Good side of gridlock: Simpler tax returns
Congress made few changes that will affect this year's returns. But the system is still complex enough to keep CPAs employed. Here are the issues to keep in mind.
This post is by Tom Herman of The Wall Street Journal.
Thanks to political gridlock in Washington last year, taxpayers will have to grapple with relatively few tax-law changes on their federal income-tax returns for 2011.
"There are a few new forms to contend with, but in general the tax return will look very similar to the past," says Brittney Saks, a partner at PricewaterhouseCoopers and head of the firm's U.S. personal financial services practice.
Even so, don't feel too sorry for professional tax preparers. Some of the changes can be tricky -- and there are plenty of complexities left over from prior years to keep most tax professionals from having to worry about joining the ranks of the unemployed.
"Although Congress keeps talking about simplicity, they've really done very little" to simplify the tax system, says Mark Luscombe, principal federal tax analyst at CCH, a Wolters Kluwer business. "So, every year, it gets a little more complex." (Post continues after video.)
Here are some of the major changes affecting this year's federal income-tax returns and a few tips from tax pros.
April 17 is the deadline this year to file your federal return and pay what you owe. The reason: April 15, the usual deadline, falls on a Sunday, and April 16 is a holiday in the District of Columbia.
April 17 also is the deadline for making contributions for 2011 to your individual retirement account.
If you need more time to file your federal returns, you can get an additional six months -- until Monday, Oct. 15 --by filing Form 4868. But it won't give you any more time to pay any amount you might owe.
Taxpayers can choose to take the standard deduction, or they can itemize deductions on Schedule A. For 2011, the basic standard deduction amount is $11,600 for married couples filing jointly. For most singles, or for a married person filing separately, it's $5,800.
There are additional amounts for older taxpayers (those born before Jan. 2, 1947), or those who are blind or both.
Don't automatically choose the standard deduction without checking to see whether you might be better off itemizing.
Teachers, counselors, principals or school aides who worked at least 900 hours during the school year in a school that provides elementary or secondary education can deduct up to $250 of school supplies that they purchased out of their own pockets for use in their classroom, says Greg Rosica, a partner at Ernst & Young. This includes books, supplies and computer equipment. They are eligible for this deduction even if they take the standard deduction.
Watch out for an important new twist, known as cost-basis reporting. This new system is required under a law meant to improve the accuracy of what taxpayers report for capital gains and losses.
Suppose you paid $1,000 for a stock in January of last year for a taxable account (not a 401k or IRA). Then you sold all those shares for $3,000 in June. Because of the new law, you should receive Form 1099-B this year from your broker showing both your cost ($1,000) and the gross proceeds ($3,000). Previously, the cost wasn't required to be reported on that form.
The law is being phased in. The rules for this year's forms apply to "only a relatively limited class of securities" -- namely corporate stock that was both purchased and sold during 2011, says Timothy L. Hanford, a former tax staffer at the House Ways and Means Committee and now a consultant at ADC Strategies in Bethesda, Md.
The new rules don't apply to stock sold in 2011 but acquired before 2011. They also don't apply to mutual-fund transactions during 2011 or stock acquired in connection with a dividend reinvestment plan.
In most cases, investors should use the new Form 8949 to report capital gains and losses for 2011, the IRS says. Use Schedule D, which long has been used for reporting transactions, as a summary sheet to report amounts for total sales price, basis and other adjustments -- and to figure how much tax you may owe. See instructions for Form 8949 and for Schedule D.
Taxpayers who take deductions for business use of a car, van, pickup or panel truck can either deduct certain actual costs or use the IRS's standard optional mileage rate.
For 2011, there are two different IRS rates: 51 cents a mile for the first six months and 55.5 cents for the second six months. The IRS changed the rates for the second half of the year to reflect higher gasoline prices.
The rate for computing deductible medical or moving expenses was 19 cents a mile for the first half of last year and 23.5 cents for the second half.
The rate for using a car to provide services to charitable organizations was unchanged at 14 cents a mile. It's set by law.
This year, many taxpayers who have financial assets in other countries are required to file a new form (Form 8938) if the total exceeds certain amounts. This new form is supposed to be attached to the taxpayers' income-tax return.
The new filing requirement "applies to U.S. citizens and resident aliens, nonresident aliens who elect to file a joint income-tax return, and certain nonresidents who live in a U.S. territory," the IRS says. Individuals who don't have to file an income-tax return need not file the new form.
For more details, see instructions for Form 8938.
Alternative Minimum Tax
For 2011, the exemption levels increased for the alternative minimum tax, or AMT, a parallel tax system where certain deductions disappear, resulting in higher tax tabs for some people. The new levels are:
- $74,450 for a married couple filing a joint return and qualifying widows and widowers, up from $72,450 in 2010.
- $37,225 for a married person filing separately, up from $36,225.
- $48,450 for singles and heads of household, up from $47,450.
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