What’s New For 2011 and 2012

Congress, in an eleventh-hour compromise agreement worked out with the Obama Administration and the GOP Leadership, has extended many of the Bush era tax reductions.  The following is an overview of the more frequently encountered tax changes that will have an effect on just about every taxpayer.

INDIVIDUAL PROVISIONS

Individual Tax Rates – Under the Bush era tax cuts, the individual tax rates were reduced and replaced with six tax brackets that increase with income: 10, 15, 25, 28, 33, and 35 percent.  These reduced rates were scheduled to return to their original levels of 15, 28, 31, 36, and 39.6 percent beginning in 2011.  That would have resulted in the lowest bracket increasing by 5 percentage points and the highest bracket 3.6 percentage points, affecting all taxpayers from the low- to the high-income.  Congress has extended the lower rates for two additional years, through the end of 2012.

Capital Gains & Qualified Dividends – Under the Bush era tax cuts, the tax on long-term capital gains (assets owned for more than one year) was reduced from a 20 percent maximum rate to 15 percent for taxpayers in the 25% and higher tax brackets.  The tax cuts also provided for a zero tax to the extent a taxpayer is in the 10 and 15 percent income tax brackets. Qualified dividend income, which had been taxed at ordinary tax rates, also became eligible for the lower capital gains rates under the Bush era tax cuts.  These lower rates are scheduled to expire after 2010.  Congress has extended the lower rates for both long-term capital gains and qualified dividends for two additional years, through the end of 2012.

Itemized Deduction Limitation – Prior to the Bush era tax cuts, itemized deductions were partially phased out for higher-income taxpayers.  This phase-out was gradually eliminated beginning in 2006 and is totally repealed for 2010.  However, the full phase-out was scheduled to return in 2011.  Congress has extended the repeal for two additional years, through the end of 2012.

Personal Exemption Phase-Out – As with itemized deductions, prior to the Bush era tax cuts, the personal exemptions were phased out for higher-income taxpayers. This phase-out was gradually eliminated and was totally repealed for 2010.  However, the full phase-out was scheduled to return in 2011.  Congress has extended the repeal for two additional years, through the end of 2012.

Marriage Penalty Relief – Prior to the Bush era tax cuts, the standard deduction for a married couple was not twice the amount of the standard deduction for a single individual.  Instead, it was only 167% of the single amount even though there were two people instead of one.  This was often referred to as the “marriage penalty.”  As part of the Bush era tax cuts, the marriage penalty was eliminated and the standard deduction for a married couple filing jointly became twice the amount for a single taxpayer.  The marriage penalty also applies to the high-end cut-off point for the 15% tax bracket.

The marriage penalty was scheduled to resume in 2011.  However, Congress has extended the repeal for two additional years, through the end of 2012.

Child Tax Credit – For several years, the maximum child tax credit has been $1,000 per qualified child, and, for 2009 and 2010, a portion of that credit was refundable for certain lower-income taxpayers.  The credit was scheduled to drop back to $500 per child and the refundable portion reduced beginning in 2011.  Congress has extended, for two additional years, the $1,000 per child credit and the enhanced refund portion, through 2012.

Earned Income Credit (EIC) – There have been a number of enhancements in the past several years including additional credit when there are three or more qualifying children and increased income beginning and end points of the EIC.  Congress has extended the EIC enhancements for two additional years, through 2012.

Dependent (Child) Care Credit – As part of the Bush era tax cuts, the maximum expenses qualifying for dependent care credit were raised from $2,400 ($4,800 for two or more qualifiers) to $3,000 ($6,000 for two or more qualifiers) and the income-based maximum credit percentage was raised from 30% to 35%.  However, these increases were scheduled to revert to the lower amounts in 2011.  Congress has extended the higher expenses limits and credit percentage through 2012.

American Opportunity Tax Credit (AOTC) – For 2009 and 2010, the Hope education credit was replaced by an enhanced AOTC.  The AOTC provides a maximum credit of $2,500, of which up to 40% can be refundable, whereas the Hope credit maximum is $1,800 and the credit is not refundable. Generally, tax credits can only be used to offset an individual’s tax liability and any excess is lost, thus the term “refundable” means a portion of the credit in excess of the tax liability can be refunded to the taxpayer.

Without extension, the AOTC was set to expire after 2010 and revert to the lower Hope credit levels without any refundable portion.  Congress has extended the AOTC for two additional years, through 2012.

Above-the-Line Tuition Deduction - Taxpayers were allowed up to a $4,000 above-the-line deduction for qualified higher education tuition and related expenses.  This deduction expired at the end of 2009.  Congress retroactively reinstated this deduction for 2010 and extended it through 2011.

Coverdell Educational Accounts – Coverdell accounts are accounts where taxpayers can contribute funds to pay for future educational needs of their children.  The amount contributed is not deductible, but the future earnings of the accounts are not taxable if used to pay for qualified education expenses.  For several years, the annual maximum contribution limit to a Coverdell account has been $2,000, but was scheduled to revert to a maximum of $500 in 2011.  Congress has extended the $2,000 limit for two additional years, through 2012.  Also to be extended for the same time period for Coverdell distribution purposes is the definition of education expenses to include elementary and secondary school expenses.

Teacher’s $250 Above-the-Line Deduction – The special deduction for classroom expenses, which allows educators to deduct up to $250 of expenses whether or not they itemize their deductions, had expired after 2009, but it has been retroactively reinstated for 2010 and extended through 2011.

Option to Deduct Sales Tax In Lieu of State Income Tax - For several years through 2009, taxpayers had the option of deducting on Schedule A as part of their itemized deductions the LARGER of: (1) State and local income tax paid, or (2) State and local sales tax paid during the year.  That option expired at the end of 2009.  Congress has retroactively reinstated this option for 2010 and extended it through 2011.

Home Energy-Savings Improvement Credit – For 2009 and 2010, taxpayers were allowed a 30% credit for home energy-savings improvements with a 2-year combined maximum of $1,500.  For 2011, that credit has been replaced by the more restrictive credit rules in place during 2006 and 2007 with a less lucrative 10% credit and a $500 lifetime cap.  Additionally, certain efficiency standards that were weakened in the American Recovery and Reinvestment Act are restored to their prior levels, and the provision provides that windows, skylights and doors that meet the Energy Star standards are qualified improvements.

Unemployment Compensation – Congress has extended federal unemployment benefits through 2011; unemployment benefits continue to be taxable income. (For 2009, the first $2,400 of unemployment compensation received per person was excluded from being taxed; extension of this exclusion to 2010 or later years is not part of the new tax bill.)

Payroll Tax Reduction – The Making Work Pay credit, which was part of the 2009 stimulus package, provided a credit of up to $400 ($800 for married couples filing jointly), subject to income limitations, and expires after 2010.  The credit has been replaced for one year only (2011) with a 2 percentage point reduction in the employee’s portion of the payroll tax (OASDI) from 6.2% to 4.2%.  The reduction applies to all wage earners regardless of income.  The employer’s share of the payroll tax is unaffected.  For wage earners with payroll in excess of the $106,800 payroll tax cap, their savings for 2011 will be $2,136 (2% of $106,800).  The OASDI portion of the SE tax for self-employed individuals would also be reduced by 2 percentage points, reducing the overall SE tax from 15.3% to 13.3%.

Tax-Free IRA to Charity Distributions Reinstated

The provision that permits taxpayers age 70½ and over to make direct distributions (up to $100,000 per year) from their Traditional or Roth IRA account to a charity has been reinstated for 2010 and 2011.  The distribution is tax-free, but there is no charitable deduction.  This provision can be very beneficial to taxpayers who have social security income and/or do not itemize their deductions.

Important - Because the extension of this benefit was passed so late in December, Congress included a provision that allows transfers made in January of 2011 to be treated as if made in 2010. Thus, the distribution counts against the 2010, not the 2011, $100,000 exclusion limitation and can be used toward a taxpayer’s 2010 minimum distribution requirement if it hasn’t already been met.

The key benefits of this provision lie in the fact that the distribution:

(1) Is not included in the taxpayer’s income for the year,

(2) Counts toward the taxpayer’s minimum required distribution for the year, if any, and

(3) Does count as a charitable contribution for the year (although not a deductible contribution). 

How does a taxpayer benefit from this provision?

• By making a contribution directly from the IRA, taxpayers are able to exclude the amount that was contributed from their income for the year, which is essentially the same as deducting the contribution without itemizing their deductions.
• This technique also lowers a taxpayer’s adjusted gross income (AGI) for other tax breaks pegged at various AGI levels, such as medical expenses, passive losses, etc., allowing them greater benefits from the AGI-limited deductions.
• For taxpayers receiving Social Security (SS), the taxability of the SS is also based on income.  Thus, excluding the portion of the IRA distribution directly distributed to the charity can, in some cases, reduce the taxable portion of the SS.
• Taxpayers who wish to make very large contributions (up to the 100,000 limit) can do so with IRA funds that would have otherwise been taxable to them.

Caution – It is important to stress that a qualified charitable IRA contribution must be directly distributed to the qualified charity. Otherwise, the distribution is taxable as income and the charitable deduction would be taken on the taxpayer’s itemized deductions subject to all the normal limitations.  It may be appropriate to call this office before attempting to execute this strategy.

Alternative Minimum Tax (AMT) – For several years, Congress has failed to permanently resolve the nagging issue of the AMT, and instead, each year has applied a one-year patch without which an estimated 28 million taxpayers would be hit with this punitive tax.

This year, Congress took the AMT issue to the brink, but in the eleventh hour decided to patch it again, this time for two years, 2010 and 2011.  For a change, taxpayers will be able to factor the AMT into their tax planning for 2011.  The patch continues the inflation adjustments to the AMT exemption amounts and allows personal tax credits to be used against the AMT.  For 2010, the AMT exemption amounts will be set at $47,450 for individuals, $72,450 for married taxpayers filing jointly, and $36,225 for married taxpayers filing separately.

Federal Estate Tax Retroactively Reinstated - The Bush era tax cuts slowly phased out the federal estate tax and abolished it altogether for decedents dying in 2010, and replaced it with a rather complicated modified carryover basis regime.  Just about everyone assumed Congress would reinstate the estate tax for 2010.  As the year wore on, opinions began to change to where just about everyone predicted Congress would not reinstate the estate tax for 2010.  Then out of the blue, mixed in with the GOP/Obama Administration compromise agreement tax provisions, was a proposal to retroactively reinstate the estate tax with a $5 million per person exemption and a tax rate of 35%.

Because the reinstatement occurred so late in the year, Congress is allowing a choice for 2010, providing the following two options:

1. Tax Option - Subject the estate to the estate tax provisions for 2010 and provide the beneficiaries with an inherited basis equal to the fair market value (FMV) of assets inherited from the decedent.

2. Modified Carryover Basis Option - Not pay the retroactive estate tax and instead utilize the modified carryover basis regime for determining the basis of inherited items.

For estates worth $5 million or less, the obvious choice would be the tax option of filing an estate tax return and taking advantage of the $5 million exemption, resulting in no tax and providing beneficiaries with an inherited basis of items equal to the items’ FMV at date of death.  For larger estates, the question becomes more complex: pay the tax now and provide the beneficiaries with a FMV basis and perhaps a lesser tax in the future when the asset is sold, or avoid the tax now and possibly saddle the beneficiaries with a larger tax when they dispose of an asset in the future?  These decisions will have to be made after considering the beneficiaries’ financial and tax circumstances, the intended use of the inherited property, and the makeup of the estate and the ability to pay the estate tax.

Another twist is a new provision that permits the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse, thus eliminating the need by most couples for complicated estate planning such as certain trust arrangements; this provision would take effect for decedents dying after 2010.  But don’t get rid of that trust just yet!  This extension is only through 2012, and based on prior performance, can we really trust Congress to develop a permanent solution to the estate tax by then?  They had eight years to devise a permanent fix last go-around and waited until the 11th hour, only to come up with a two-year, temporary fix.

The $5 million per person exemption and top tax rate of 35% applies to estate, gift and generation skipping taxes through 2012, except the exemption amount will be inflation adjusted beginning in 2012, and the increase from $1 million to $5 million for the lifetime exemption for gifts applies for 2011 and 2012, but not 2010.

BUSINESS PROVISIONS

Bonus Depreciation – Generally, business assets cannot be written off in the year of purchase and must be depreciated over their useful life.  As an incentive to jump start the economy and promote business investment in recent years, Congress has allowed a bonus depreciation of 50% of the cost of the investment in equipment and certain leasehold improvements.  Congress has increased the bonus depreciation to 100% for qualified investments made from Sept. 9, 2010 through Dec. 31, 2011.  New business equipment placed in service in 2012 will be eligible for a bonus depreciation of 50%.  This generally provides a tax break for large businesses and others that can’t take advantage of the Section 179 expensing deduction because of income limitations.

Section 179 Expense Deduction – For 2011, taxpayers are able to expense (rather than depreciate) up to $500,000 of the cost of certain capital expenses.  Under the compromise agreement starting in 2012, the maximum Sec.179 expense will drop to $125,000, indexed for inflation.

Research Tax Credit – The research tax credit expired at the end of 2009.  Congress has reinstated the credit for 2010 and extended it through 2011.

The Affordable Care Act was enacted on March 23, 2010. It contains some tax provisions that take effect this year and more that will be implemented during the next several years. The following is a list of provisions now in effect; additional information will be added to this page as it becomes available.

Small Business Health Care Tax Credit This new credit helps small businesses and small tax-exempt organizations afford the cost of covering their employees and is specifically targeted for those with low- and moderate-income workers. The credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees.

Changes to Flexible Spending Arrangements Effective Jan. 1, 2011, the cost of an over-the-counter medicine or drug cannot be reimbursed from Flexible Spending Arrangements or health reimbursement arrangements unless a prescription is obtained. The change does not affect insulin, even if purchased without a prescription, or other health care expenses such as medical devices, eye glasses, contact lenses, co-pays and deductibles. The new standard applies only to purchases made on or after Jan. 1, 2011, so claims for medicines or drugs purchased without a prescription in 2010 can still be reimbursed in 2011, if allowed by the employer's plan. A similar rule goes into effect on Jan. 1, 2011 for Health Savings Accounts (HSAs), and Archer Medical Savings Accounts (Archer MSAs). Employers and employees should take these changes into account as they make health benefit decisions for 2011.

Health Coverage for Older Children Health coverage for an employee's children under 27 years of age is now generally tax-free to the employee. This expanded health care tax benefit applies to various work place and retiree health plans. These changes immediately allow employers with cafeteria plans –– plans that allow employees to choose from a menu of tax-free benefit options and cash or taxable benefits –– to permit employees to begin making pre-tax contributions to pay for this expanded benefit. This also applies to self-employed individuals who qualify for the self-employed health insurance deduction on their federal income tax return.

Excise Tax on Indoor Tanning Services A 10-percent excise tax on indoor UV tanning services went into effect on July 1, 2010. The first payment of the tax was due Monday, Nov. 1. Payments are made along with Form 720, Quarterly Federal Excise Tax Return. The tax doesn't apply to phototherapy services performed by a licensed medical professional on his or her premises. There's also an exception for certain physical fitness facilities that offer tanning as an incidental service to members without a separately identifiable fee.

Employer-Provided Health Coverage Starting in tax year 2011, the Affordable Care Act requires employers to report the value of the health insurance coverage they provide employees on each employee's annual Form W-2. However, to provide employers the time they need to make changes to their payroll systems or procedures in preparation for compliance with this requirement, the IRS will defer the reporting requirement for 2011, making that reporting by employers optional in 2011. The revised Form W-2 for 2011 is now available in draft for viewing. This is the W-2 that most employees will receive in early 2012. The draft form includes the codes that employers may use to report the cost of coverage under an employer-sponsored group health plan.

This reporting is for informational purposes only, to show employees the value of their health care benefits so they can be more informed consumers. The amount reported does not affect tax liability, as the value of the employer contribution to health coverage continues to be excludible from an employee's income, and it is not taxable.

Adoption Credit The Affordable Care Act raises the maximum adoption credit to $13,170 per child, up from $12,150 in 2009. It also makes the credit refundable, meaning that eligible taxpayers can get it even if they owe no tax for that year. In general, the credit is based on the reasonable and necessary expenses related to a legal adoption, including adoption fees, court costs, attorney's fees and travel expenses. Income limits and other special rules apply. In addition to filling out Form 8839, Qualified Adoption Expenses, eligible taxpayers must include with their 2010 tax returns one or more adoption-related documents.

Qualified Therapeutic Discovery Project Program This program was designed to provide tax credits and grants to small firms that show significant potential to produce new and cost-saving therapies, support U.S. jobs and increase U.S. competitiveness. Applicants were required to have their research projects certified as eligible for the credit or grant.

Submission of certification applications began June 21, 2010, and applications had to be postmarked no later than July 21, 2010, to be considered for the program. Applications that were postmarked by July 21, 2010, were reviewed by both the Department of Health and Human Services (HHS) and the IRS. All applicants were notified by letter dated October 29, 2010, advising whether or not the application for certification was approved. For those applications that were approved, the letter also provided the amount of the grant to be awarded or the tax credit the applicant was eligible to take.

Group Health Plan Requirements The Affordable Care Act establishes a number of new requirements for group health plans.

Medicare Part D Coverage Gap "donut hole" Rebate The Affordable Care Act provides a one-time $250 rebate in 2010 to assist Medicare Part D recipients who have reached their Medicare drug plan's coverage gap. This payment is not taxable. This payment is not made by the IRS.

Additional Requirements for Tax-Exempt Hospitals The Affordable Care Act adds requirements in the Internal Revenue Code that tax-exempt hospitals must meet to maintain their tax-exempt status.

Annual Fee on Branded Prescription There is annual fee on branded prescription pharmaceutical manufacturers and importers. The Affordable Care Act created an annual fee payable beginning in 2011 by certain manufacturers and importers of brand name pharmaceuticals.

Modification of Section 833 Treatment of Certain Health Organizations The Affordable Care Act amended section 833 of the Code, which provides special rules for the taxation of Blue Cross and Blue Shield organizations and certain other organizations that provide health insurance.

The following paragraphs explain the changes to the credit for 2011.
Amount of credit increased. The maximum amount of the credit has increased. The most you can get for 2011 is:

• $3,094 if you have one qualifying child,
• $5,112 if you have two qualifying children,
• $5,751 if you have three or more qualifying children, or
• $464 if you do not have a qualifying child.

Earned income amount increased. The maximum amount of income you can earn and still get the credit has increased for 2011. You may be able to take the credit if:

• You have three or more qualifying children and you earn less than $43,998 ($49,078 if married filing jointly),
• You have two qualifying children and you earn less than $40,964 ($46,044 is married filing jointly),
• You have one qualifying child and you earn less than $36,052 ($41,132 if married filing jointly), or
• You do not have a qualifying child and you earn less than $13,660 ($18,740 if married filing jointly).

Investment income amount. The maximum amount of investment income you can have and still get the credit is $3,150 for 2011.

Advance payment of the credit. You can no longer get advance payments of the credit in your pay during the year as you could in 2010 and earlier years.

2011 Changes

High Deductible Health Plan (HDHP). For Archer MSA purposes, the minimum annual deductible for an HDHP increases to $2,050 ($4,100 for family coverage) and the maximum annual deductible increases to $3,050 ($6,150 for family coverage).

Maximum out-of-pocket expenses. The maximum out-of-pocket expenses limit for Archer MSAs increases to $4,100 ($7,500 for family coverage).

Nonprescription medicines no longer qualify. For tax years beginning after December 31, 2010, nonprescription medicines (other than insulin) no longer qualify as an expense for Archer MSA purposes unless they are prescribed.

High Deductible Health Plan (HDHP). For HSA purposes, the minimum annual deductible of an HDHP increases to $1,200 ($2,400 for family coverage) and the maximum annual deductible and other out-of-pocket expenses limit increases to $5,950 ($11,900 for family coverage).

Limits on contributions. The maximum HSA contribution increases to $3,050 ($6,150 for family coverage).

2011 Changes

Nonprescription medicines no longer qualify. For tax years beginning after December 31, 2010, nonprescription medicines (other than insulin) do not qualify as an expense for HSA purposes unless they are prescribed.

Increase in Deductible Limit for Long-Term Care Premiums. For 2011, the maximum amount of qualified long-term care premiums you can include as medical expenses has increased. You can include qualified long-term care premiums, up to the amounts shown below, as medical expenses on Schedule A (Form 1040).

• Age 40 or under - $340.
• Age 41 to 50 - $640.
• Age 51 to 60 - $1,270.
• Age 61 to 70 - $3,390.
• Age 71 or over - $4,240.

For 2011, the standard deduction amounts are:

• Single-$5,800
• Married filing separately-$5,800
• Married filing jointly-$11,600
• Qualifying widow(er) with dependent child-$11,600
• Head of household-$8,500

First-time homebuyer credit. To claim the first-time homebuyer credit for 2011, you (or your 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 December 31, 2008, and ending before May 1, 2010.

Repayment of first-time homebuyer credit. If you have to repay the credit, you may be able to do so without attaching Form 5405 (see below).

How to repay the credit. If you are required to repay the credit, complete Parts III and IV of Form 5405. You may have to complete Part V as well. Attach the form to your Form 1040. Include the repayment on Form 1040, line 59b. If you bought the home in 2008 and owned and used it as your main home for all of 2011, you can enter your 2011 repayment directly on Form 1040, line 59b, without attaching Form 5405.

Repayment of credit. If you bought the home after 2008, you generally must repay the credit if you dispose of the home or the home stops being your main home within the 36-month period beginning on the purchase date. This includes situations where you sell the home, you convert it to business or rental property, the home is destroyed, condemned, or disposed of under threat of condemnation, or the lender forecloses on the mortgage. You repay the credit by including it as additional tax on the return for the year the home stops being your main home. If the home continues to be your main home for at least 36 months beginning on the purchase date, you do not have to repay any of the credit. If you and your spouse claim the credit on a joint return, each spouse is treated as having been allowed half of the credit for purposes of repaying the credit.
Exceptions. The following are exceptions to the repayment rule.

• If you sell the home to someone who is not related to you, the repayment in the year of sale is limited to the amount of gain on the sale. When figuring the gain, reduce the adjusted basis of the home by the amount of the credit.
• If the home is destroyed, condemned, or disposed of under threat of condemnation, and you acquire a new main home within 2 years of the event, you do not have to repay the credit.
• If, as part of a divorce settlement, the home is transferred to a spouse or former spouse, the spouse who receives the home is responsible for repaying the credit if required.
• If you die, repayment of the credit is not required. If you file a joint return and then you die, your surviving spouse must repay his or her half of the credit if required.
• In some cases, there is an exception for members of the uniformed services or Foreign Service and for intelligence community employees.

Home bought in 2008. If you claimed the credit for a home you bought in 2008, you generally must have begun repaying it on your 2010 return. You must continue repaying it with your
2011 tax return. In addition, you generally must repay any credit you claimed for a home you bought in 2008 if you sold the home in 2011 or the home stopped being your main home in 2011. However, you do not have to repay the credit if one of the exceptions to the repayment rule applies.

How to take the credit. To take the credit, complete Form 5405 and attach it to your Form 1040. Enter your credit on Form 1040, line 67. Attach a copy of your settlement statement.

Gain from the sale or exchange of the main home is no longer excludable from income if allocable to periods of nonqualified use. Generally, nonqualified use means any period after 2008 where neither you nor your spouse (or your former spouse) used the property as a main home (with certain exceptions). A period of nonqualified use does not include:

1. Any portion of the 5-year period ending on the date of the sale or exchange that is after the last date you (or your spouse) use the property as a main home;
2. Any period (not to exceed an aggregate period of 10 years) during which you or your spouse is serving on qualified official extended duty:
3. As a member of the uniformed services,
4. As a member of the Foreign Service of the United States, or
5. As an employee of the intelligence community; and
6. Any other period of temporary absence (not to exceed an aggregate period of 2 years) due to change of employment, health conditions, or such other unforeseen circumstances as may be specified by the IRS.

To figure the portion of the gain that is allocated to the period of nonqualified use, multiply the gain by the following fraction:

• total nonqualified use during period of ownership after 2008 divided by total period of ownership

Nonbusiness energy property credit. The credit is figured differently than it was for 2010. The credit now has a lifetime limit of $500, of which only $200 can be for windows. Other limits and rules have also changed. See Nonbusiness energy property credit under Residential Energy Credits.

Nonbusiness energy property credit. You may be able to take a credit equal to the sum of:

1. 10% of the amount paid or incurred for qualified energy efficiency improvements installed during 2011, and
2. Any residential energy property costs paid or incurred in 2011.
   There is a lifetime limit of $500 for all years after 2005, of which only $200 can be for windows;  $50 for any advanced main air circulating fan; $150 for any qualified natural gas, propane, or oil furnace or hot water boiler; and $300 for any item of energy efficient building property.

Caution!  If the total of nonbusiness energy property credits you have taken in previous years (after 2005) is more than $500, you cannot take this credit in 2011.

Qualified energy efficiency improvements are the following improvements that are new, can be expected to remain in use at least 5 years, and meet certain requirements for energy efficiency.

• Any insulation material or system that is specifically and primarily designed to reduce heat loss or gain of a home.
• Exterior windows (including skylights).
• Exterior doors.
• Any metal or asphalt roof that has appropriate pigmented coatings or cooling granules specifically and primarily designed to reduce heat gain of the home.

Residential energy property is any of the following.

• Certain electric heat pump water heaters; electric heat pumps; central air conditioners; natural gas, propane, or oil water heaters; and stoves that use biomass fuel.
• Qualified natural gas, propane, or oil furnaces; and qualified natural gas, propane, or oil hot water boilers.
• Certain advanced main air circulating fans used in natural gas, propane, or oil furnaces.

Residential energy efficient property credit. You may be able to take a credit of 30% of your costs of qualified solar electric property, solar water heating property, fuel cell property, small wind energy property, and geothermal heat pump property. The credit amount for costs paid for qualified fuel cell property is limited to $500 for each one-half kilowatt of capacity of the property.
Basis reduction. You must reduce the basis of your home by the amount of any credit allowed.

How to take the credit. Complete Form 5695 and attach it to your Form 1040. Enter the credit on Form 1040, line 52.

For 2011, the standard mileage rate for the cost of operating your car for:

• Business
• 1/1/2011-6/30/2011:  51 cents a mile
• 7/1/2011-12/31/2011:  55 ½ cents a mile
• Medical
• 1/1/2011-6/30/2011:  19 cents a mile
• 7/1/2011-12/31/2011:  23 ½ cents a mile
• Moving
• 1/1/2011-6/30/2011:  19 cents a mile
• 7/1/2011-12/31/2011:  23 ½ cents a mile
• Charity
• 1/1/2011-12/31/2011:  14 cents a mile

 

For 2012, the standard mileage rate for the cost of operating your car for:

• Business:  55 ½ cents a mile
• Medical:  23 cents a mile
• Moving:  23 cents a mile
• Charity:  14 cents a mile

You may be able to take this credit if you, or your spouse if filing jointly, made:

• Contributions (other than rollover contributions) to a traditional or Roth IRA,
• Elective deferrals to a 401(k) or 403(b) plan (including designated Roth contributions) or to a governmental 457, SEP, or SIMPLE plan,
• Voluntary employee contributions to a qualified retirement plan (including the federal Thrift Savings Plan), or
• Contributions to a 501(c)(18)(D) plan.

 

The credit is equal to 50% of the contribution if AGI is:
$0-$34,000 for Married Filing Jointly
$0-$25,500 if Head-of-household
$0-$17,000 if Single, Married Filing Separately, or Qualifying Widow(er)

The credit is equal to 20% of the contribution if AGI is:
$34,000-$36,500 for Married Filing Jointly
$25,500-$27,375 if Head-of-household
$17,000-$18,250 if Single, Married Filing Separately, or Qualifying Widow(er)

The credit is equal to 10% of the contribution if AGI is:
$36,500-$56,500 for Married Filing Jointly
$27,375-$42,375 if Head-of-household
$18,250-$28,250 Single, Married Filing Separately, or Qualifying Widow(er)

The credit is $0 if AGI is above:
$56,500 for Married Filing Jointly
$42,375 if Head-of-household
$28,250 if Single, Married Filing Separately, or Qualifying Widow(er)

The contribution limit to your traditional IRA for 2011 and 2012 will be the smaller of the following amounts:

• $5,000, or
• Your taxable compensation for the year.
  

 

If you were age 50 or older, the most that can be contributed to your traditional IRA for 2011 and 2012 will be the smaller of the following amounts:

• $6,000, or
• Your taxable compensation for the year.

For 2011, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified AGI is:

• More than $90,000 but less than $110,000 for a married couple filing a joint return or a qualifying widow(er),
• More than $56,000 but less than $66,000 for a single individual or head of household, or
• Less than $10,000 for a married individual filing a separate return.

If you either live with your spouse or file a joint return, and your spouse is covered by a retirement plan at work, but you are not, your deduction is phased out if your modified AGI is more than $169,000 but less than $179,000. If your modified AGI is $179,000 or more, you cannot take a deduction for contributions to a traditional IRA.

Modified AGI limit for traditional IRA contributions increased. For 2012, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified AGI is:

• More than $92,000 but less than $112,000 for a married couple filing a joint return or a qualifying widow(er),
• More than $58,000 but less than $68,000 for a single individual or head of household, or
• Less than $10,000 for a married individual filing a separate return.

If you either live with your spouse or file a joint return, and your spouse is covered by a retirement plan at work, but you are not, your deduction is phased out if your modified AGI is more than $173,000 but less than $183,000. If your modified AGI is $183,000 or more, you cannot take a deduction for contributions to a traditional IRA.

File Form 1040, 1040A or 1040EZ 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.

Exemption Amount. The amount you can deduct for each exemption has increased from $3,650 for 2010 to $3,700 for 2011.

Roth IRAs. If you converted or rolled over an amount to a Roth IRA 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.

Due date for contributions and withdrawals. Contributions can be made to your IRA for a year at any time during the year or by the due date for filing your return for that year, not including extensions. Because April 15, 2012, falls on a Sunday and Emancipation Day, a legal holiday in the District of Columbia, falls on Monday, April 16, 2012, the due date for making contributions for 2011 to your IRA is April 17, 2012.

There is a 6% excise tax on excess contributions not withdrawn by the due date (including extensions) for your return. You will not have to pay the 6% tax if any 2011 excess contributions are withdrawn by the due date of your return (including extensions).

Modified AGI limit for Roth IRA contributions increased. For 2011, your Roth IRA contribution limit is reduced (phased out) in the following situations.
Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $169,000. You cannot make a Roth IRA contribution if your modified AGI is $179,000 or more.
Your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time in 2011 and your modified AGI is at least $107,000. You cannot make a Roth IRA contribution if your modified AGI is $122,000 or more.
Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more.

Modified AGI limit for Roth IRA contributions
increased. For 2012, your Roth IRA contribution limit is reduced (phased out) in the following
situations.

• Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $173,000. You cannot make a Roth IRA contribution if your modified AGI is $183,000 or more.
• Your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time in 2012 and your modified AGI is at least $110,000. You cannot make a Roth IRA contribution if your modified AGI is $125,000 or more.

Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more.

You may be able to claim a casualty loss deduction for amounts you paid to repair damage to your home and household appliances that resulted from corrosive drywall. The deduction is limited if you have a pending claim for reimbursement (or intend to pursue reimbursement) through property insurance, litigation, or other means.

Each personal casualty or theft loss is limited to the excess of the loss over $100 (instead of the $500 limit that applied for 2009). In addition, the 10%-of-AGI limit generally continues to apply to the net loss. Congress is considering increasing the loss limit amount.

A custodial parent who has revoked his or her previous release of a claim to a child's exemption must include a copy of the revocation with his or her return.