This newsletter is intended to provide generalized information that is appropriate in certain situations. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer. The contents of this newsletter should not be acted upon without specific professional guidance. Please call us if you have questions.
From Roth conversions to changes in reporting capital gains and losses, there were a number of tax changes in 2011. Whether you already know about them or simply need a reminder, here's a look at 10 changes in 2011 that might benefit you, the taxpayer, this tax season.
1. April 17 Tax Deadline: Two Extra Days to File and Pay
Taxpayers across the nation will have until Tuesday, April 17, 2012, to file their 2011 income tax returns and pay any taxes due. Taxpayers have extra time because April 15 falls on Sunday, and Emancipation Day, a holiday in the District of Columbia, is observed the following day on Monday, April 16. By law, filing deadlines that fall on D.C. holidays are extended to the next day that is not a Saturday, Sunday, or holiday.
The April 17 deadline applies to any return or payment normally due on April 15. It also applies to the deadline for requesting a tax-filing extension and for making 2011 IRA contributions. Taxpayers requesting an extension will have until Oct. 15 to file their 2011 tax returns.
2. Tax Credits Extended
Legislation, enacted in December 2010, extended several popular tax benefits, including the American opportunity credit for parents and students, the enhanced child tax credit and the expanded Earned Income Tax Credit.
3. Limited Non-business Energy Property Credit Still Available
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.
Because of the way the credit is figured, in many cases, it may only be helpful to people who make energy-saving home improvements for the first time in 2011. That's because homeowners must first subtract any non-business energy property credits claimed on their 2006, 2007, 2009 or 2010 returns before claiming this credit for 2011.
The cost of certain high-efficiency heating and air conditioning systems, water heaters and stoves that burn biomass all qualify, along with labor costs for installing these items. In addition, 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.
4. Repayment of First-Time Homebuyer Credit
Taxpayers who claimed the first-time homebuyer credit for a home bought in 2008 must generally make the second of 15 annual repayment installments on their 2011 return.
Separately, a repayment requirement also applies where a taxpayer purchased a home and claimed the credit on a prior year return and then sold it or stopped using it as a main home in 2011.
Though the credit has expired for most home buyers, certain members of the armed forces and some other taxpayers who bought a home early in 2011 may still qualify for the credit on their 2011 return.
5. New Way to Report Capital Gains and Losses
In most cases, taxpayers now use new Form 8949 to report capital gain and loss transactions. Schedule D, the form traditionally used to show these individual transactions, is now used as a summary sheet, reporting amounts for total sales price, basis and other adjustments for all individual transactions, and for figuring the tax. For securities both bought and sold in 2011, the Form 1099-B, issued by the broker, normally shows the taxpayer's basis.
6. Reporting Roth Conversions
As in 2010, income limits no longer apply to rollovers or conversions to Roth IRAs from other retirement plans. However, unlike 2010 conversions, all of the income resulting from a 2011 conversion must be included on the taxpayer's 2011 return.
For 2010 conversions, only half of the resulting income must be included in income in tax-year 2011 and the other half is reported in 2012, unless the taxpayer chose to include all of it in income for 2010.
7. AMT Exemption Increased
For tax-year 2011, the alternative minimum tax exemption increases to the following levels:
8. Health Insurance Deduction for Self-Employed Individuals
In 2011, eligible self-employed individuals and S corporation shareholders can use the self-employed health insurance deduction to reduce their income tax liability. 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.
9. Change for HSAs and MSAs
Starting in 2011, the additional tax on distributions from a health savings account (HSA), not used for qualified medical expenses, increases from 10 percent to 20 percent. Report on Form 8889. Similarly, the additional tax on distributions from an Archer medical savings account (MSA), not used for qualified medical expenses, rises from 15 percent to 20 percent.
10. New Form for Reporting Foreign Financial Assets
Taxpayers must report specified foreign financial assets on new Form 8938, if the aggregate value of those assets exceeds certain thresholds. This new requirement is designed to improve tax compliance by taxpayers with offshore financial assets. Form 8938 is separate from and does not replace the existing requirement that U.S. persons with financial accounts located in a foreign country report those accounts to the Treasury Department using Form TD F 90-22.1. Unlike Form TD F 90-22.1, Form 8938 is attached to a taxpayer's income tax return. Individuals who do not have an income tax return filing requirement need not file Form 8938.
The Form 8938 filing requirement applies to U.S. citizens and resident aliens, nonresident aliens who elect to file a joint income tax return and certain nonresidents who live in a U.S. territory. Form 8938 is required when the total value of specified foreign assets exceeds certain thresholds. For example, a married couple living in the U.S. and filing a joint tax return would only file Form 8938 if their total specified foreign assets exceed $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.
The thresholds for taxpayers who live abroad are higher. For example, a married couple living abroad and filing a joint return would file Form 8938 if the value of specified foreign assets exceeds $400,000 on the last day of the tax year or more than $600,000 at any time during the year.
If you have questions about these or other tax changes, please call us. We'd be happy to assist you.
How to Avoid Identity Theft During Tax Season
Consumers should protect themselves against online identity theft and other scams that increase during--and after--the filing season. Such scams may appropriate the name, logo, or other appurtenances of the IRS or U.S. Department of the Treasury to mislead taxpayers into believing the communication is legitimate.
The Internal Revenue Service receives thousands of reports each year from taxpayers who receive suspicious emails, phone calls, faxes or notices claiming to be from the IRS. Many of these scams fraudulently use the IRS name or logo as a lure to make the communication appear more authentic and enticing. The goal of these scams, referred to as phishing, is to trick you into revealing your personal and financial information. The scammers can then use your information -- like your Social Security number, bank account or credit card numbers -- to commit identity theft or steal your money.
Scams involving the impersonation of the IRS usually take the form of e-mails, tweets, or other online messages to consumers. Scammers may also use phones and faxes to reach intended victims. Some scammers set up phony Web sites.
The IRS and E-mail
Generally, the IRS does not send unsolicited e-mails to taxpayers. Further, the IRS does not discuss tax account information with taxpayers via e-mail or use e-mail to solicit sensitive financial and personal information from taxpayers. The IRS does not request financial account security information, such as passwords and PIN numbers, from taxpayers.
Most Scams Impersonating the IRS are Identity Theft Schemes
In this type of scam, the scammer poses as a legitimate institution to trick consumers into revealing personal and financial information - such as passwords and Social Security, PIN, bank account and credit card numbers - that can be used to gain access to their bank, credit card, or other financial accounts.
Attempted identity theft scams that take place via e-mail are known as phishing. Other scams may try to persuade a victim to advance sums of money in the hope of realizing a larger gain. These are known as advance fee scams.
How an Identity Theft Scam Works
Typically, a consumer will receive an e-mail that claims to come from the IRS or Treasury Department. The message will contain an enticing or intimidating subject line, such as "Tax Refund," "Inherited Funds," or "IRS Notice." Usually, the message will state that the recipient needs to provide the IRS with information to obtain the refund or avoid some penalty. The message will instruct the consumer to open an attachment or click on a link in the e-mail. This may lead to an official-looking IRS Web site. The look-alike site will then contain a phony but genuine-looking online form or interactive application that requires personal and financial information, which the scammer then uses to commit identity theft.
Alternatively, the clicked link may secretly download malware to the consumer's computer. Malware is malicious code that can take over the computer's hard drive, giving the scammer remote access to the computer, or it could look for passwords and other information and send them to the scammer.
Phony Web or Commercial Sites
In many IRS-impersonation scams, the scammer sends the consumer to a phony Web site that mimics the appearance of the genuine IRS Web site, IRS.gov. This allows the scammer to steer victims to phony interactive forms or applications that appear genuine but require the targeted victim to enter personal and financial information that will be used to commit identity theft.
The official Web site for the Internal Revenue Service is IRS.gov, and all IRS.gov Web page addresses begin with http://www.irs.gov/.
In addition to Web sites established by scammers, there are commercial Internet sites that often resemble the authentic IRS site or contain some form of the IRS name in the address but end with a .com, .net, .org, or other designation instead of .gov. These sites have no connection to the IRS. Consumers may unknowingly visit these sites when searching the Internet to retrieve tax forms, publications, and other information from the IRS.
Frequent or Recent Scams
There are a number of scams that impersonate the IRS. Some of them appear with great frequency, particularly during and right after filing season, and recur annually. Others are new.
Other Known Scams
The contents of other IRS-impersonation scams vary but may claim that the recipient will be paid for participating in an online survey or is under investigation or audit. Some scam e-mails have referenced Recovery-related tax provisions, such as Making Work Pay, or solicited for charitable donations to victims of natural disasters. Taxpayers should beware an e-mail scam that references underreported income and the recipient's "tax statement," since clicking on a link or opening an attachment is known to download malware onto the recipient's computer.
How to Spot a Scam
Many e-mail scams are fairly sophisticated and hard to detect. However, there are signs to watch for, such as an e-mail that:
What to Do
Taxpayers who receive a suspicious e-mail claiming to come from the IRS should take the following steps:
If you've received an email claiming to be from the IRS, call us to talk it over before taking any action. We don't want you to fall victim to a scam.
Five Hidden Reasons You Need a Will
Most people don't appreciate the full importance of a will, especially if they think their estate is too small to justify the time and expense of preparing one. And even people who recognize the need for a will often don't have one, perhaps due to procrastination or a disinclination to broach this sensitive subject with loved ones.
The truth is, nearly everyone should have a will. Here's why.
Reason 1. To Choose Beneficiaries
Intestate succession laws of the state in which you live determine how your property will be distributed if you die without a valid will. For example, in most states the property of a married person with children who dies intestate (i.e., without a will) generally will be distributed one-third to the spouse and two-thirds to the children, while the property of an unmarried, childless person who dies intestate generally will be distributed to his or her parents (or siblings, if the parents are deceased).
These distributions may be contrary to what you want. In effect, by not having a will, you are allowing the state to choose your beneficiaries. Further, a will allows you to specify not only who will receive the property, but how much each beneficiary will receive.
Note: If you wish to leave property to a charity, a will may be needed to accomplish this goal.
Reason 2. To Minimize Taxes
Many people feel they do not need a will because their taxable estate does not exceed the amount allowed to pass free of federal estate tax. These assumptions, however, should be reviewed given the current state of change in the federal estate tax laws because in most cases a properly prepared will is necessary to implement estate tax reduction strategies. It is important to review and update your will on a regular basis. Most wills were originally written with the existence of a federal estate tax at a certain level.
In addition, your taxable estate may be larger than you think. For example, although life insurance, qualified retirement plan benefits, and IRAs typically pass outside of a will or estate administration, retirement plan benefits and IRAs (and sometimes life insurance) are still part of your federal estate. As such, they can cause your estate to go over that threshold amount. Also, in some states, the estate or inheritance tax differs from the federal laws.
Tip: Changes in the estate tax laws and in the size of your estate may warrant a re-examination of your estate plan.
Reason 3. To Appoint a Guardian
If for no other reason, you should prepare a will to name a guardian for your minor children in the event of your death without a surviving spouse. While naming a guardian does not bind either the named guardian or the court, it does indicate your wishes, which courts generally try to accommodate.
Reason 4. To Name an Executor
Without a will, you cannot appoint someone you trust to carry out the administration of your estate. If you do not specifically name an executor in a will, a court will appoint someone to handle your estate, perhaps someone you might not have chosen. Obviously, there is peace of mind in selecting an executor you trust.
Reason 5. To Help Establish Domicile
You may wish to firmly establish domicile (permanent legal residence) in a particular state, for tax or other reasons. If you move frequently or own homes in more than one state, each state in which you reside could try to impose death or inheritance taxes at the time of death, possibly subjecting your estate to multiple probate proceedings. To lessen the risk of this, you should execute a will that clearly indicates your intended state of domicile.
If you need guidance with your will, just give us a call. We are happy to assist you.
Dependents and Exemptions: 6 Important Facts
Even though each individual tax return is different, some tax rules affect every person who may have to file a federal income tax return. These rules include dependents and exemptions. The IRS has six important facts about dependents and exemptions that will help you file your 2011 tax return.
1. Exemptions reduce your taxable income. There are two types of exemptions: personal exemptions and exemptions for dependents. For each exemption you can deduct $3,700 on your 2011 tax return.
2. Your spouse is never considered your dependent. On a joint return, you may claim one exemption for yourself and one for your spouse. If you're filing a separate return, you may claim the exemption for your spouse only if they had no gross income, are not filing a joint return, and were not the dependent of another taxpayer.
3. Exemptions for dependents. You generally can take an exemption for each of your dependents. A dependent is your qualifying child or qualifying relative. You must list the Social Security number of any dependent for whom you claim an exemption.
4. If someone else claims you as a dependent, you may still be required to file your own tax return. Whether you must file a return depends on several factors including the amount of your unearned, earned or gross income, your marital status and any special taxes you owe.
5. If you are a dependent, you may not claim an exemption. If someone else -- such as your parent -- claims you as a dependent, you may not claim your personal exemption on your own tax return.
6. Some people cannot be claimed as your dependent. Generally, you may not claim a married person as a dependent if they file a joint return with their spouse. Also, to claim someone as a dependent, that person must be a U.S. citizen, U.S. resident alien, U.S. national or resident of Canada or Mexico for some part of the year. There is an exception to this rule for certain adopted children.
If you need help determining who you can claim as a dependent and how much you can deduct for each exemption you claim, don't hesitate to call. We're here to help!
7 Tips for Preparing Your Taxes Without the Stress
Many people find preparing their tax return to be stressful and frustrating. But it doesn't have to be! Here are 7 tips for how to do your taxes without pulling out your hair:
And remember, if you run into any problems or you have any questions, call us. We are more than happy to help.
Missing Your Form W-2?
You should receive a Form W-2, Wage and Tax Statement, from each of your employers for use in preparing your federal tax return. Employers must furnish this record of 2011 earnings and withheld taxes no later than January 31, 2012 (if mailed, allow a few days for delivery).
If you do not receive your Form W-2, contact your employer to find out if and when the W-2 was mailed. If it was mailed, it may have been returned to your employer because of an incorrect address. After contacting your employer, allow a reasonable amount of time for your employer to resend or to issue the W-2.
If you still do not receive your W-2 by February 15th, contact the IRS for assistance at 1-800-829-1040. When you call, have the following information handy:
If you misplaced your W-2, contact your employer. Your employer can replace the lost form with a "reissued statement." Be aware that your employer is allowed to charge you a fee for providing you with a new W-2.
You still must file your tax return on time even if you do not receive your Form W-2. If you cannot get a W-2 by the tax filing deadline, you may use Form 4852, Substitute for Form W-2, Wage and Tax Statement (available on the IRS website), but it will delay any refund due while the information is verified.
If you receive a corrected W-2 after your return is filed and the information it contains does not match the income or withheld tax that you reported on your return, you must file an amended return on Form 1040X, Amended U.S. Individual Income Tax Return.
If you have questions about your Forms W-2 and 1099 or any other tax-related materials, please call or email our office.
Tax Due Dates for February 2012
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