While 2011 ended without many last-minute tax law changes aside from the payroll tax cut extension, taxpayers should still be aware of a number of changes.
CCH principal federal tax analyst Mark Luscombe highlighted several tax provisions that will affect the 2011 tax filing season.
Provisions specific to individual taxpayers include:
• First installment of taxes owed on 2010 Roth conversions. Individuals who did a Roth conversion in 2010 and elected to spread the tax payment over 2011 and 2012 will have to pay one-half of the tax owed on their 2011 income tax return. However, if a taxpayer took a distribution in 2011 from their 2010 Roth conversion, they may be required to pay more to cover taxes on the distributed amount. In addition, tax on any additional conversions done in 2011 will have to be included on the 2011 tax return.
• Changes to Form 1040. Changes affecting the 1040 include a new line (Line 59b) for repayment of the First-Time Homebuyer Credit. The repayment installment can be entered directly on Line 59b without the use of Form 5405 if the taxpayer continued to own the home and use it as their main home throughout 2011. In addition, there is no longer a line on the Form 1040 for the Making Work Pay Credit, which expired at the end of 2010.
• Changes for investors in reporting basis. Investors will see that Form 1099-B has been revised to provide for their broker to report the basis of transactions during the year. The IRS will check to see that this information matches the basis reported on the taxpayer’s return. Additionally, these transactions should now be reported on the new Form 8949, rather than directly on Schedule D.
• Carryover basis on inherited assets may be lower than expected for some. Taxpayers who inherited assets where the estate elected to use the 2010 estate tax repeal option will receive a Form 8939 in January or February from the estate executor providing the basis information for those assets. Estates that used the 2010 estate tax repeal option will use as the basis the basis of the asset in the hands of the decedent, or carryover basis, unless a limited stepped-up basis is allocated to that asset. This carryover basis is often significantly less than the stepped-up basis – or the value of the asset at the time of the decedent’s death.
“An heir of a 2010 estate using the 2010 estate tax repeal option who sold the asset before receiving the Form 8939 may be surprised at the amount of capital gain owed from the sale,” Luscombe noted.
• New requirements for reporting foreign assets. Foreign Account Tax Compliance Act (FATCA) reporting requires foreign assets to be reported if they have a total value of more than $50,000 ($100,000 if married filing jointly). FATCA is broader than what is defined under the Report of Foreign Bank and Financial Accounts, or FBAR. For example, FATCA includes stock or securities issued by someone other than a U.S. “person,” any interest in a foreign entity, and any financial instrument or contract that has an issuer or counterparty other than a U.S. “person.” In addition to the prior obligation to report FBAR accounts on Form TDF90-22.1, FATCA must now be reported on a new Form 8938.
In addition, two tax changes broadly affecting employers include:
• New W-2 reporting of employer-sponsored health care coverage. Although it is only optional for Form W-2s issued in 2012 (becoming mandatory in 2013 under the health care reform legislation) some employees may receive W-2s for 2011 that include a new code (DD) in Box 12 and amount for employer-sponsored health care coverage. This provides the IRS with information to determine if the employer and employee have complied with the health insurance mandates of health care reform. However, as those mandates are not yet in effect, this added information on the W-2 does not impact 2011 federal tax return filing requirements.
• Employee retention credit. This credit related to 2010 hiring, however, it required retaining the employee for at least 52 weeks to qualify for the credit, thereby moving eligibility for the credit to 2011 tax returns. To qualify for the credit, the employer must have paid wages in the last 26 weeks equal at least to 80 percent of the wages for the first 26 weeks. The credit is claimed on Form 5884-B and is the lesser of $1,000 or 6.2 percent of the retained worker’s wages during the period.
In addition, taxpayers should know about two new regulations affecting tax preparers for 2011:
• E-filing mandate. Starting with tax returns filed in 2012, tax preparers must e-file if they are filing 11 or more returns. This is up from more than 100 returns for the last filing season. There are limited exceptions: clients may in writing instruct their preparer that they want to opt out of e-filing; and a preparer can apply to opt out due to hardship by notifying the IRS via Form 8944.
• Tax preparer exam. The IRS now requires paid tax preparers other than attorneys, CPAs and enrolled agents, to take and pass an exam. These preparers have until December 31, 2013 to pass the test.
Separately, the Internal Revenue Service also highlighted a number of changes Wednesday:
Two extra days to file and pay. Taxpayers across the nation will have until Tuesday, April 17, 2012, to file their 2011 income tax returns and pay any taxes due. Taxpayers have extra time because April 15 falls on Sunday, and Emancipation Day, a holiday in the District of Columbia, is observed the following day on Monday, April 16. By law, filing deadlines that fall on D.C. holidays are extended to the next day that is not a Saturday, Sunday, or holiday.
The April 17 deadline applies to any return or payment normally due on April 15. It also applies to the deadline for requesting a tax-filing extension and for making 2011 IRA contributions.
Limited Nonbusiness Energy Property Credit available in 2011. This credit generally equals 10 percent (down from 30 percent the past two years) of what a homeowner spends on eligible energy-saving improvements, up to a maximum tax credit of $500 (down from the $1,500 combined limit that applied for 2009 and 2010). In addition, the energy standards are increased for most property; windows, exterior doors and skylights, for example, must meet Energy Star Program requirements.
Because of the way the credit is figured, the IRS noted, in many cases, it may only be helpful to people who make energy-saving home improvements for the first time in 2011. That’s because homeowners must first subtract any nonbusiness energy property credits claimed on their 2006, 2007, 2009 or 2010 returns before claiming this credit for 2011.
The cost of certain high-efficiency heating and air conditioning systems, water heaters and stoves that burn biomass all qualify, along with labor costs for installing these items. In addition, the cost of energy-efficient windows and skylights, energy-efficient doors, qualifying insulation and certain roofs also qualify for the credit, though the cost of installing these items do not. See Form 5695 and its instructions for details.
Standard mileage rates up in 2011. The standard mileage rate for business use of a car, van, pick-up or panel truck is 51 cents a mile for miles driven during the first six months of 2011 (January through June) and 55.5 cents a mile for the rest of the year, up from 50 cents for 2010.
The rate for the cost of operating a vehicle for medical reasons or as part of a deductible move is 19 cents a mile from January through June and 23.5 cents a mile after that, up from 16.5 cents per mile in 2010.
The rate for using a car to provide services to charitable organizations is set by law and remains at 14 cents a mile.
AMT exemption increased. For tax-year 2011, the alternative minimum tax exemption increases to the following levels:
• $74,450 for a married couple filing a joint return and qualifying widows and widowers, up from $72,450 in 2010.
• $37,225 for a married person filing separately, up from $36,225.
• $48,450 for singles and heads of household, up from $47,450.
Health insurance deduction for self-employed people. In 2011, eligible self-employed individuals and S corporation shareholders can use the self-employed health insurance deduction to reduce their income tax liability. Eligible taxpayers still claim this deduction on Form 1040 Line 29. Premiums paid for health insurance covering the taxpayer, spouse and dependents generally qualify for this deduction. In addition, premiums paid to cover an adult child under age 27 at the end of the year, also qualify, even if the child is not the taxpayer’s dependent. However, the deduction from self-employment income for determining self-employment tax, which was available only in tax-year 2010, no longer applies.
As before, the insurance plan must be set up under the taxpayer’s business, and the taxpayer cannot be eligible to participate in an employer-sponsored health plan. For details see Publication 17 and the instructions to Form 1040 (including a worksheet).
Change for HSAs and MSAs. Starting in 2011, the additional tax on distributions from a health savings account (HSA), not used for qualified medical expenses, increases from 10 percent to 20 percent. Report on Form 8889 . Similarly, the additional tax on distributions from an Archer medical savings account (MSA), not used for qualified medical expenses, rises from 15 percent to 20 percent. Report them on Form 8853.
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