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.