For many, tax season is a migraine-inducing trial of one's sanity. Deduction rules change, credits disappear just as quickly as they had appeared, and tax rates and exemptions consistently fluctuate. Here are a few tax tips for 2011 to keep in mind:
Paying Back the First Time Home Buyer Credit
If you've been receiving mailed reminders regarding payback of this credit, you should be aware that reminders will no longer be mailed. You must now use an online lookup tool on the I.R.S. website to check your repayment obligation. For those unaware of when they may have to pay back this credit, if your house remains as your principal residence for more than three years after the purchase date, then you are required to repay the credit in equal payments over 15 years with no interest charges. If, however, the house ceases to be your principal residence within three years after the purchase date, then the full amount of the credit will immediately be owed.
Earned Income Tax Credit
Although this credit has been around since 1975, it's constantly receiving updates in regard to the qualifications for being able to claim this credit. Last year, approximately 80% of taxpayers who filed for the credit received it. For 2011, an individual who makes $49,078 or less in a year. The amount of the credit will depend upon your earned income and whether there are any dependent children in the household, but the maximum amount for the credit is $5,751.
Capital Expense Exceptions
Generally, if your business purchases an asset which will be useful for years to come, then it is treated as a capital expense. Assets can include a variety of equipment, including computers, vehicles, software, tools, etc. The typical manner in which capital expenses are deducted is through amortization. Rather than being able to deduct your purchase of an asset as a deductible expense for that tax year, you would have to deduct a portion of the expense for the first year, and then deduct equal portions in subsequent years for the next X (usually between 5 and 15) years. However, Section 179 has changed this, and has given business owners a little more leeway. For 2011, you may immediately deduct up to $500,000 in capital expenses without needing to amortize the expense. This is a general rule, and limitations and exceptions do apply for various types of assets; you will want to consult with a CPA or tax attorney to insure that you are applying the rules properly.
2010 Roth IRA Rollovers
If you converted or rolled over an amount to a Roth IRA in 2010, but you did not elect to report the taxable amount on your 2010 return, then you must report half of it on your 2011 return and the rest on your 2012 return. This also applies to any conversions or rollovers of a 401(k) or 403(b) plan to a designated Roth account in 2010. Keep in mind that this deferred treatment of taxes related to a Roth rollover expired in 2011. If you have any taxable income due to a Roth rollover made in 2011, then you must pay taxes on the income in the same year. Failure to properly report many rollovers can result in a costly assessment of the taxes, penalties, and interest due.
If you've ever had to declare a loss due to a natural disaster, or if you have ever had to report taxes paid on the sale of a new vehicle in 2009 or 2010, then you've probably completed a Schedule L. This schedule was in use for a few years, but as of the 2011 filing season, it has become obsolete. Rather than utilizing Schedule L to figure out your higher standard deduction, the I.R.S. now has a variety of categories which qualify taxpayers for a higher standard deduction.
Are you a college student? If so, you may be eligible for a deduction of up to $4,000 for your tuition and fees. Your adjustable gross income must be less than $65,000 (or $130,000 if filing jointly with a spouse), but this is a very worthwhile deduction that most college students should be able to easily obtain. Are you a K-12 teacher? You may be able to deduct up to $250 (or $500 if filing jointly with a spouse who is also an educator) of the unreimbursed expenses used in your classroom. These expenses include books, supplies, computer equipment, and supplementary materials, among other things.
Low Capital Gain Rates
For those individuals who report making $33,950 or less (or less than $67,900 if filing jointly), profits on long-term capital gains won't be taxed at all in 2011 and 2012. Additionally, many financial forecasters are predicting that the capital gains rate will be significantly higher when 2013 rolls around. The prediction of future rates is speculation at best, and new legislation could easily extend low capital gain rates, but for those with significant portfolios of long-term investments, it may be worth considering cashing them in within the next year so as to avoid higher rates down the road.