2011 Changes to Individual Returns

Since Individual Tax Filing season is upon us, I thought it would be a good idea to outline some of the significant changes that are in effect this year. Some of this is dry material, but if it applies to you should be very helpful.

Filing due date. April 15, 2012 is a Sunday. Because of the April 16 Emancipation Day holiday in the District of Columbia, the due date of 2011 Form 1040 moves to April 17, 2012.

First-time homebuyer credit. Members of the military and certain other federal employees serving outside the U.S. had additional time to buy a principal residence in the U.S. and qualify for the first-time homebuyer credit. Generally, qualified military taxpayers had to purchase, or enter into a binding contract to buy, a principal residence on or before April 30, 2011. If a binding contract was entered into by that date, the taxpayer had until June 30, 2011, to close on the purchase.

Repaying the first-time homebuyer credit. For qualified homes purchased in 2008, the first-time homebuyer credit operated similarly to a no-interest loan and taxpayers must repay the credit in annual installments beginning with the 2010 tax year. For 2011, the IRS has advised taxpayers who purchased their homes in 2008 and who used it as their main home in 2011 that they can enter their repayment amount on Line 59b on 2011 Form 1040 without having to attach Form 5405, First-Time Homebuyer Credit and Repayment of the Credit.

Standard mileage rates. The IRS made a 2011 mid-year adjustment to the business standard mileage rate to reflect rising fuel costs. The business standard mileage rate for business miles driven on or after January 1, 2011 and on or before June 30, 2011 is 51 cents per mile. The business standard mileage rate for business miles driven on or after July 1, 2011 and on or before December 31, 2011 is 55.5 cents per mile. The medical/moving rate also experienced a mid-year adjustment in 2011 from 19 cents per mile for the first half of 2011 to 23 .5 cents per mile for the second half of 2011. The statutorily determined charitable mileage rate remained unchanged at 14 cents per mile for all of 2011.

Specified foreign financial assets. The IRS has developed Form 8938, Statement of Specified Foreign Financial Assets, for specified taxpayers to report specified foreign financial assets. Generally, certain taxpayers holding specified foreign financial assets above various monetary thresholds will use Form 8938 to report those assets. Taxpayers must attach Form 8938 to their annual income tax return. The IRS has explained that Form 8938 reporting applies for specified foreign financial assets in which the taxpayer has an interest in tax years starting after March 18, 2010. For most individual taxpayers, this means they will start filing Form 8938 with their 2011 income tax return to be filed this tax filing season.

Roth IRAs. In 2010, a taxpayer may have rolled over eligible distributions from a retirement plan to a Roth IRA, converted (transferred) amounts from a non-Roth IRA to a Roth IRA, or made an in-plan Roth rollover (after September 27, 2010). In any of these events, the taxpayer must report half of the taxable amount of these 2010 rollovers and conversions on his or her 2011 return and half on his or her 2012 return unless the taxpayer elected to include the taxable amount in income for 2010; recharacterized his or her 2010 rollover or conversion to a Roth IRA (in-plan Roth rollovers cannot be recharacterized); or received a distribution in 2010 or 2011 of any of the taxable amount, in which case, the taxpayer may have to report an amount other than half on his or her 2011 return.

Standard deduction. For 2011, the standard deduction for single taxpayers and married couples filing separately is $5,800. The standard deduction for married couples and qualifying widow(er)s is $11,600 for 2011 and the standard deduction for heads of households is $8,500 for 2011.

Exemptions. For 2011, the amount for each exemption is $3,700.

Residential energy credits. Two credits, the Code Sec. 25C nonbusiness energy property credit and the Code Sec. 25D residential energy efficient property credit, reward taxpayers who make qualified energy improvements to their residences. The Code Sec. 25C credit expired after December 31, 2011. The Code Sec. 25D credit is scheduled to expire after December 31, 2016. Both credits are claimed on Form 5695, Residential Energy Credits.

Self-employed individuals. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act) reduced the OASDI tax rate on self-employment income to 10.4 percent. Because of the reduction, Congress modified the deduction for self-employment taxes under Code Sec. 164(f). For any tax year that begins in 2011, the self-employment tax liability deduction under Code Sec. 164(f) equals the sum of 59.6 percent of the applicable OASDI taxes plus 50 percent of the applicable Medicare taxes.

Small business expensing. For tax years beginning in 2011, the dollar limitation under Code Sec. 179 is $500,000 and the investment limitation is $2 million. A taxpayer may elect to treat up to $250,000 of qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property as Code Sec. 179 property for tax years beginning in 2011.

Expired/expiring incentives

Along with a lengthy list of tax extenders, a number of other tax provisions expired at the end of 2011 or are scheduled to expire after 2012.

Extenders. Expired tax extenders include (not an exhaustive list):

  • State and local sales tax deduction;
  • Research tax credit;
  • Transit benefits parity;
  • Higher education tuition deduction;
  • Teachers’ classroom expense deduction;
  • Special expensing rules for film and television productions;
  • New Markets Tax Credit;
  • Enhanced deduction for charitable contribution of food
  • Indian employment credit;
  • Grants in lieu of tax credits for specified energy property;
  • Incentives for biodiesel, renewable diesel and alternative fuels;
  • Refined coal production credit;
  • Percentage depletion for marginal wells;
  • Employer wage credit for activated military reservists;
  • Subpart F exceptions for active financing income;
  • Brownfields remediation expensing; and
  • Railroad track maintenance credit.

Bonus depreciation. The 2010 Tax Relief Act extended 100 percent bonus depreciation in the case of qualifying property acquired after September 8, 2010 and before January 1, 2012, and placed in service before January 1, 2012 (or before January 1, 2013, in the case of property with a longer production period and certain noncommercial aircraft). Under current law, 50 percent bonus depreciation may apply to qualified property placed in service after 2011 and before 2013 (after 2012 and before 2014 in the case of property with a longer production period and certain noncommercial aircraft).

Research tax credit. The credit for increasing research activities (known as the research tax credit) was extended through the end of 2011 by the Tax Relief Act of 2010. The research credit has expired for periods after December 31, 2011.

Transit benefits parity. The 2010 Tax Relief Act extended parity for the exclusion limitation on van pool benefits, transit passes and qualified parking through the end of 2011. Parity expired after 2011 and the transit benefit reverted to $125 per month (as adjusted for inflation).

AMT exemption amounts. For tax years beginning in 2011, the alternative minimum tax (AMT) exemption amounts are $48,450 for single taxpayers; $74,450 for married taxpayers filing joint returns and surviving spouses; and $37,225 for married taxpayers filing separately. Absent action by Congress, the AMT exemption amounts for tax years beginning after 2011 are scheduled to be $33,750 for single taxpayers; $45,000 for married couples filing joint returns and surviving spouses; and $22,500 for married couples filing separate returns.

FUTA surtax. The 0.2 percent federal unemployment tax (FUTA) surtax expired for the second half of 2011. As a result, the IRS has explained that FUTA taxes for calendar year 2011 are calculated using two rates: 6.2 percent of taxable wages paid through June 30, 2011; and 6.0 percent of taxable wages paid after June 30, 2011.

Qualified principal residence indebtedness. Scheduled to sunset after 2012 is the temporary exclusion for qualified acquisition indebtedness on a principal residence, which applies to qualified discharges occurring on or after January 1, 2007 and before January 1, 2013. To be qualified, the indebtedness must be acquisition indebtedness with a $2 million limit ($1 million for a married taxpayer filing separately).

If you have any questions regarding these or other tax provisions, please do not hesitate to contact us.  Happy Tax Filing!

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