Tax Changes Affecting Your 2011 Return
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The good news for taxpayers working on their 2011 tax returns is there aren't many major surprises this filing season.
"It's not too significant a year in that there's not a lot of uncertainty," says Mark Luscombe, principal federal tax analyst at CCH in Riverwoods, Ill. The Bush-era tax laws were extended through 2011 and 2012, so taxpayers generally know what to expect when it comes to how much they'll owe.
But just how you get to your final tax bill could be different. Some other tax changes, many slipped into legislation years earlier, are taking effect with 2011 filings. And the Internal Revenue Service has revised or added forms to help it collect what it says we owe.
These tax law changes could help some filers pay a lower tax bill. Or they could cost others a few more tax dollars.
Either way, every taxpayer needs to be aware of them. Here's what to look, or look out, for as you work on your 2011 Form 1040.
When is the Tax Deadline in 2012?
A key change for this filing season has nothing to do directly with tax laws. Thanks to 2012 calendar quirks, taxpayers get three extra days to finish their returns.
The usual April 15 tax return filing deadline is Sunday. That normally would mean the deadline would fall on the next business day.
But Monday, April 16, is Emancipation Day. And that's a holiday in the District of Columbia. Because the Internal Revenue Service is headquartered in D.C., any holiday in the nation's capital applies to all tax filings nationwide.
So while D.C. is typically the target of wrath when taxpayers encounter tax problems, the District deserves some thanks this year for two extra days to file.
And the third extra day? That comes via Feb. 29 because 2012 is a leap year.
New Form to Report Capital Gains, Losses
While the Bush-era low capital gains tax rates remain in effect, the way many taxpayers will report these earnings has changed.
Taxpayers in the 10% and 15% income tax brackets still won't owe any tax on their asset sale profits. But taxpayers in the four higher tax brackets will pay a 15% rate, and they now must record those capital gains or losses on the new Form 8949 for the 2011 tax year.
The IRS also has revised the Schedule D on which the final tax information is entered.
The new and revised forms were created to help the IRS better compare your asset sale filing with the information the tax agency receives from brokers and other money managers. Essentially, the extra work for you will let the IRS know you are properly accounting for all of your investment transactions and paying the appropriate amount of tax.
Form 1099-B Helps Investors Track Basis
The trend for added tax reporting, especially when it comes to investments, continues with another new tax statement: Form 1099-B.
One of the most frustrating things for taxpayers who sell assets is determining the property's basis. Basis reflects your total investment in a property, including purchase price and improvements. It's subtracted from the property's sale price, and the difference determines the profit upon which your tax bill is based. Now at least some of those calculations should be a bit easier.
Beginning with the 2011 tax year, investors who sell some assets will get Form 1099-B, which is a new information-reporting tax document. If you sold a "covered security," that is, a stock you bought on or after Jan. 1, 2011, that asset's basis will be shown on the 1099-B.
You'll still have to find the data for basis for assets purchased before 2011. But for this filing season, as well as future tax years when more investment activities will be covered by expanded information reporting rules, figuring the tax due on some property sales will be easier.
Form 1099-K Helps Track Taxpayer Income
Form 1099-K is another new form that's part of expanded IRS efforts to track taxpayer income.
Companies that process credit and debit cards as well as third-party network payments (PayPal, Amazon, eBay and the like) now must report the gross amount of those payments to merchants on 1099-K and copy the IRS.
There is an exception for smaller businesses. If the payment transactions are fewer than 200 and total less than $20,000, the 1099-K reporting is not required.
And because of concerns about confusion with the new form, the IRS has deferred the requirement that taxpayers report 1099-K amounts on 2011 taxes. But this attempt to make things easier could backfire.
Filers of business returns, including Schedule C used by sole proprietors, will see a new line on their applicable tax returns for 1099-K income. But the business returns' instructions say to enter zero on the line designated for reporting 1099-K amounts and instead report such earnings on the line for all gross receipts.
If you do get a 1099-K, be sure to carefully follow the new form's reporting rules so the income is entered properly on your tax return.
Health Care Data on Your W-2
Careful readers of Form W-2 might notice a new entry in box 12 of this annual income statement. As part of the new health care law, the amount of your workplace-provided health care benefits will show up here.
Don't panic. The code DD next to the amount indicates that the amount is not taxable income.
The entry is informational only, for you as well as the Internal Revenue Service. The IRS will use this data to help it enforce future health care law provisions.
First-Time Homebuyer Tax Credit Payback
This is not new, but it's still an issue for homeowners who claimed the first-time homebuyer tax credit in its original form.
The Housing and Economic Recovery Act of 2008 established this tax credit of $7,500, but it was not a true credit. It was a no-interest loan from Uncle Sam that must be repaid in 15 equal, annual installments. Payback began with 2010 income tax returns filed last year.
For this second year of repayment, the process has been streamlined a bit for many taxpayers. If you bought your home for which you claimed the credit in 2008 and owned and used it as your main home for all of 2011, you can enter your 2011 repayment amount directly on the Form 1040 without attaching Form 5405.
Let's hope this change also will help lessen the processing problems encountered last year. In the previous filing season, many homeowners saw their refunds held up because of IRS difficulties in dealing with the repayment provision.
Roth Conversion Payback
If you converted a traditional IRA to a Roth IRA in 2010, you probably elected the default tax payment option in connection with your retirement plan conversion.
That choice allowed you to defer the IRA conversion tax last year and spread payment of it over two future years. Half of that payment is now due.
You must report half of the taxable IRA conversion amount on your 2011 return. The remainder will be reported and paid on your 2012 return.
What if you have some extra cash and want to pay all the IRA conversion taxes on your 2011 return? Sorry. You are stuck with the two-year payback. So stash that money in an interest-paying account so you'll have it (and a bit more) for your 2012 filing.
Calculating 2 Mileage Rates
If you used an auto for business travel last year and plan to claim the standard mileage deduction, be sure to pay attention to when you took the trips. High gasoline prices in 2011 prompted the IRS to increase the deduction rate at midyear.
The mileage rate for business use of a vehicle was 51 cents per mile from Jan. 1, 2011, through June 30, 2011. On July 1, 2011, the rate increased to 55.5 cents a mile.
This type of tax deduction change is why good tax record keeping is so important.
10 New Tax Law Changes to Know
The IRS has made a concerted effort in recent years to track down money individuals stash in foreign accounts, or as the IRS refers to them, offshore accounts.
To this end, the agency made some changes to Schedule B, the form used to report interest and dividend earnings.
This tax filing year, the IRS is asking more questions on Schedule B and requiring some foreign account holders to file a new document, Form 8938.
The foreign account reporting thresholds for the new form vary, depending on whether a taxpayer lives in the United States or files a joint income tax return with his or her spouse. The specifics can be found in the Form 8938 instructions -- or in your tax software or from your tax professional.
If you must report a foreign account, don't even think about ignoring the IRS filing. The penalty for failure to file or for submitting an incorrect Form 8938 starts at $10,000.
Schedule L and Schedule M Are Gone
Don't look for Schedule L or Schedule M tax forms this year. Neither applies to 2011 taxes.
Schedule L previously was used to figure additions, such as property tax or auto sales tax payments, to a taxpayer's standard deduction. These tax claims weren't allowed in 2011, so Schedule L is no longer in use.
Similarly, the Making Work Pay tax credit expired in 2010 and was replaced by the 2 percentage point cut in the employee payroll withholding tax. Just like the Schedule L, Schedule M is gone when it comes to 2011 tax
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