20 Tax Law Changes You Need to Know

Several important tax changes took effect in 2011 that will impact federal income tax returns filed this April. While some of the changes are straightforward, such as the standard mileage rates, others, including the tax handling of foreign financial assets, may be more complicated. Following is a list of the tax law changes for 2011 Federal tax returns.

Alternative Minimum Tax The alternative minimum tax (AMT) exemption amount increases for tax year 2011 to the following levels:
  • $48,450 for singles and heads of household (up from $47,450 in 2010)
  • $37,225 for married filing separately (up from $36,225)
  • $74,450 for married filing jointly, and qualifying widows or widowers (up from $72,450)
Alternative Motor Vehicle Credit The alternative motor vehicle credit cannot be claimed for a vehicle bought after 2010, unless it is a new fuel cell motor vehicle.

Capital Gains and Dividends Lower rates for long-term capital gains and dividends remain in effect for 2011 and 2012. The rate on long-term capital gains and dividends remains at zero for those taxpayers in the 15% income tax bracket and below; the rate is 15% for taxpayers in the 25% bracket and above. Most taxpayers will use new Form 8949 to report capital gain and loss transactions. Schedule D, the form that has been traditionally filed to show these transactions, is now used as a summary sheet.

Child Tax CreditThe 2010 Tax Relief Act extended the credit of $1,000 per eligible child through 2012.

Designated Roth Accounts Taxpayers who rolled over an amount from a 401(k) or 403(b) plan to a designated Roth account during 2010 and did not elect to report the taxable amount on a 2010 return must report half on the 2011 return and the rest on the 2012 return.

Due Date of Tax Return Because April 15 is a Sunday and April 16 is the Emancipation Day holiday in the District of Columbia, tax returns are due on Apr. 17, 2012.

Estate Tax For individuals who died after 2010, the federal estate tax provides a $5 million exemption and a maximum 35% rate. These estate tax rules are scheduled to end following 2012.

First-Time Homebuyer Credit In order to claim the first-time homebuyer credit for 2011, a taxpayer (or their spouse, if married) must have been "a member of the uniformed services or Foreign Service, or an employee of the intelligence community on qualified official extended duty outside the United States for at least 90 days during the period beginning after Dec. 31, 2008, and ending before May 1, 2010." For more, check out Top Tips For First-Time Home Buyers.

Foreign Financial Assets For tax years beginning after Mar. 18, 2010, certain taxpayers may have to file the new Form 8938 with their returns. Form 8938 is used to report the ownership of specified foreign financial assets (including any financial account maintained by a foreign financial institution) if the total value exceeds a specified threshold. The threshold amount varies depending on if the individual resides in the U.S. and if the tax return is filed jointly with a spouse. It is a separate form and does not replace existing requirements for reporting foreign assets to the Treasury Department using Form TD F 90-22.1.

Health Savings Accounts and Archer MSAs Beginning in 2011, the additional tax on health-savings account and Archer medical savings account distributions not used for qualified medical expenses has increased to 20% (up from 10% for HSAs and 15% for Archer MSAs). Also, starting in 2011, only prescribed drugs and insulin are considered qualified medical expenses.

Income Tax RatesThe 2011 rates carry over from 2010, but the income brackets are higher to account for inflation. The 2011 tax rate schedule can be found on page 273 of IRS Publication 17 "Your Federal Income Tax: Tax Guide 2011 For Individuals."

Mailing Your Return The mailing address for paper returns may have changed because the IRS has changed the filing location for several regions. Taxpayers are advised by the IRS to read the "Where Do You File?" page at the end of the 1040 instruction booklet.

Making Work Pay Tax CreditThe making work pay tax credit has expired and cannot be claimed on the 2011 return.

Energy Tax Credits for Homeowners The "25(C)" credit for energy-efficient improvements has been extended, but the amount of the credit has been reduced to a maximum of $500 per taxpayer per lifetime. Taxpayers who took the maximum $1,500 credit in 2010 are not eligible.

Personal Exemptions The amount one can deduct for each exemption has increased to $3,700 (up from $3,650 in 2010).

Repayment of First-Time Homebuyer Credit Taxpayers who must repay the credit may be able to do so without using Form 5405.

Roth IRAs Unlike 2010 conversions, all income resulting from a 2011 conversion must be included in that year's return. For 2010 conversions, half of the resulting income must be reported in the 2011 return, and the rest in the 2012 return.

Self-Employed Health Insurance Deduction For 2011, qualified self-employed taxpayers and S corporation shareholders can use the self-employed health insurance deduction to reduce income tax liability. The taxpayer must not be eligible to participate in an employer-sponsored health plan, and the insurance plan must be set up under the taxpayer's business. Premiums paid for health insurance for the taxpayer, spouse and dependents typically qualify for the deduction. The deduction is taken on Form 1040 Line 29. The deduction from self-employment income for determining self-employment tax, available for tax year 2010, no longer applies.

Standard Deduction Increased The standard deduction for certain taxpayers who do not itemize their deductions on Schedule A of Form 1040 has been increased. The amount of the deduction depends on the taxpayer's filing status. The standard deduction for most people is $5,800 for single or married filing separately, $11,600 for married filing jointly or for qualifying widow or widower with a dependent child and $8,500 for heads of household.

Standard Mileage Rates The standard mileage rate for the business use of a car, van, pick-up or panel truck has increased to 51 cents a mile for the first half of 2011, and 55.5 cents per mile for the second half.

The Bottom Line The Internal Revenue Service's website provides detailed information on these important tax law changes. If you have questions about these changes or about your 2011 tax return, please consult a qualified tax professional.
Please note: While every attempt has been made to provide timely and accurate information, this article should not be considered a definitive tax guide, nor should it replace the advice of a qualified tax professional.

Liz's 5 New Year Financial Tips

Happy New Year! This time of year brings hope to everyone, even those who are struggling or out of work. We all need hope.  But sometimes we find ourselves in financially difficulty due to lack of discipline and lack of planning. Yes ladies and gentlemen, being financially fit is just as important as being physically fit. So we all need to be mindful to slim that excess spending line and boost bottom line! Right?! Right.

To protect and prepare yourself, here are a few resolutions to consider:

1. If you have small children, start funding college 529 plans early. A coveted education at Harvard University this year cost $53,000 and college costs never go down. Start saving for Bobby and Bonnie in a tax-deferred 529 as early as possible, preferably right after they're born.

2. Here's an easy one. Start teaching your children about the importance of hard work and money when they are small. House chores and an allowance go hand in hand and are great tools for setting the foundation for "responsibility". I see today's children demanding and getting. When parents easily give them without teaching, explaining and discipline, it's much harder down the road when that parent loses a job and children don't understand and are still demanding. It places tremendous anxiety on the parent. Don't let your children fall into that "entitled group".  When I was a single mother with two daughters, and struggling, my eldest daughter understood. When she started working after college, she helped me with the mortgage. We had few luxuries and no vacations and no eating out, but we had a home and food and eachother and more importantly no debt or creditors breathing down our necks. Our stress levels were better than most people in our situation, and so was hour health, thank God.

3. Lower your mortgage payments. Interest rates remain at historically low levels, with the 30-year fix-rate mortgage now below 4% for qualified buyers. If you haven't already, now is the time to lower your monthly payment by refinancing our current mortgage at a lower rate.  Homeowners, even those in hard-hit markets such as Florida, Arizona and Nevada who owe more on a mortgage than their home is worth, will have a better chance to refinance through the government's Home Affordable Refinance Program, or HARP, which has been enhanced and extended through the end of 2013. Even one percentage point can save you roughly $140 a month ona $250,000 mortgage.

4. Save More for Retirement. My customers who have been with me for years knew this was coming. Disappearing are pensions, and stock in companies are devaluing and that is dangerous if you placed all your eggs in one basket.  The government has boosted the maximum you can set aside in a tax-deferred 401(k) account in 2012 by $500 to $17,000.  How to do this? Raise the percentage taken out of your paycheck to ensure you take advantage of the new higher savings limit.  If you get a raise, or received a bonus, deposit it straight away into 401(k) if you have not reached your maximum. 

Other solutions: Stop spending foolishly.  You don't need the latest iphone or flatscreen TV  or video games or eat out every other night. Start saving money for emergencies like job loss or unexpected car repair or medical bill.  The recommendation is to save for three month's worth of expenses in case you lose your job. But in this recession, I recommend saving 6 months worth. Yes you can do it. It does take sacrifice.

If you're not disciplined enough to save, have the money deducted automatically from your paycheck into savings account.

5. Don't Invest on News Headlines.  Homework pays not headlines.  Constant homework and research will give you the advantage. By the time activity reaches the headlines, it's actually old news and millions of people have already bought or sold the stock. If you missed the boat, wait it out. Long-term usually sees a rebound. We can't promise but as you know the 20 year cycle of any stock sees gains.

I hope these tips helps. And please do not hesitate to contact me for upcoming tax season. Like my client's say "It's like getting a Mercedes at a Ford price". I'm a CPA that offers mom and pop prices. You have enough to worry about. I love accounting and numbers and so I can take the burden from your shoulders.

or lizandrade@juno.com

Happy New Year!