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6 Tax Changes That Benefit Taxpayers for 2012

Thanks to the passage of the American Taxpayer Relief Act of 2012 (ATRA), many tax provisions that expired in 2011 were retroactively extended (or made permanent) that are of benefit to taxpayers filing 2012 returns this year. Here are six of them:

1. Education-Related Tax Deductions

ATRA extended, through 2017 and retroactive to 2012, two popular and widely used education-related tax benefits that expired in 2011: the deduction for qualified tuition and related expenses and the deduction for certain expenses of elementary and secondary school teachers. Both are above-the-line deductions, which means that they can be taken before calculating adjusted gross income (AGI).

2. Limited Non-Business Energy Property Credits

Non-business energy credits expired in 2011, but were extended (retroactive to 2102) through 2013 by ATRA. For 2102 (as in 2011), this credit generally equals 10 percent of what a homeowner spends on eligible energy-saving improvements, up to a maximum tax credit of $500 (down significantly from the $1,500 combined limit that applied for 2009 and 2010).

Because of the way the credit is figured however, in many cases, it may only be helpful to people who make energy-saving home improvements for the first time in 2012. That’s because homeowners must first subtract any non-business energy property credits claimed on their 2006, 2007, 2009, 2010, and 2011 returns before claiming this credit for 2012. In other words, if a taxpayer claimed a credit of $450 in 2011, the maximum credit that can be claimed in 2012 is $50 (for an aggregate of $500).

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.

3. Mortgage Insurance Deductible as Qualified Interest

ATRA extended, through 2013 (and retroactive to 2102), a tax provision that expired in 2011 that allows taxpayers to deduct mortgage insurance premiums as qualified residence interest. As such, taxpayers can deduct, as qualified residence interest, mortgage insurance premiums paid or accrued before Jan. 1, 2014, subject to a phase-out based on the taxpayer’s AGI.

4. AMT “Patch” Made Permanent

The AMT ‘patch” was made permanent by ATRA; however, exemption amounts for 2012 and beyond are higher than in years’ past and are now indexed to inflation. For tax-year 2012, the alternative minimum tax exemption amounts increase to the following levels:

  • $78,750 for a married couple filing a joint return and qualifying widows and widowers, up from $74,450 in 2011.
  • $39,375 for a married person filing separately, up from $37,225 in 2011.
  • $50,600 for singles and heads of household, up from $48,450 in 2011.

5. Transportation “Fringe Benefits”

Parity for transportation fringe benefits provided by employers for the benefit of their employees expired at the end of 2011; however, ATRA reinstated this parity retroactive to 2012. As such, the monthly limit for qualified parking is $240 and the benefit for transportation in a commuter highway vehicle or a transit pass is $245 for tax year 2012.

6. State and Local Sales Taxes

Retroactive to 2012, ATRA extended (through 2013) the tax provision that allows taxpayers who itemize deductions the option to deduct state and local general sales and use taxes instead of state and local income taxes.

If you have questions about these or other tax changes, please call us. We’d be happy to assist you.

Tax Credit for Employers Hiring Veterans This Year

Many businesses may qualify to receive thousands of dollars through the Work Opportunity Tax Credit (WOTC), but employers planning to claim an expanded tax credit for hiring certain veterans should act soon because they are only eligible for the credit if the veteran begins work before the new year.

Here are five key facts about the WOTC as expanded by The Veterans Opportunity to Work (VOW) to Hire Heroes Act of 2011.

1. Hiring Deadline: Employers may be able to claim the expanded WOTC for qualified veterans who begin work on or after November 22, 2011 but before January 1, 2013.

2. Maximum Credit: The maximum tax credit is $9,600 per worker for employers that operate for-profit businesses, or $6,240 per worker for tax-exempt organizations.

3. Credit Factors: The amount of credit will depend on a number of factors. Such factors include the length of the veteran’s unemployment before being hired, the number of hours the veteran works and the amount of the wages the veteran receives during the first-year of employment.

4. Disabled Veterans: Employers hiring veterans with service-related disabilities may be eligible for the maximum tax credit.

5. State Certification: Employers must file Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, with their state workforce agency. The form must be filed within 28 days after the qualified veteran starts work. Some states accept Form 8850 electronically.

Please give us a call if you need assistance filling out Form 8850 or if you’d like more information about the expanded tax credit for hiring veterans.

10 Changes for 2011 That Benefit Most Taxpayers

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:

  • $74,450 for a married couple filing a joint return and qualifying widows and widowers, up from $72,450 in 2010.
  • $37,225 for a married person filing separately, up from $36,225.
  • $48,450 for singles and heads of household, up from $47,450.

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.

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