Tax Time Again!
Too soon? I agree! Nothetheless it's time to begin collecting the information for your 2011 return.
In this issue I'll offer you some suggestions on getting your records together. Getting an early start helps in two ways - the work is simpler and you save more money.
I also have some reminders on law changes which may affect you.
Changes for the future? Lors of talk. 2012 is a presidential election year. The economy needs plenty of help, but be prepared for more talk than action for several months.
Tax Laws Keep Changing
Keep These in Mind While You Gather Records
Many favorable tax rules were extended by the major tax bill last December. Not all rules got the same treatment. Some expire this year, some expire after 2012.
Tax Rates will remain at current levels through 2012. IRS just gave the inflation adjustments for 2011. You'll probably not notice the tiny difference. In 2013, the "Bush Tax Cuts" are set expire. This would lead higher rates for everyone.
Couples get one more year of favorable rates. In 2013 many of the "marriage penalty" provisions are supposed return.
Home Energy Credits. Two special credits for 2011 - one large, one small.
Generation. Big credits apply if you generate energy. Solar is the most common, but wind, geothermal, and fuel cell devices qualify. These reduce your taxes by a full 30% of what you spend. There's no upper limit. If the credit wipes out your tax, the excess carries the next year. You'll get the full benefit. Credits apply for any property where you reside, even a vacation home. But, no pools or other recreation use. These are expensive projects, but the tax credit gives a true 30% discount.
Conservation. Energy-saving improvements to your main" home offer less help. Look for costs to install insulation, doors, windows, skylights, certain furnaces, heat pumps, and air conditioners. Main home only – no vacation or rental properties. You get only 10% of the first $5,000 you spend - with a big catch. The $5,000 is your combined expenditure for 2006, 2007, and 2011. Yep, sounds crazy, but we'll need to dig out information from '06 and '07.
Possible catch. IRS says you need manufacturer's statement that the device qualifies - keep the brochure, or print the information from their website. We haven't heard the final word, but we might need to send this with your return.
Education Benefits. Course work to improve job skills has been deductible for years. But, special benefits for any college education began in 1997. There are three different benefits.
I can easily compare rules to give you the greatest benefit. Problem: you must be able to explain the program, and to segregate the costs into different categories.
Tuition & Fees. Schools send out Form 1098-T each January to report tuitions paid. It's sent to the student's address, but credits belong on the return claiming the student's "personal exemption". Usually that's the parents' return. Any cost covered by a scholarship or grant can't be counted.
Required Books & Supplies. Please keep track of required texts, lab manuals & required course fees.
Other Materials & Costs. I'll need to know costs for notebooks, pens, pencils, and any other supplies purchased to perform the classwork. "Other costs" is a broad concept. It might include special software where course work must be submitted on- line - it might even include monthly fees for the internet connection, or even the cost of a computer if needed for the course. Look for any special tools or art supplies. Be alert for costs such as library fees or special study groups, or costs to copy course materials. For work-related classes we can even include mileage costs for going to classes.
Your savings can vary. For most college education, only the first $4,000 spent for each student gives a tax break. If tuition alone exceeds $4,000, don't worry about other costs. Your savings could reach $2,500. The savings are "means tested". They begin tdisappear for single filers at $80,000 of income ($160,000 for couples). For work- related classes, all costs count, and there are no income limitations.
Other College Issues. Several other tax issues might apply if you or your children are in college,
College Savings Plans. Did you use money from a "Section 529 Plan" or a "Coverdell" savings plan to pay part of the costs? If so, you'll see an IRS Form 1099-Q. The plans were allowed to grow without tax. But, now we must show the funds were used for "qualified expenses", else the earnings are taxed, and you could pay a penalty as well. Keep records of any and all costs.
Youngster's Tax Returns. If the student is your child, we might run into something called "Kiddie Tax" rules. Please warn your child not to file their own return until we check the rules together.
Over – 70 1/2 IRA To Charity. You must take a distribution each year. If you have the IRA Custodian send a check ta charity, the amount can be excluded from your income. You are treated as if you took your full required distribution, but the donation is directly removed from your income. You don't need to itemize deductions, so you get full value for the gift.
Mortgage Insurance. Last year for this one. Form 1098 will show the interest you paid on your mortgage. It should also show any mortgage insurance. We can deduct this along with the interest.
Troubled Loans. If you had a loan modified, or lost a property in a foreclosure or short sale, I need lots of details. Your problems are not behind you until we deal with the income tax issues. You might have income from the cancellation of part of the mortgage. If IRS forms have arrived - 1099-A and/or 1099-C. - I must see these. I'll need as much information as possible about what really happened. I need a complete history of loans for the property. It helps if I can see some mortgage statements. These cases can involve more than simply tax law, please be as thorough as possible.
Miscellaneous Items. A host of other provisions are set to expire after 2012. We can deal with these at the time of filing your return.
Businesses. Liberal rules for depreciation were extended to 2012. Vehicle deductions are normally limited by "luxury car caps", but for 2011 we can claim an extra $8,000 in the first year you own the car. After 2011 this extra $8,000 is set to disappear.
Mileage Rates. For 2011 we have a "split" rate. From January through June we get 51˘ per mile. For the second half of the year it's 55.5˘. Thus, I must ask you to find figures for each half of the year.
Collect Unemployment? You're not alone - record numbers of Americans collected this year. Please be alert for the tax reporting form. This is taxable money. In 2009 the first $2,400 was ignored. This year it's all taxable,
Non-Itemizers may remember being allowed to claim some bonus deductions the past couple of years. Property taxes and sales taxes on new car were popular ones. These special deductions expired last year. For 2011 expect no extra savings.
Foreign Asset Reports. Do you have an account or assets in another country? Of course, we are all required to report our "worldwide income" on our tax returns. A few of you are accustomed to filing an additional simple report on foreign accounts if the balance reached $10,000 or more at any time during the year. Beginning this year, an extra report is needed if you have an interest in $50,000 or more of such foreign assets. Please let me know as soon as possible -the Form is brand new. A learning experience for both of us!
Stocks & Mutual Funds. When you sell or trade in stocks we must report whether you have a gain or a loss. We compare your sale with original costs. Most brokers actually provide this information. Key phrase: Look for a "Statement of Realized Gain/Loss". These days you can usually find this if you can access your account via computer. Or you can look for this statement in the “annual consolidated statement” you receive in January.
Prepare Early. This will be a special year. We don't want to miss anything. Prepare carefully, and there are two benefits: (1) You'll see this in maximum tax savings, and (2) my fee will be as low as possible. We may even have a little time to plan for future savings! It's your money, but it takes both of us to keep as much as possible for you.
In January - Important Tax Information
IRS Receives the same reports of income and deductions as are sent to you. After all returns are filed, their computers will compare the reports with your return. They rarely miss an error. Watch January's mail. You'll see "Important Tax Information Enclosed" on the envelope.
1099's. You get 1099-INT or 1099-DIV for any account paying interest or dividends. Did you find all of them? Keep notes.
Other 1099’s. Real estate sales are on Form 1099-S. Stock sates on 1099-B. Pensions or IRAs are on 1099-R. There are several others.
Other Income. You may see forms for unemployment benefits, state tax refunds, prizes, awards, or gambling winnings. Don't lose these!
Partnerships, etc. Forms K-l from partnerships, trusts, estates, and corporations arrive later. We can do the rest of your return early. Mail these forms to me when they arrive.
Form 1098. Some deductions. Form 1098 reports your mortgage interest. For a private loan, get your payment book. If your lender was the seller, you need name, address, and tax I.D. number. Form 1098-T is for tuitions paid. Student loan interest is on Form 1098-E. If you donated a vehicle to charity you'll see Form 1098-C.
After January. In February figure out what's missing. Missing a W-2? Contact the employer. If you can't locate the employer, find your pay stubs. Missing an expected 1099? It's time to call the bank or broker.
Late Information! If information arrives late, mail it to me. Missing receipts for deductions? Make a list of your best recollection, sign and date it, and keep it with your records. This can help if you are audited.
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