no itemized deduction phase out limit for 2011

The year 2011 is not over yet. You still have time to make your charitable donations for 2011. Especially because there is no limit on the itemized deduction amount in 2011. In other words, those with a high income will not have their itemized deductions reduced. For high income earners, if you want to make the charitable deduction count to reduce your tax, this is a good year to do it!

Deadlines for IRA and 401K

December 31, 2011 is the last day to make your 401K contribution that will count toward tax year 2011. Check if you have reached the maximum amount you can contribute to 401K, which is $16,500, or $22,000 if you are 50 or older.

April 1, 2012 is the last day to take the first required minimum distribution (RMD), if you turned age 70 1/2 in 2011. However, if you delay your first required distribution until April next year, you will then have to take two distributions in the same year because the second distribution will be due on December 31. Taking two distributions in the same year may bump you up into a higher tax bracket, resulting a large tax bill.

April 17, 2012 is the last day to fund your IRA for 2011 tax year. When you fund your IRA in 2012, please make sure you specify which tax year it is for. You can file your tax return claiming the IRA contribution for 2011 before the money is deposited.

Tax moves before the year end

Most of the tax moves mentioned in this article here, have already been posted in my blog or in my emails to my clients. I post the link below to serve as a good summary:
http://www.mint.com/blog/planning/6-tax-tips-to-make-before-december-31st-112011/

1. Check your paycheck 
2. Max out your retirement accounts 
3. Cut your losses
4. Check your health
5. Be charitable
6. Go green

Estate Planning - Estate and gift tax exclusion amounts

One of the most effective tax planning involves making gifts to your beneficiaries during your life. For 2011 and 2012, the annual gift tax exclusion is $13,000, with life time gift tax exclusion of $5 million. You may give up to $13,000 a year in cash or asset to anybody without any gift tax.

For example, you and your spouse give $26,000 this year to each of your children, you pay no gift tax because of the annual gift tax exclusion. Even if you give more than the exclusion amount to a single person this year, you might not owe any gift tax. For example, you and your spouse give $100,000 to help your child for a down payment to buy a house. You will have to file a gift tax return to keep track of the additional amount of $74,000 from the lifetime gift tax exclusion amount of $5 million, but pay no gift tax this year.

2011 Standard Mileage Rate changed

The standard mileage rate is a set rate per mile you can use to deduct your car expenses. This rate is different for different driving expenses. If your company reimbursed you for travel expense at a rate lower than what the IRS allows, you can still claim a deduction for the difference.

For 2011, the standard mileage rate for business travel is 51 cents a miles before July 1, 2011 and 55.5 cents per miles driven after June 30, 2011. See the table below for different rates.

For miles driven from 1/1/11 to 6/30/11:            
Business                                 51 cents                                                
Moving and medical                19 cents
Charity                                    14 cents
                                                               
For miles driven from 7/1/11 to 12/31/11:
Business travel                       55.5 cents
Moving and medical                23.5 cents
Charity                                    14   cents

Tax planning - should you pay both installments of property tax this year?

Paying the property tax for your home in advance can save you money on your tax bill for 2011. However, if you are subject to Alternative Minimum Tax (AMT) this year, paying extra property tax will not reduce your tax.

You may have to pay the AMT if your taxable income adjusted for AMT is higher than the AMT exemption amount. State and local income taxes and real estate tax are examples of the adjustments. The AMT exemption amount for 2011 is $48,450 for single and $74,450 for married filing jointly.

Questions on foreclosure or short sale

I used to get a lot of questions on foreclosure at the office. Oftentimes, the callers or clients were surprised to find out they may have a big income tax bill when they've lost their home or rental property. If you are interested in this subject, I'd like to point you to the following IRS article: http://www.irs.gov/newsroom/article/0,,id=174034,00.html

Q) How is your situation different if you have refinanced your residence?

A) There is no taxable income from the cancellation of debt for the original mortgage. However, refinancing changed the loan from the original non-recourse loan (not personally liable) to a personally liable recourse loan, then you might have taxable income from the cancellation of debt.

Q) What are the tax consequences from foreclosure or short sale?

There are two tax consequences:

1) The cancellation of debt may be treated as ordinary income. 2) Since the foreclosure is treated as a sale, you might realize a gain or loss. It is possible for someone to lose their property in a foreclosure and end up having to pay capital gains tax. The capital gain amount are calculated differently based on the loan type.
                              

Q) Will filing for bankruptcy help?

A) Yes, if the debt is approved by the court, the cancellation of debt is not considered as taxable income.

Q) How is the tax situation for rental property different?

A) Under the Mortgage Forgiveness Debt Relief Act of 2007, you don't have to pay federal income tax on up to $2 million of debt secured by your home. This tax relief does not cover rental properties. It only applies to forgiveness from 2007 to 2012. 

More on energy tax credit for homeowners

You may still have time to plan for two home energy credits for 2011. The two credits are Energy Property Credit and Residential Energy Efficient Property Credit.


Energy property credit for homeowners


The energy property credit is extended this year, but the amount has shrunk to a maximum of $500 per taxpayer per lifetime. If you took the $1,500 credit last year, you no longer qualify. The credit is only available if you have not taken more than $500 of the energy property credit in prior years since 2005.


The 2011 credit rate is 10 percent of the material cost of qualified energy efficiency improvements. It does not cover the labor cost and only $200 may be used for windows.


To qualify for this credit, you can install qualified energy efficient improvements such as insulation, new windows, doors, roofs, stoves that burn biomass fuel, and certain high-efficiency heating and air conditioning systems, water heaters.


The energy improvements must be placed into service at your principal residence located in the United States before January 1, 2012.


Residential Energy Efficient Property Credit


The residential energy efficient property credit is for qualifying home improvement for alternative energy such as solar electric systems, solar hot water heaters, geothermal heat pumps, etc. The credit equals 30 percent of the cost with no cap. Generally, labor costs are included when figuring this credit.

You should check the manufacturer’s tax credit certification statement before purchase because not all energy-efficient improvements qualify for these tax credits.

Capital Gain Tax hike after end of 2012

As the super committee is working on reducing the deficit these days, the Bush tax cut is once again in focus. This reminds me that the current capital gain tax rate will expire by the end of 2012, with or without changes by the committee.

Bush's tax cut was extended during Barack Obama's presidency for two years. As part of Bush's tax cut, for taxpayers in the 15% income tax bracket and below, the 5% maximum tax rate on qualified dividends and net capital gain was reduced to 0 (zero) % in 2008.

Similarly, the maximum tax rate on qualified dividends and net capital gain was changed to 15% from 20% since May 5, 2003 under Bush's tax cut.

Are you going to sell your capital gain property before the end of 2012 to avoid a higher tax?

2012 SEP-IRA limits

For self-employed clients, I have been suggesting that they set up a Simplified Employee Pension Plan (SEP) to get the tax deferral benefit. The contributions to an employee's SEP-IRA cannot exceed the lesser of 25% of the employee's compensation of $50,000 in 2012. The limit has moved up to $50,000 from $49,000 in 2011. Please note that the 25% is based on net profit, not gross revenue. After reducing the self-employment tax, the rate is 20%, not 25%.

See the IRS web site below for how to choose, setup, and participate in a SEP plan:
http://www.irs.gov/retirement/sponsor/article/0,,id=139828,00.html

Home office deduction affects your taxable income when selling.

If you are working at home and taking a home office deduction, please be warned that the depreciation taken for the home office is taxable at 25% when selling your residence. This amount CANNOT be excluded under the residence gain exclusion of $500,000 for joint filer or $250,000 for single filer.

Taxes on your child's investment income

I was once asked about the kiddie tax, is it beneficial to keep the account under the child's name? I think it is. Even though investment income is taxed at the parent's rate when you start to liquidate the account to pay for college tuition, you still save taxes at the child's rate during the period when the investment was growing and the investment income was low.


When your child is under 18, or a full-time student under 23, you don't have to pay tax for the first $950 of investment income such as interest, dividends, capital gains for your child. In another words, the standard deduction for a child with only investment income is $950. 

The next $950 investment income is taxed at the child's tax rate. Any investment income higher than $1,900 is taxed at the parent's tax rate, referred as the kiddie tax. If your child is young and the investment income is not more than $1900, you can reduce the tax by having investment accounts under your child's name.

If the investment income is less than $1,900, then it is not subject to the kiddie tax. Your child's standard deduction will increase if the child also has a job. The taxable income is taxed at the child's rate. The taxable income is greatly reduced by the higher standard deduction in this case.

One more reason to encourage your child to take a summer job!

Tax-loss Harvesting

You can save tax by selling losing stocks. If you have a lot of capital gains in the year, you can reduce the gain by selling stocks or investment properties that have dropped in value. In another words, you offset your capital gains with the losses. If you have enough losses, you can offset all your gains for the year.

Open enrollment - Dependent care FSA

Make sure you participate in the dependent care flexible spending account (FSA) to the maximum amount you can afford. Money you allocated to the FSA accounts not only reduce your taxable income from your earnings, it will also reduce your social security and medicare tax. Under the FSA, you can receive up to $5,000 tax-free benefits. It is a big tax saving you don't want to ignore.

Herman Cain's "9-9-9" tax plan

The following are extracted from the Wall Street Journal article: Study Puts Cain Tax Plan Under Microscope

online.wsj.com/article/SB10001424052970203658804576639523370969998.html?KEYWORDS=income+tax

"Herman Cain's "9-9-9" tax plan would boost taxes paid by moderate- and low-income households while cutting taxes for upper-income earners, according to a study released Tuesday by a think tank.

The analysis by the Tax Policy Center concludes that more than 90% of people earning less than $37,090—the bottom 40% of earners—would see a tax increase under Mr. Cain's plan. It also estimated that those who earn $17,900 or less per year—the bottom 20%—would pay $1,854 more per year on average in U.S. sales taxes and income tax levies that many now are exempt from paying.

By contrast, about half of households in the top 20% of earners, with incomes greater than $111,000, would get an average tax cut of $14,400."

Salary deferral amount for retirement has increased.

For many companies, it is open enrollment time again. IRS raised the limit for 2012. If you have been contributing the maximum to the 401K, 403b or other retirement plan, you can plan to defer more to reduce your taxable income. 

You can contribute up to $17,000. That is $500 more than last year's limit of $16,500. The catch-up limit for workers 55 years and older is the same, $5,500.

Some people only contribute to 401K up to the company's matching percentage. Think about how the amount you contribute not only lowers your taxable income, it also reduces your social security and medicare taxes. You save a lot of tax by participating to the maximum amount. 

Furthermore, the tax-deferred nature of the retirement saving such as 401K or IRA is a big tax saving tool that you cannot ignore.

Tax planning - do you have the right amount of withholding?

The amount of tax withholding should match with the amount of tax you owe. Many people like to have a refund. In a way it is like giving Uncle Sam an interest-free loan. So, why not pay yourself instead?

Tax planning starts with the correct amount of withholding. If you like to get your money when you earn it rather than waiting a year for a refund, Just file a revised Form W-4 with your employer. The more "allowances" you claim on the W-4, the less tax will be withheld. You can calculate your withholding using the IRS withholding calculator at www.irs.gov/individuals/article/0,,id=96196,00.html  

If you'd like your tax preparer to assist you with the tax planning, the beginning of the fourth quarter of the year or the beginning of the year, January, is usually a good time to review your tax situation and plan for the coming year.

Open enrollment - Medical flexible spending account limit will be capped in 2013.

Although varied by the company's plans, the maximum amount allowed by IRS for the flexible spending account (FSA) is $4,000 in 2011.  Please be aware that this limit will be capped at $2,500 per year from 2013. The flexible spending account is a pretax account for medical expenses.

If you have been considering some elective medical procedures that are not fully covered by the health insurance, you can make the most of your FSA in 2012 to take the higher FSA amount.

Open enrollment - Dependent care FSA

Make sure you participate in the dependent care flexible spending account (FSA) to the maximum amount you can afford. Money you allocated to the FSA accounts not only reduce your taxable income from your earnings, it will also reduce your social security and medicare tax. Under the FSA, you can receive up to $5,000 tax-free benefits. It is a big tax saving you don't want to ignore.

If your child care expense is more than $5,000, make sure you claim child-care credit for the additional expenses. The maximum child and dependent care credit is $3,000 for one child and $6,000 for two or more.

Keep mileage logs

When you keep mileage logs for a tax deduction, not only should you keep records for each trip: date, destination/purpose, beginning mileage, ending mileage, business mileage, personal mileage and total miles, you should also make sure the destination and purpose of the trip is not vague. It should contain a specific address and the client's name, not just the city. It is also a good idea to keep third party records, such as service records to support odometer readings.

Ages for taking retirement distribution

• 55: Early retirees may withdraw from their employer retirement plans at age 55 and avoid the IRS 10% premature distribution penalty.

• 59½: To withdraw assets from any type of IRA (Traditional, including rollover, SEP and SIMPLE IRAs), you must wait until 59½ to avoid the 10% federal (2.5% state) penalty. You can avoid the penalty if you meet one of the exceptions or roll-over the distribution in a timely manner. Hardship is not one of the exceptions.

• 70½: You must begin taking distribution from your Traditional IRAs by April 1 of the year following the year reaching age 70½. This rule is called the Required Minimum Distribution (RMD). If you are retired, you must begin making distribution from your 401K accounts by April 1 of the calendar year after turning age 70½ or April 1 of the calendar year after retiring, whichever is later.

Energy Credit for solar panels

If you install renewable-energy equipment, such as solar panels in the primary residence or vacation home by the end of the year, you can claim a credit for 30% of the cost, including installation, with no limit. This credit is good through 2016.

Payroll tax holiday

The payroll tax, also known as FICA, is split evenly between employees and employers. Employees pay 6.2% and employers pay the other 6.2% for a total of 12.4% for social security, plus a 2.9% medicare tax, split 1.45% to employers and 1.45% to employees. For self-employed, the FICA is also referred as the Self-Employment tax, SE tax. The employer's share of the FICA taxes, 7.65% is deducted in the tax return.


After the expiration of 'Making Work Pay Credit' in December 2010, in order to continually boost the amount of money people pocket in their paychecks, for 2011, congress has reduced the social security tax by 2% for employees. Therefore, self employed will pay SE tax at a rate of 13.3% instead of 15.3%, with the same 7.65% deductible with the tax return.


President Obama's new proposal gives even more cuts for both employees and employers. The proposal will cut the social security tax in half for both employers and employees, it will be 3.1% instead of 6.2% each. The employer's cut is limited to the first $5 million of a firm's payroll.


                        Social Security tax                  Medicare tax
-----------------------------------------------------------------------------------------
                        employer          employee        employer         employee
-----------------------------------------------------------------------------------------
2010                 6.2%                6.2%              1.45%             1.45%
-----------------------------------------------------------------------------------------
2011                 6.2%               4.2%               1.45%              1.45%
-----------------------------------------------------------------------------------------
President Obama's proposal:
                        3.1% *              3.1%              1.45%              1.45%

* to the first $5 million of the payroll

Energy Credit

Last year, I asked my clients to purchase and install energy efficient improvements by 12/31/10. If you have not yet done so, there is a modified energy credit available for 2011.

In 2009 and 2010, there was a nonrefundable credit for 30% of costs for qualifying residential improvements for heating and cooling efficiency (e.g., windows, doors, installation, and heating and air conditioning systems) up to $1,500 collectively for 2009 and 2010.

For 2011, the credit was reduced to 10% of cost of qualifying purchases up to $500 lifetime credit ($200 for windows). The extended tax credit is in effect for all qualifying systems and products installed during the 2011 calendar year and expires on December 31, 2011.

To see what products are eligible, visit the web site: http://www.energystar.gov/taxcredit