By now taxpayers should have received all the W-2s, 1099s and every other financial reporting that they need to file their individual tax return for the year ended December 31, 2011.
Despite all of the usual political saber-rattling about tax reform, there have been very few dramatic changes to the Internal Revenue Code that will affect either this year’s tax filing or even tax planning for next year.
Here is a quick look at some of the minor changes.
The personal exemption and standard deduction have increased by $50 and $100 respectively for single tax filers, and $100 to $200 for joint filers. If you use your car for business, there is a dual rate system. You can deduct 51 cents per mile for car use for the first six months of 2011 and 55.5 cents for the last six months of the year. The way things are going at the pump, expect that rate to skyrocket next year.
There have not been any changes in capital gains rates but how you report sales of stocks and bonds is now slightly different. The old form, Schedule D, is still used but now it’s as a summary sheet of all long-term and short-term sales (Short-term is a holding period of anything less than a year and a day.) Individual transactions now have to be reported on Form 8949.
Last year, many taxpayers received a $400 credit ($800 for married couples filing jointly) by filling out Schedule M for something called the “Making Work Pay Credit” which was the result of the payroll tax reduction law passed in 2010. Alas, don’t look for Schedule M or this gift from Uncle Sam this year as it has expired.
The personal exemption phase-out and the limitation on itemized deductions (where your personal exemptions and Schedule A deductions get reduced if you have a high adjusted gross income) were not in effect in 2010 nor are they this year. Unless Congress passes new legislation however, both will be making comebacks for 2012 personal tax returns.
Speaking of itemized deductions, the alternative minimum tax, which basically recalculates income tax liability by eliminating certain otherwise allowable itemized deductions such as state & local taxes, real estate taxes, unreimbursed employee expenses, and a portion of medical expenses, is still around despite the perennial outcries from nearly every elected official regardless of party affiliation. This year, the income threshold before the AMT kicks in has risen by $2,000 for individuals and married couples from 2010.
Deductions lower taxable income but tax credits are even more valuable because they reduce your tax obligation on a dollar-for-dollar basis. They are similar to the way grocery coupons work.
Most families are familiar with Form 2441, which is commonly referred to as the Child Care Credit. If you work you can get a credit on your taxes for after-school activities and day camp costs for children under the age of 13. What is not as well known is that you can also get tax relief for certain costs involved with the custodial care of an elderly parent while you work.
A rather obscure credit that anyone who contributes either to a 401(k) or 403(b) plan, a traditional or Roth IRA should look into is the Credit for Qualified Retirement Savings Contributions on Form 8880 which could be worth up to $1,000 in tax savings. The catch, and it’s a big one, is that there are severe taxable income phase-outs that begin at $17,000 for singles. If you are single and earn more than $34,000 you are ineligible. For married couples, the reduction in tax credit begins at taxable incomes of $34,000. If you are married and file a joint return and you have a taxable income exceeding $56,000 then you are out of luck on this credit.
An excellent and easy-to-read reference book is the Ernst & Young Tax Guide 2012 which provides excellent guidance in the areas of both tax preparation and planning.
One of the biggest stories in New York last year was when Governor Cuomo signed into law the right for gay couples to marry. Gay marriage is a state law and is still not recognized by the federal government. This means that married gay couples in our state can select the “married filing jointly” status on their New York State returns (IT-150 or IT-201) but must file as individuals for the federal (“1040") return.
A final note. Since this is an election year you can expect the usual calls for “tax simplification” and its more draconian cousin, “the flat tax,” as campaign season heats up. While there are certainly numerous provisions in the bulky Internal Revenue Code that should be less convoluted, the reality is that “one size does not fit all” when it comes to tax equity. Simple is not always fair.
Lloyd Carroll and Harvey Man are both Queens residents and full-time members of the Accounting faculty at Borough of Manhattan Community College. Carroll, as longtime readers know, is also a regular contributor to the Queens Chronicle.