Tax Saving Strategies for the 2012 Filing Season
Tuesday, January 3rd, 2012 | Uncategorized | No Comments
By Mr. Douglas E. Warren, CPA CFF CFE FCPA
Whether you’re training for a marathon, landing the job of your dreams or closing a sale, you’re not going to succeed without being well prepared and fully informed. Well, the same holds true when managing and preparing your taxes.
Waiting until the return due date of April 17th for the 2012 filing season to put your financial house in order is a straight path to paying higher taxes. Here are some of the recent tax-law information, incentives, and planning strategies that will not only help you complete your tax return, but may also help you minimize your 2011 tax bill.
NEW FOR 2011
In 2011, there were not a lot of changes from 2010. However, there was one change that affects almost all working taxpayers: the Making Work Pay Credit. This was a refundable credit up to $400 for a single individual ($800 if married) based on a percentage of earned income. The credit was essentially replaced with the 2% reduction in the employee portion of Social Security tax. This incentive is worth up to $2,136 per person.
Every year the IRS adjusts the standard deduction to account for inflation. For 2011, the standard deduction is $5,800 if single or married filing separately and $11,600 if married filing jointly or qualifying widow(er)s. It’s $8,500 if head of household.
Taxpayers age 65 and older or taxpayers who are blind receive an additional standard deduction of $1,450 (single or head of household) or $1,150 (married filing jointly, married filing separately or qualifying widow/er).
An alternative to claiming the standard deduction is itemizing your deductions. Itemized deductions include medical expenses, certain state and local taxes, mortgage interest, charitable contributions, casualty and theft losses, and other miscellaneous items such as tax-return preparation fees, investment advisory fees and unreimbursed employee business expenses.
CHARITABLE DEDUCTIONS
Making charitable contributions can instill a feeling of goodwill and tax laws have been created to recognize philanthropic efforts.
Donations you make by cash, check or credit card to qualified religious, charitable, educational institutions are deductible up to 50% of your AGI, if you itemize your deductions. Contributions that are not deductible include those made to political groups, fraternities and sororities, certain scholarships, for-profit hospitals, and blood banks.
Also, remember to obtain and keep a record to substantiate all donations, regardless of the amount, even cash donated to charitable organizations.
Donating appreciated assets that qualify for the long-term capital gains treatment can actually do more to cut your tax bill. When you give appreciated long-term securities to a nonprofit, you deduct the full market value of the asset at the time of the donation and you avoid paying capital gains tax on the appreciation.
A tax deduction for clothing and household items is generally allowed only if the items are in good condition.
LONG-TERM HEALTH CARE PREMIUMS
An increasing number of Americans require long-term care due to advanced age or chronic conditions. Unfortunately, nursing homes and their high costs, which can exceed $70,000 annually, are not covered by Medicare or supplemental Medicare insurance.
You can include your premiums for qualified long-term care services as medical expenses up to the following amounts:
• Age 40 or under – $340
• Age 41 to 50 – $640
• Age 51 to 60 – $1,270
• Age 61 to 70 – $3,390
• Age 71 or over – $4,240
JOB SEARCH EXPENSES
For many of us, we spend the majority of our day on the job and the hours we typically devote to our work seem to grow even greater during rocky economic times. However, in addition to a paycheck, experience and hopefully some degree of satisfaction, we receive a number of benefits that have important tax implications, one of which pertains to our job search efforts.
Many unreimbursed expenses incurred as a result of employment are deductible as miscellaneous itemized deductions, though they can only be claimed to the extent they are greater than 2% of adjusted gross income.
MORTGAGE INTEREST
In most cases, you can deduct all of the interest you pay on any loan secured by your home if you itemize your deductions. Interest is generally deductible on up to $1 million ($500,000 if married filing separately) of home-acquisition loans. These are loans used to buy, build or substantially improve your principal residence or second home, and are secured by that same residence.
Interest on a home-equity loan up to $100,000 ($50,000 if married filing separately) is also deductible. You can also use this deduction for one additional residence that you identify as your second home.
As long as the home-equity loan is secured by your home, it doesn’t matter how you spend the proceeds. Home improvements, college tuition, debt consolidation or an exotic vacation – it’s up to you. Just be sure you have a plan to pay it back.
HOME ENERGY CREDITS
In 2011, homeowners can again claim tax credits for making certain energy-saving improvements to their home. These credits include the (1) Non-business Energy Property Credit and (2) Residential Energy Efficient Property Credit. However, the credits are not as favorable as 2010.
Under the Non-business Energy Property Credit, homeowners can receive a credit of 10% of the costs of qualified energy-efficient improvements and 100% of the costs of certain energy property expenditures, although dollar limitations may apply to specific types of property, including a maximum lifetime credit of $500.
Energy efficient improvements include insulated walls or ceilings; energy-efficient exterior doors and windows, including skylights; specially treated metal or asphalt roofs; and a high-efficiency furnace, water heater or central air conditioning system, and energy property expenditures such as certain heat pumps, water pumps and circulating fans.
The 30% Residential Energy Efficient Property Credit applies to costs for qualified residential solar panels, a geothermal heat pump, solar water-heating equipment, qualified solar electric property costs, and small wind-energy property. This credit has no dollar limit or principal-residence requirement. A second 30% credit for qualified fuel-cell plants has principal-residence and kilowatt-capacity requirements, and cannot be greater than $500 for each 0.5 kilowatt of capacity.
RETIREMENT
Individual Retirement Accounts (IRAs)
The top annual contribution for traditional or Roth IRAs remains at $5,000 for 2011. If you’re age 50 or older by the end of 2011, you can make an additional $1,000 “catch-up” contribution.
You cannot contribute more than your qualifying income for the year, but if your spouse has little or no income, you can contribute to either a traditional IRA or Roth IRA for your spouse based on your earnings.
Traditional IRA contributions may be deductible depending on your modified AGI and whether you or your spouse (if filing jointly) is covered by an employer-sponsored retirement plan. Also, you must begin to take minimum required distributions from the IRA once you reach age 70½, but this does not apply to Roth IRAs.
Roth IRA contributions are not deductible, but you can withdraw them at any time tax free. You can also withdraw earnings on contributions tax free after five years if you are age 59½ or older, disabled or paying qualifying first-time homebuyer expenses.
You have until the filing deadline of April 17, 2012 to open and contribute to an IRA for 2011. But why wait? The sooner you contribute, the longer your money grows tax deferred or tax free.
IN CONCLUSION
First, remember that your CPA can be a valuable partner in providing answers to your questions and helping to keep your tax bill to a minimum.
Second, don’t hesitate to ask a lot of questions to make sure you understand the advice you’re being given.
Third, don’t wait until tax time to seek professional tax assistance. Your CPA can help you plan for tax savings throughout the year.
The tax professionals at Warren & Tallent are available to assist you with your tax planning and tax preparation needs. Give us a call today.
This information was compiled by the American Institute of Certified Public Accountants and was current as of December 15, 2011.
Warren & Tallent
www.wandtcpa.com
Sweetwater location:
606C South Main Street
(423) 337-5003
Madisonville location:
409 College Street, N., #2
(423) 442-3890
