduction to reduce their income tax liability. Eligible taxpayers can also still claim this deduction on Form 1040. Premiums paid for health insurance covering the taxpayer, spouse and dependents generally qualify for this deduction. In addition, premiums paid to cover an adult child under age 27 at the end of the year, also qualify, even if the child is not the taxpayer’s dependent. However, the deduction from self-employment income for determining self-employment tax, which was available only in tax-year 2010, no longer applies. As before, the insurance plan must be set up under the taxpayer’s business, and the taxpayer cannot be eligible to participate in an employer-sponsored health plan.
12) Tuition Credit - Maximum credit for the American Opportunity Credit is $2,500 per student in 2011 and 2012 (covers 100% of the first $2,000 and 25% of the next $2,000) for tuition, fees and course materials (books) for the first 4 years of post-secondary education in a degree or certificate program. Also, Eligible taxpayer, spouse or dependent enrolled in an eligible postsecondary institution may deduct up to $4,000 paid for tuition and fees in 2011.
Finally, the penalties for failure to file and late filing of information returns have increased. In some cases it has doubled. This depends on the return and date of late filing.
