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Key Changes in Federal Tax Law Will Have Impact on Your Taxes

February 02, 2012

Mary Hoyt, CPA
Partner
BlumShapiro  

 

 

Like every other year, there are changes taking effect this year regarding federal income tax filings for individuals.  With 2011 W-2 forms now out and people focused on getting their taxes done in the next 2 ½ months, they should be mindful of many of these changes.

For starters, and once again, it is important for people to remember, they have two extra days to get their tax returns filed this year, rather than the traditional April 15th date. With April 15th falling on a Sunday this year and April 16th being Emancipation Day in Washington DC, people have until Tuesday, April 17th to file this year, if they need it. This could be beneficial in helping to ease the last-minute crunch.

When filing your 2011 return, take the following into consideration:

  • New Forms – There are two new forms for people to be aware of this year – Form 8949 and Form 8938. The former (8949) is for reporting capital gains and losses.  Brokers will need to provide basis for securities acquired after 2010.  The latter form (8938) is to report foreign financial assets on a tax return.
     
  • Roth IRA Conversions – For those who converted traditional IRAs to Roth IRAs in 2010 and did not elect to pay the tax on it in 2010, half of that conversion income is now taxable in 2012.
     
  • CHET Contributions – As in the past, for those who made contributions to Connecticut Higher Education Trust (CHET) college accounts, there are tax savings available for individuals who contributed up to $10,000 and single filers who contributed up to $5,000.  With the higher Connecticut 2011 tax rates, this contribution can result in more tax savings.
     
  • Roth IRA Planning Tip – There are income limitations on who can contribute directly to a Roth IRA; however, there is no income limitation on who can convert from a traditional IRA to a Roth IRA.  Depending on your income level, you might want to consider making a non-deductible contribution to an IRA, then converting the account to a Roth.  (If you have other IRAs or earnings during the transition period, there may be some taxable income to report.)

For 2012 we will see the loss of a number of tax credits to which individuals and families may have grown accustomed over the past several years.  The following federal tax credits are no longer available to people in 2012:

  • Residential Energy Credit (this had been reduced in 2011, and now is eliminated)
  • Educators Expense Deduction (For K-12 level)
  • Tuition and Fees Deduction
  • Sales Tax Deduction
  • Mortgage Insurance Deduction
  • Charitable Contributions for IRAs

These credits led to substantial tax savings in past years, and the loss of them could impact people financially this year.  That is why consulting a tax professional for advice on how to potentially make up these losses could be something people may want to explore.

On a positive note, there is some good news on the maximum 2012 contribution limits to retirement plans and Health Savings Accounts (HSAs).  The latter will allow small increases this year – $50 more for individuals (to a maximum $3,100) and $100 for families (to a maximum of $6,250), while those with 401K and 403B retirement accounts will see the maximum annual contributions rise to $17,000 this year, up $500 from a year ago.  For individuals 50 years of age or older, an additional $5,500 can be contributed.

Finally, people need to be aware of major changes to come in 2013.  If the “Bush Tax Cuts” expire at the end of this year and Congress does not act to continue them, there will be increases in the top federal tax rate (up from 35% to 39.6% ), long-term capital gains tax rate (increasing from 5% and 15% to 10% and 20%), and the 15% qualified dividends rate would cease to exist.  These scheduled changes, along with the new taxes to pay for healthcare that are effective in 2013, are significant.

Taxpayers need to know about what is on the horizon to do effective tax planning.  It is always better to start sooner rather than later.

Mary Hoyt, CPA, is a partner with BlumShapiro, New England’s largest regional accounting, tax and business consulting firm based in Connecticut, with offices in West Hartford, Westport and Shelton, CT and Boston and Rockland, MA.  The firm serves as business advisors for today’s leading companies, non-profit organizations and government entities, working to strategically tailor and consistently deliver tested solutions for unlocking an organization’s full potential.  For more information about BlumShapiro, visit blumshapiro.com.

 

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