YEAR-END INDIVIDUAL TAX NEWSLETTER
Dear Clients, January 24, 2012
Thank you for your business for this tax filing season – we appreciate you choosing us as your CPA. Minimizing future tax bills may require a true balancing act, but could also be a planning opportunity if you have the ability to control the timing and/or nature of certain deductions and income items. To ensure the utmost accuracy and expertise regarding the tax law, the smartest move is to talk to your CPA to develop your best tax plan.
The purpose of this letter is to educate and inform our clients on the changes and opportunities available for 2011 and 2012. We encourage you to share this newsletter with others so they may also be informed on the most recent tax developments. Please contact our office if you would like more information, or to schedule a tax planning appointment. Here are some of the key highlights:
- · Long-Term Capital Gains Rates, and Qualified Dividends – Taxed at 0% for those in the 10% and 15% tax brackets. Higher-bracket filers still benefit from lower rates at 15%.
- · Homebuyer Tax Credit – Those with this credit from 2008-2010 may have to repay the credit in full if the home is sold or converted to non-personal use within 3 years of purchase.
- · Making Work Pay Credit – Gone in 2011 – Was $400 (singles) & $800 (couples) in 2009 & 2010
- · Energy Tax Credit – 10% in 2011 – The max credit is $500, including prior year amounts.
- · Sales Tax Itemized Deduction – Gone in 2012 – Since Florida has no state income tax, itemized filers can deduct sales tax based on IRS tables. Large purchases (autos, boats, RVs) get an extra amount. This deduction expires after 2011, although we hope to see it extended.
- · Educator Deduction ($250 for teachers) and “Page 1” Tuition Deduction – Gone in 2012.
- · 401K Max Contribution – $17,000 in 2012 + another $5,500 if age 50 or over.
- · 2012 & 2011 Mileage: Medical .23 (for 2012) and .19 for 2011, Charity .14, and Business .55.5 (after 6/30/11) and .51 for 1/1-6/30/11
- · Health Savings Account (HSA) – An excellent tax savings and planning tool! Contributions are 100% tax deductible (avoiding the 7.5% threshold), and can then be used for out of pocket medical costs. The plan must qualify as an H S A with high deductibles of more than $1,200 (individuals) or $2,400 (family plans). You must not be covered by a secondary plan. With an H S A plan, you may contribute up to $3,050 ($3,100 in 2012) for self-coverage or $6,150 ($6,250 in 2012) for family plans, plus an additional $1,000/year if age 55 or over. Unused amounts roll over to subsequent years, and compound for increased account balances, with earnings that grow tax-free. HSA’s may provide tax-free dollars for medical costs later in life, and there are no income phase-outs for participation.
- · Individual Retirement Accounts (IRA’s):
- · Required minimum distributions (RMDs) that began in a previous year must be taken by December 31st of the current year to avoid up to 50% in penalties. RMDs must start no later than April 1st of the year after turning age 70 ½ (excludes Roth IRAs)
- · In 2011, anyone, regardless of income level, could convert a traditional IRA to a Roth IRA. The conversion may have produced taxable income for the 2011 tax return.
- · Tax planning tip: Converting to a Roth IRA may be especially beneficial if your income is lower, or your deductions are higher, in 2011/2012 than in a normal tax year. Filers with little or no taxable income may benefit from the conversion being taxed at lower rates.
- · If you converted a traditional IRA to a Roth IRA and now wish to reverse that decision, it may be beneficial to contact our office to schedule a consultation regarding this matter.
Other areas of recent tax developments:
- · Many agencies are now sharing information on taxable income to increase tax compliance. These include the IRS, Department of Revenue, Social Security Administration, Foreign Banks, Merchant Services for credit cards, and Third-Party Payment Processors such as EBay and PayPal (even for smaller volume sellers). It is your responsibility to report all taxable income.
- · Identity theft is a rapidly increasing problem for fraudulent tax returns. Please contact our office immediately if you suspect fraudulent or fictitious filings.
- · Foreign bank accounts are now heavily enforced and must be disclosed on the tax return for those living and banking overseas, deposits into foreign family support accounts, etc.
- · The foreign earned income tax exclusion is $92,900 for 2011 ($95,100 in 2012). However, this income IS NOT excluded – it is still taxable, just at lower rates.
Special Rules for a Limited Time – Income levels at which certain deductions are phased out DO NOT apply for 2011 OR 2012. There are no income phase-out levels for:
- · Itemized deductions (Schedule A)
- · Personal exemptions
- · Dependency exemptions
A Word of Caution…
- · New reporting requirements are in place for 2011 for stocks and investments. The Schedule D reporting form has been revised and a new Form 8949 has been added. Separate Forms 8949 must be used for (1) Cost basis provided by the broker on the Form 1099, (2) Cost basis NOT included on the Form 1099, and (3) Cost basis with no Form 1099 issued. The totals of all Forms 8949 carry forward to the revised Schedule D form.
- · Non-Cash Charitable contributions are being heavily scrutinized by the IRS. You may use the website www.itsdeductible.com to determine reasonable values. Make sure to keep all receipts and provide a detailed list of items given.
- · If you have significant changes in income and/or tax deductions, or a change in lifestyle (marriage, retirement, birth, etc.), your tax position may be much different than in prior years. We welcome the opportunity to advise you on these matters to prevent surprises at filing time.
- · Parents of working teenagers, college students, or an adult child returning home often prepare their child’s return or let them prepare it themselves, and the child may claim themselves as a dependent. The dependency exemption is usually more beneficial to the parents with higher tax rates than the child with lower rates. Although a child’s return often seems simple, there are complex rules regarding dependents. Costs to correct these issues often exceed our fees to prepare the return. Please contact our office for assistance with your dependent’s tax return. And remember that filers caring for elderly parents may also qualify for a dependent deduction.
- · As a result of the difficult economic times in which we now live, increasing numbers of individuals have short sales, foreclosures, reduced or cancelled credit card debt, and other debt reductions. This is called “cancellation of debt” and may result in a tax document, Form 1099-C. This form triggers taxable income, but may be exempted from the tax in certain cases.
- · If Congress fails to act, employees will see more taxes being withheld from their paychecks as of March 1st, due to the “payroll tax cut” from 6.2% to 4.2% expiring on 2/29/12. Additionally, dual income households with standard withholding may already experience insufficient tax payments due to higher rates applied to combined income amounts.
- · There has been a large increase in fraudulent tax returns being filed. In these cases, the individual is sometimes responsible for repaying the fraudulent refund submitted and/or does not receive the refund to which he was entitled. To prevent this from happening to you, safeguard your personal information and social security number.
- · The “Bush tax cuts” that were extended an additional two years at the end of 2010 are now scheduled to expire at the end of 2012, creating significant increases in tax burdens. Additionally, new tax laws already enacted are set to take effect in 2013. Taxpayers that do not plan appropriately may face unpleasant tax liabilities with major financial impacts.
The IRS collects 96% of all federal revenue!! The federal budget is already suffering, audits are on the increase, and the tax law is more complex than ever. It is critical to insure filing compliance and reporting requirements, while also embracing all tax saving opportunities. There is a high-stakes debate as to what Congress may decide about our tax future. Thank you for allowing us to be a resource to help insure your best tax scenario.
DON’T LET YOUR DOLLARS GET WASHED AWAY WITH IMPROPERLY PREPARED RETURNS
You may also visit our website at www.dkbrierycpa.com
Contact our office at (904) 880-3200.