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As always, Congress and the President invariably call for simplifying the tax laws.  And invariably, they don’t achieve this goal.  Each year, for the past few years, there have been numerous tax changes with which even tax professionals struggle.  As you begin to prepare, or have your tax professional prepare your 2011 individual income tax return, you will find it reflects a number of new or extended tax breaks.  While some are fairly straightforward, others are more complex.  It is not always as easy as simply putting in numbers as there are often various choices to make with the outcome less or more beneficial to you.  The following is a brief list of many of these provisions.

  • Roth IRA rollovers continue to be unrestricted. You can now make a qualified rollover contribution to a Roth IRA, regardless of the amount of your modified adjusted gross income.  This is very important if you expect tax increases in the next few years.  You may want to pay the tax currently rather than defer it to a year when the rates may be higher.
  • Self-employed health insurance deduction.   A self-employed person who paid for health insurance may be able to include in their self-employed health insurance deduction any premiums paid to cover a child who was under age 27 at the end of 2011, even if the child was not a dependent. Conversely, while health insurance costs for a taxpayer and family were deductible in computing 2010 self-employment tax, they are no longer a deduction for self-employment tax in 2011.  The premium costs continue to be a 100% deduction for income tax purposes however. In addition, the IRS has made it clear that Medicare Part B premiums can be included in this deduction.
  • Self-employment tax rate.  Effective 2011, the social security portion of the self-employment tax rate is reduced from 12.4% to 10.4%.  This reduction is the counterpart to the 2% reduction in an employee’s social security tax withholding.  The net effect is the self-employment tax is reduced from 15.3% to 13.3%.  Congress extended this provision through February 2012, and they are currently working to extend it even further.
  • Small business health insurance credit. This credit still exists for an eligible small employer who makes qualifying contributions to buy health insurance for his employees. This credit is very complex but it can yield substantial tax savings. In general, the credit is 35% of premiums paid and can be taken against regular and alternative minimum tax.  While some of the computations are cumbersome, it is a very worthwhile credit and according to IRS statistics, much overlooked.
  • Limits on personal exemptions and itemized deductions.  You do not lose part of your deduction for personal exemptions and itemized deductions, regardless of the amount of your adjusted gross income.  This provision is currently set to expire after 2012.
  • Adoption credit. The maximum adoption credit is $13,360 per eligible child for both non-special needs adoptions and special needs adoptions. This credit is a refundable credit for 2011, so you get the credit even if it exceeds your taxes.  Beginning in 2012, it becomes a non-refundable credit again.
  • Families with a family member in college can benefit from a credit or deduction.  The American Opportunity Credit is available for students in their first four years of college.  In addition to tuition and associated class fees, books, equipment and supplies are also now included in this credit/deduction.  A taxpayer is allowed a credit (dollar for dollar credit against taxes) of up to 100% of the first $2,000 of qualified expenses and 25% of the next $2,000, a maximum of $2,500.  Also, the credit is also classified as a refundable credit so up to 40% of this credit can be received even if it exceeds your taxes.  In lieu of the credit, a taxpayer can elect a tuition and fees deduction.  You should calculate your return using both the credit and opting for the deduction to see which yields better results.  Don’t forget the state impact as there is only a deduction from federal income on the state if a credit is taken on the federal return.
  • If you have individual capital gain and loss transactions (ie from sales of stock, etc) you must now file form 8949 instead of putting these transactions directly on Schedule D.  The totals from this form will appear on Schedule D and will be combined there with other types of capital transactions.
  • And one last tip.  Many taxpayers’ itemized deductions are falling just under the standard deduction so the taxpayers are taking the standard deduction.  If the two are close in amounts, it may yield a better result to elect to itemize deductions on the federal return instead of taking the standard as the state of NC doesn’t allow the same standard deduction as the federal.  Occasionally, you will pay a combined lower federal and state tax choosing this method.  You must calculate your state taxes on the same basis as your federal, but you should run your federal return and state return both ways to see which yields an overall lower tax.

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