2011 Changes – IRS Fact Sheet

2011 Changes Offer Tax Benefits to Almost Everyone;

 Special Tax Payment and Reporting Requirements Apply to Many

FS-2012-1, January 2012

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 theDistrict 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.

Tax Benefits 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. Details on these and many other deductions and credits are in Publication 17.

Limited Nonbusiness Energy Property Credit Available in 2011

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 nonbusiness 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. See Form 5695 and its instructions for details.

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. Report this repayment on Form 1040 Line 59b.

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. Use Form 5405 to report the repayment.

Though the credit has expired for most homebuyers, 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. See Form 5405 and its instructions for details.

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. The information on this form will help taxpayers correctly fill out Form 8949. See the instructions for Schedule D for details.

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. See Form 8606 and its instructions for details.

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. For those who did not make this choice, report the taxable amount on either Line 15b or Line 16b of Form 1040 for 2011. See the instructions to Form 1040 for details.

 

 

Standard Mileage Rates Up in 2011

The standard mileage rate for business use of a car, van, pick-up or panel truck is 51 cents a mile for miles driven during the first  six months of 2011 (January through June) and 55.5 cents a mile for the rest of the year, up from 50 cents for 2010.

The rate for the cost of operating a vehicle for medical reasons or as part of a deductible move is 19 cents a mile from January through June and 23.5 cents a mile after that, up from 16.5 cents per mile in 2010.

The rate for using a car to provide services to charitable organizations is set by law and remains at 14 cents a mile.

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.

Health Insurance Deduction for Self-Employed People

In 2011, eligible self-employed individuals and S corporation shareholders can use the self-employed health insurance deduction to reduce their income tax liability. Eligible taxpayers still claim this deduction on Form 1040 Line 29. 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. For details see Publication 17 and the instructions to Form 1040 (including a worksheet).

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. Report on Form 8853

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 toU.S.citizens and resident aliens, nonresident aliens who elect to file a joint income tax return and certain nonresidents who live in aU.S.territory. Form 8938 is required when the total value of specified foreign assets exceeds certain thresholds. For example, a married couple living in theU.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.

The instructions to Form 8938 explain the thresholds for reporting, what constitutes a specified foreign financial asset, how to determine the total value of relevant assets, what assets are exempted, and what information must be provided.

Tax Law Changes for 2011 Federal Tax Returns

Before you file your 2011 federal income tax return in 2012, you should be aware of a few important tax changes that took effect in 2011. Check www.IRS.gov before you file for updates on any new legislation that may affect your tax return.
Due date of return. File your federal tax return by April 17, 2012. The due date is April 17, instead of April 15, because April 15 is a Sunday and April 16 is the Emancipation Day holiday in the District of Columbia.
New forms. In most cases, you must report your capital gains and losses on the new Form 8949, Sales and Other Dispositions of Capital Assets. Then, you report certain totals from that form on Schedule D (Form 1040). If you had foreign financial assets in 2011, you may have to file the new Form 8938, Statement of Foreign Financial Assets, with your return.
Standard mileage rates. The 2011 rates for mileage are different for January 1 through June 30 than for July 1 through December 31. For business use of your car, you can deduct 51 cents a mile for miles driven the first half of the year and 55 ½ cents for the second half. Medical and moving mileage are both 19 cents per mile for the early half of the year and 23 ½ cents in the latter half.
Standard deduction and exemptions increased.
The standard deduction increased for some taxpayers who do not itemize deductions on IRS Schedule A (Form 1040). The amount depends on your filing status.
The amount you can deduct for each exemption has increased $50 to $3,700 for 2011.
Self-employed health insurance deduction. This deduction is no longer allowed on Schedule SE (Form 1040), but you can still take it on Form 1040, line 29.
Alternative minimum tax (AMT) exemption amount increased. The AMT exemption amount has increased to $48,450 ($74,450 if married filing jointly or a qualifying widow(er); $37,225 if married filing separately).
Health savings accounts (HSAs) and Archer MSAs. The additional tax on distributions from HSAs and Archer MSAs not used for qualified medical expenses increased to 20 percent. Beginning in 2011, only prescribed drugs or insulin are qualified medical expenses.
Roth IRAs. If you converted or rolled over an amount from a traditional IRA to a Roth IRA or designated Roth in 2010 and did not elect to report the taxable amount on your 2010 return, you generally must report half of it on your 2011 return and the rest on your 2012 return.
Alternative motor vehicle credit. You can claim the alternative motor vehicle credit for a 2011 purchase only if the vehicle is a new fuel cell motor vehicle.
First-time homebuyer credit. The credit expired for most taxpayers for 2011. Some military personnel and members of the intelligence community can still claim the credit in 2011 for qualified purchases.
Health coverage tax credit. Recent legislation changed the amount of this credit, which pays qualified health insurance premiums for eligible individuals and their families. Participants who received the 65 percent tax credit in any month from March to December 2011 may claim an additional 7.5 percent retroactive credit when they file their 2011 tax return.
Mailing a return. The IRS changed the filing location for several areas. If you’re mailing a paper return, see the Form 1040 instructions for the correct address.
Detailed information on these changes can be found on the IRS website – www.irs.gov.

Links:
Fact Sheet 2012-01 2011 Changes Offer Tax Benefits to Almost Everyone
Form 1040 instructions (PDF 941K)
1040 Central
Form 8949, Sales and Other Dispositions of Capital Assets

Eight Facts to Determine Your Filing Status

Determining your filing status is one of the first steps to filing your federal income tax return. There are five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household and Qualifying Widow(er) with Dependent Child. Your filing status is used to determine your filing requirements, standard deduction, eligibility for certain credits and deductions, and your correct tax.

Some people may qualify for more than one filing status. Here are eight facts about filing status that the IRS wants you to know so you can choose the best option for your situation.

1. Your marital status on the last day of the year determines your marital status for the entire year.

2. If more than one filing status applies to you, choose the one that gives you the lowest tax obligation.

3. Single filing status generally applies to anyone who is unmarried, divorced or legally separated according to state law.

4. A married couple may file a joint return together. The couple’s filing status would be Married Filing Jointly.

5. If your spouse died during the year and you did not remarry during 2011, usually you may still file a joint return with that spouse for the year of death.

6. A married couple may elect to file their returns separately. Each person’s filing status would generally be Married Filing Separately.

7. Head of Household generally applies to taxpayers who are unmarried. You must also have paid more than half the cost of maintaining a home for you and a qualifying person to qualify for this filing status.

8. You may be able to choose Qualifying Widow(er) with Dependent Child as your filing status if your spouse died during 2009 or 2010, you have a dependent child, have not remarried and you meet certain other conditions.

There’s much more information about determining your filing status in IRS Publication 501, Exemptions, Standard Deduction, and Filing Information. Publication 501 is available at www.irs.gov or by calling 800-TAX-FORM (800-829-3676). You can also use the Interactive Tax Assistant on the IRS website to determine your filing status. The ITA tool is a tax law resource on the IRS website that takes you through a series of questions and provides you with responses to tax law questions.

Link:
IRS Publication 501, Exemptions, Standard Deduction, and Filing Information

Tax Tips for the Self-Employed

There are many benefits that come from being your own boss. If you work for yourself, as an independent contractor, or you carry on a trade or business as a sole proprietor, you are generally considered to be self-employed.

Here are six key points the IRS would like you to know about self-employment and self- employment taxes:

1. Self-employment can include work in addition to your regular full-time business activities, such as part-time work you do at home or in addition to your regular job.

2. If you are self-employed you generally have to pay self-employment tax as well as income tax. Self-employment tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. You figure self-employment tax using a Form 1040 Schedule SE. Also, you can deduct half of your self-employment tax in figuring your adjusted gross income.

3. You file an IRS Schedule C, Profit or Loss from Business, or C-EZ, Net Profit from Business, with your Form 1040.

4. If you are self-employed you may have to make estimated tax payments. This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages. Estimated tax is the method used to pay tax on income that is not subject to withholding. If you fail to make quarterly payments you may be penalized for underpayment at the end of the tax year.

5. You can deduct the costs of running your business. These costs are known as business expenses. These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year.

6. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.
For more information see the Self-employment Tax Center, IRS Publication 334, Tax Guide for Small Business, IRS Publication 535, Business Expenses and Publication 505, Tax Withholding and Estimated Tax, available at www.irs.gov or by calling the IRS forms and publications order line at 800-TAX-FORM (800-829-3676).

Links:

• Publication 334, Tax Guide for Small Business
• Publication 535, Business Expenses
• Publication 505, Tax Withholding and Estimated Tax
• Schedule C, Profit or Loss from Business and instructions
• Schedule C-EZ, Net Profit from Business
• Schedule SE, Self-Employment Tax and instructions
• Form 1040-ES, Estimated Tax for Individuals

IRS Tax Tip 2012-25: Taxable or Non-Taxable Income?

Issue Number: IRS Tax Tip 2012-25

Inside This Issue

---

Taxable or Non-Taxable Income?

Although most income you receive is taxable and must be reported on your federal income tax return, there are some instances when income may not be taxable.

The IRS offers the following list of items that do not have to be included as taxable income:

• Adoption expense reimbursements for qualifying expenses
• Child support payments
• Gifts, bequests and inheritances
• Workers’ compensation benefits (some exceptions may apply; see Publication 525, Taxable and Nontaxable Income)
• Meals and lodging for the convenience of your employer
• Compensatory damages awarded for physical injury or physical sickness
• Welfare benefits
• Cash rebates from a dealer or manufacturer

Some income may be taxable under certain circumstances, but not taxable in other situations. Examples of items that may or may not be included in your taxable income are:

• Life insurance If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds, which were paid to you because of the insured person’s death, are generally not taxable unless the policy was turned over to you for a price.
• Scholarship or fellowship grant If you are a candidate for a degree, you can exclude from income amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify for the exclusion.
• Non-cash income Taxable income may be in a form other than cash. One example of this is bartering, which is an exchange of property or services. The fair market value of goods and services exchanged is fully taxable and must be included as income on Form 1040 of both parties.

All other items—including income such as wages, salaries, tips and unemployment compensation — are fully taxable and must be included in your income unless it is specifically excluded by law.

These examples are not all-inclusive. For more information, see Publication 525, Taxable and Nontaxable Income, which can be obtained at the IRS.gov website or by calling the IRS at 800-TAX-FORM (800-829-3676).
Link: IRS Publication 525, Taxable and Nontaxable Income

 

2011 IRS Tax News for Small Businesses

Note: The following information was provided by the “IRS Tax Calendar for Small Businesses and the Self-Employed”, found here: http://www.tax.gov/calendar/news.htm .

Hiring Incentives to Restore Employment (HIRE) Act

Two new tax benefits are now available to employers hiring individuals who were previously unemployed or only working part time. These provisions are part of the Hiring Incentives to Restore Employment (HIRE) Act enacted into law on March 18, 2010.

Payroll Tax Exemption for Hiring the Unemployed:

The payroll tax exemption provides employers with an exemption from their 6.2 percent share of social security tax on wages paid to qualifying employees. This provision is effective for wages paid from March 19, 2010 through December 31, 2010.

Business Credit for Retention of Certain Newly Hired Individuals in 2010:

This is a general business credit to encourage retention of new hires. The employer may claim the credit for each qualified employee who remains an employee for 52 consecutive weeks, provided that the employee’s pay does not decrease significantly in the second half of the year. The amount of the credit is the lesser of $1,000 or 6.2 percent of wages (as defined for income tax withholding purposes) paid by the employer to the retained qualified employee during the 52 consecutive week period. The credit cannot be carried back but may be carried forward.

For more information, visit the HIRE Act: Questions and Answers for Employers page.

Health Care Tax Credit

Health coverage legislation enacted this year includes a Small Business Health Care Tax Credit to help small businesses and small tax-exempt organizations provide health insurance coverage to their employees.

Small businesses and tax-exempt organizations providing health insurance coverage will qualify for a special tax credit. Included in the health care reform legislation, the Patient Protection and Affordable Care Act encourages small business employers to offer health insurance coverage for the first time or maintain coverage they already have. In general, the credit is available to small business employers paying at least half the cost of single coverage for their employees.

For more information, visit the Small Business Health Care Tax Credit for Small Employers page.

The American Recovery and Reinvestment Act (ARRA) of 2009 contains several tax provisions that affect businesses including the following:

COBRA Changes 

The Recovery Act outlines changes to the health benefit provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985. The provision affects former employees and other potential COBRA payers such as insurance carriers.

ARRA provides a 65 percent subsidy for up to 15 months of the cost of COBRA coverage for an employee who was involuntarily terminated from his/her job from September 1, 2008, through May 31, 2010. The former employee must have been enrolled in an employer-provided health plan at the time of involuntary termination to qualify for the credit.

The eligible former employee must pay 35 percent of the total premium and the former employer claims the remaining 65 percent of the total premium as a credit on Line 12a of Form 941, Employer’s Quarterly Federal Tax Return. The credit was first available with the first quarter Form 941 due April 30, 2009. The credit is subject to verification requirements, so the former employer must keep adequate documentation to support the credit claimed.

The COBRA subsidy is available to people who become eligible for COBRA coverage as a result of a reduction in hours occurring between September 1, 2008, and May 31, 2010, followed by an involuntary termination between March 2, 2010 and May 31, 2010. Individuals who did not take COBRA coverage after the reduction in hours or who signed up but later dropped it, get another chance to sign up for COBRA coverage.

See COBRA Health Insurance Continuation Premium Subsidy for more information.

Excise Tax on Indoor Tanning Services

Beginning July 1, 2010, indoor tanning services will be subject to a 10 percent excise tax under the Affordable Care Act. Indoor tanning service providers are responsible for collecting the tax from the person paying for the service and in some situations, from the person receiving the service. Report the indoor tanning services tax quarterly on Form 720, Quarterly Federal Excise Tax Return.

Refer to Excise Tax on Indoor Tanning Services Frequently Asked Questions for more information.

Earned Income Tax Credit

Help your employees increase their take-home pay at no cost to you!

Please help us alert your employees about a valuable tax credit that could put up to $5,600 in their pockets. If you have employees who earned less than $48,000 in 2010, they may qualify for the Earned Income Tax Credit, or EITC. However, IRS estimates that up to one in four qualifying individuals will fail to claim and receive the credit. With your assistance, we can reduce that number.

However, before taxpayers can receive EITC, they must first file federal income tax returns, even if they are not otherwise required to file. Some states have a similar tax credit, increasing the dollars due these employees.

IRS has several resources to help you inform your employees about EITC. Go to the EITC employer page for links to technical information, communication toolkits and marketing materials. Corporate Voices, a leading nonprofit nonpartisan organization that represents the private sector on working family policy issues, also publishes a downloadable employer EITC guide.

Some relatively inexpensive ways you can alert your employees about EITC include:

• Posters in employee break rooms;
• Messages on your company intranet site;
• Articles in your company newsletter;
• A link from your intranet site to EITC information;
• E-mail messages to your workforce;
• Stuffers with your Form W-2 mail-out;
• Leveraging other internal communication channels;
• Including EITC information in new employee orientations.