Tax Changes & Planning Opportunities
Greetings to clients and friends! Below is a brief update on 2011 & 2012 tax law changes to some of the most relevant tax provisions.
INDIVIDUAL INCOME TAXES
Extension of Current Tax Rates
No change in income tax rates (e.g., ordinary income, qualifying dividends, and capital gains). Individual tax rates remain at 10, 15, 25, 28, 33, and 35 percent through calendar year 2012. Long term capital gains and qualified dividends will continue to be taxed at a maximum rate of 15% through 2012. If you are in the 10% income tax rate, capital gains will be taxed at 0%.
No phase out
Itemized deductions and personal exemptions will NOT be phased out for higher income taxpayers in 2011 or 2012. The amount a taxpayer can deduct for each exemption is $3,700 for 2011.
Tax Credits & Deductions
There will be a continuation of various tax credits through 2012 (e.g., The Child Tax Credit, the Earned Income Tax Credit, and the American Opportunity Tax Credit) all of which phase out for higher-income taxpayers. The following deductions have been extended through 2011: higher education tuition deduction, teacher’s classroom expense deduction, and charitable contribution of IRA proceeds. The Student Loan interest deduction has been extended through 2012.
Social Security Taxable Earnings
The Social Security contribution and benefit base will increase from $106,800 in 2011 to $110,100 in 2012. It is likely this base will continue to increase over the coming years.
Alternative Minimum Tax:
For 2011, the AMT exemption is increased to $74,450 (Married Filing Jointly). The AMT patch expires on 12/31/2011.
Planning Tip: AMT has generally been a problem only for those with large medical expenses, state and local taxes, real estate taxes, miscellaneous deductions or incentive stock options in relation to their income. Now, add to that list dividend income and long-term capital gains.
Required Minimum Distribution for Roth IRA Conversions
For 2011 and forward, there is no AGI limit on converting a traditional IRA to a Roth. For conversions taking place in 2011 and forward, the tax on conversion must be paid in the year of conversion. Please advise us if you did a 2011 Roth Conversion.
If you completed a ROTH conversion in 2010 and elected to defer the tax to years 2011 and 2012, you will pay tax on ½ the conversion in 2011 and the other ½ in 2012.
Standard Mileage Rates:
2011 2011 2012
1/1-6/30 7/1-12/31
Business .51 .555 .555
Medical .19 .19 .23
Charity .14 .14 .14
Expired Provisions for 2011
The first-time homebuyer credit and the making work pay credit expired in 2010 and are no longer available.
Bonus Depreciation
Bonus depreciation for qualifying investments made through December 31, 2011 will be eligible for 100% bonus depreciation. For the year 2012, it returns to 50%.
Section 179 Depreciation
For 2011, the maximum amount a taxpayer may expense is $500,000 of qualifying property. This will be reduced to $125,000 in 2012 and to $25,000 in 2013.
Teacher Supply Deduction
The $250 deduction for teacher supplies has been extended as long as 900 hours are worked in the calendar year.
Education Credits
Effective through 2012, the American Opportunity Credit provides a maximum credit of $2,500 and extends to all four years of a college-degree program study; 40% of this credit is refundable. The Lifetime Learning Credit with a maximum of $2,000 may also be available. In lieu of either credit the taxpayer can claim the tuition deduction. Both the credit and deduction are subject to phase-out for higher income taxpayers.
Energy Credits
For all qualified upgrades, the credit is 10% of the covered cost up to a maximum credit of $500. If you claimed $500 or more in energy tax credits from 2006-2010, you are NOT eligible for any additional credits in 2011.
Schedule D & Form 1099-B
For 2011 and forward, Schedule D and Form 1099-B have a new look. Some 1099-B forms will now include cost or other basis information.
Foreign Assets
Please advise us if you have ANY foreign bank accounts or other assets, including real property in a foreign country; we anticipate implementation of heightened disclosure requirements.
Marriage Penalty
The so called “marriage penalty” is anticipated to return in the coming tax years.
Estate/Gift Tax Exclusion for 2011
The estate tax exemption increased to $5M effective through 2012. The annual gift tax exclusion of $13,000 will stay the same for 2012. Many people take advantage of this provision each year as part of their estate planning strategy. One can give away even more than the exclusion amount by directly making someone else’s tuition or medical bills directly to those service providers. Gifts above $13,000 will not generate income for the recipient or a deduction for the donor, but do require filing of a gift tax return.
RETIREMENT PLANNING
Individual Retirement Account (IRA) Contribution Limitation
The maximum annual contribution to an IRA is $5,000 for 2011. Taxpayers age 50 and over can make additional catch-up contributions. The catch-up amount is $1,000. Both the regular and catch-up contribution increases apply to Traditional and Roth IRAs.
401(k) Contribution Limitations
The maximum annual contribution to a 401(k) is $16,500 for 2011 and $17,000 for 2012. Taxpayers age 50 and over can make additional catch-up contributions of $5,500 for 2011 and for 2012.
SIMPLE IRA Contribution Limitations
The maximum annual contribution to a SIMPLE IRA is $11,500 for 2011 and for 2012. Taxpayers age 50 and over can make additional catch-up contributions of $2,500 for 2011 and for 2012.
SEP Contribution Limitations
The maximum annual compensation limit for a SEP account is $245,000 for 2011. The annual contribution limit for SEP accounts is $49,000 for 2011.
Remember to maintain good records. They can make the filing process easier, and will help you prevail in an IRS audit.
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