The time to start focusing on your 2011 federal tax return is drawing near. As always, there are some key changes from earlier years. Here are some of the important new things to know.
This Year’s Deadline is April 17
Taxpayers have until Tuesday, April 17, to file their 2011 tax returns and pay any tax due, the IRS announced. That’s because April 15 falls on a Sunday, and Emancipation Day, a holiday observed in the District of Columbia, falls on Monday, April 16.
According to federal law, District of Columbia holidays affect tax deadlines in the same way that federal holidays do. Therefore, taxpayers nationwide will have two extra days to file this year. If you request a filing extension, you have until Monday, October 15 to file your return.
Filing Issues for Business Owners
First-Year Bonus Depreciation - For qualifying new (not used) assets that were placed in service (hooked up and ready for use) in your unincorporated business by December 31, 2011, you can write off the entire cost in 2011 thanks to the 100 percent first-year bonus depreciation break. Qualifying assets include most software, vehicles, and equipment. To claim the deduction, an IRS form must be filed with your Form 1040.
Liberalized Section 179 Deductions - For tax years beginning in 2011, eligible unincorporated businesses and S corporations can immediately write off up to $500,000 of qualifying new and used assets — including most software, certain “heavy” vehicles, most equipment, and up to $250,000 of qualifying real estate improvements. This is thanks to the Section 179 first-year depreciation break. Assets must be placed in service (hooked up and ready for business use) by the end of the tax year beginning in 2011 to be eligible for the liberalized Section 179 deduction rules. Again, an IRS form must be completed.
Reduced Self-Employment Tax Bill - For 2011 only, the Bush tax cut extension legislation included a reduction in the Social Security tax component of the self-employment (SE) tax from the normal 12.4 percent of net SE income to 10.4 percent. The Medicare tax component of the SE tax remained at the usual 2.9 percent rate. For 2011, the net SE income ceiling for the Social Security tax component of the SE tax was $106,800. Therefore, the SE tax rate on the first $106,800 of net 2011 SE income is 13.3 percent (10.4 percent for Social Security plus 2.9 percent for Medicare) versus the usual 15.3 percent. The maximum amount you can save from the Social Security tax reduction is $2,136 (2 percent times $106,800). The savings are reflected on Schedule SE, Self-Employment Tax, which must be filed with Form 1040.
Deduction for Self-Employment Tax Is Not Reduced - If you are self-employed, you can usually deduct exactly half of your SE tax bill on Form 1040. Due to the aforementioned reduction in the Social Security tax component of the SE tax, there’s a new drill for your 2011 return. Your SE tax deduction equals 57.51 percent of the SE tax amount, as long as that amount does not exceed $14,204. If your SE tax bill exceeds $14,204, you multiply the SE tax amount by 50 percent and then add $1,067. These calculations are made on Schedule SE. The effect is to allow you to claim an SE tax deduction equal to what your write-off would have been without the Social Security tax cut.
Capital Gains and Losses
If you made taxable sales of stocks, mutual fund shares, other securities, or other capital assets (such real estate) last year, a new form (Sales and Other Dispositions of Capital Assets) must be included with your return along with the familiar Schedule D (Capital Gains and Losses).
The reason for new Form 8949 is the fact that securities brokers must now report to sellers (like you) the basis of certain securities that were sold in taxable accounts in 2011. They must also tell you if the gains and losses from selling such securities were short-term or long-term. Previously, securities brokers had no such obligations.
The most notable types of securities covered by the expanded broker reporting rules are common stock that was acquired and sold in 2011 and mutual fund shares that were acquired and sold in 2011 if all the shares were acquired in a single block. If you sold a covered security in 2011, the basis of the security should be shown in Box 3 of the Form 1099-B (Proceeds from Broker and Barter Exchange Transactions) that you should receive from your broker by no later than February 15. In Box 8, the broker should tell you if the gain or loss from the sale of the covered security was short-term or long-term.
If you sold a non-covered security in 2011, Box 6 of the 1099-B should be checked to indicate that the expanded broker reporting rules are not applicable. Non-covered securities include all common stock and mutual fund shares acquired before 2011, common stock acquired in 2011 via a dividend reinvestment plan, and mutual fund shares acquired in 2011 if you acquired several blocks on different dates. (In 2012 and 2013, additional categories of securities will be covered by the expanded broker reporting rules.)
On new Form 8949, you must segregate gains and losses from securities that are covered by the expanded broker reporting rules from gains and losses that are not covered.
Key Point: The expanded broker reporting rules do not affect sales of securities held in your IRA or other tax-favored retirement account, such as a 401(k) account. Gains and losses from sales in such accounts have no immediate impact on your tax situation and need not be reported on your return.
Deduction for Sales Taxes on Major Purchases (Vehicles, Boats, and More)
A couple years ago, you were allowed to claim a temporary write-off for state and local sales taxes on new (not used) vehicle purchases. The sales tax break for new vehicles expired at the end of 2009, but another potentially valuable sales tax break is still available to itemizers. That’s because you can choose to deduct general state and local sales taxes paid in 2011 instead of state and local income taxes. If you choose the sales tax deduction option, you can write off actual sales tax amounts on major 2011 purchases such as new or used motor vehicles (including motorcycles, motor homes, and RVs), new or used boats, new or used aircraft, and certain home additions and renovations. The sales tax deduction option was originally scheduled to expire at the end of 2010, but it was extended it through 2011.
You can also deduct sales taxes on other less expensive purchases. If you did not keep track of your actual sales tax expenditures (few people do), you can deduct a predetermined amount from IRS tables based on where you live. That’s on top of actual sales tax amounts from the types of major purchases listed earlier.
Key Point: Usually, the sales tax deduction option is only helpful to those who live in states that have no personal income taxes. However if you made one or more major purchases in 2011, the sales tax deduction option might be beneficial even if you don’t fit into that category.
For 2010 Roth Converters
If you converted a traditional IRA into a Roth account in 2010, the transaction was treated as a taxable liquidation of your traditional IRA followed by a contribution to the Roth account. As such, the conversion triggered taxable income equal to the difference between the value of the traditional IRA on the conversion date and your basis in the account from nondeductible contributions (if any). For 2010 conversions, you had the option of reporting half the conversion income on your 2011 Form 1040 and the other half on your 2012 return (instead of reporting 100 percent of the conversion income on your 2010 return).
In other words, you could defer the tax hit from a 2010 conversion until 2011 and 2012. You could do the same 2011/2012 tax deferral with a qualified retirement plan distribution (from a 401(k) plan, a profit-sharing plan, and the like) that was rolled over into a Roth IRA in 2010 (another type of Roth conversion transaction).
If you took advantage of the 2011/2012 deferral option for a 2010 Roth conversion, part of the tax bill has come due because you must now report half the conversion income on your 2011 Form 1040. You will report the other half on your 2012 return.
Key Point: If you did a 2010 Roth conversion and did not take advantage of the 2011/2012 deferral option, no action is necessary with your 2011 return.
Energy-Efficient Home Improvement Credits
For 2011, you can potentially claim a federal income tax credit of up to $500 based on expenditures for qualified energy-efficient home improvements such as new windows, doors, insulation, roofs, and central air conditioners. If you claimed credits in earlier years, they are subtracted from the $500 limit. (For 2010, the maximum credit was a more-generous $1,500.)
If you spent money on more esoteric energy-efficient improvements, like a solar water heating system or geothermal heat pump, you can potentially claim a separate credit for up to 30 percent of the cost. To claim either of the credits, an additional form must be completed and included with your Form 1040.
Liberalized Adoption Credit
For 2011, the maximum adoption credit increased to $13,360 (up from $13,170 for 2010). In addition, the credit is 100 percent refundable (before 2010, it was nonrefundable). That means you’ll receive a check for any leftover adoption credit after your federal income tax bill has been reduced to zero. To claim the credit, Form 8839 (Qualified Adoption Expenses) must be completed and included with your Form 1040.
Homebuyer Credit Repayment Requirement
You may have to repay the credit claimed for a 2009 or 2010 home purchase with your 2011 Form 1040 if you stopped using the home as your principal residence in 2011. You generally must repay the lesser of the full amount of the credit or your gain on sale (if any).
If you have a loss, you don’t have to repay the credit. For purposes of the credit repayment requirement, a special gain/loss calculation is made. If the credit repayment requirement impacts you, a separate IRS form must be filed with your Form 1040. The credit repayment amount is treated as an addition to your tax bill.
If you have questions or need clarification on your personal or business tax return this year, we can help you at Rodefer Moss. Call us today!