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Marie Young, Enrolled Agent

Updated December 20, 2011

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2012 Standard Mileage Rates

The Internal Revenue Service issued the 2012 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2012, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

55.5 cents per mile for business miles driven
23 cents per mile driven for medical or moving purposes
14 cents per mile driven in service of charitable organizations

Income Tax Rates and Brackets
The current income tax rates and brackets we have enjoyed for the past several years of 10%, 15%, 25%, 28%, 33%, and 35% have been extended through 2012. The special capital gains tax rates of 0% and 15% will also continue in 2012. The special capital gains tax rates continue to apply to "qualified dividends".

Itemized Deductions
Sales tax deduction in lue of the state and local income tax deduction has been extended through 2011. The phase-out of the itemized deductions for higher income taxpayers was scheduled to begin again in 2011 but it has been delayed until 2013. The mortgage insurance premium deduction has been extended through 2011.

Marriage Penalty
The standard deduction for a married couple filing jointly has been double the amount allowed for a taxpayer filing single for a few years now. This benefit was set to expire after 2010 but has now been extended for 2 additional years. After 2012, the married filing joint standard deduction base returns to former lever of approximately 170% of the amount allowed for single filers.

The ceiling of the 15% tax bracket for a married couple has also been extended until 2012.

Charitable Contributions
Various special charitable contribution deductions have been extended through 2011. These include:

Contributions of appreciated real property for conservation purposes;
Contributions of food inventory;
Contributions of book inventories to public schools; and
Corporation contributions of computer equipment for educational expenses.

Education Tax Issues

The American Opportunity Tax Credit (modified Hope Credit) was set to expire after 2010 but has now been extended for an additional 2 years.
The current provisions for Coverdell Educational Savings Accounts have been extended through 2012 as well. This includes the higher $2,000 annual contribution, the ability to use the funds for education below post-secondary (such as elementary and secondary schools), and the method of calculating the amount subject to tax if the taxpayer does not have sufficient qualifying education related expenses for the year.
The Tuition Deduction has been retroactively reinstated for 2010 and extended through 2011.
The deduction for student loan interest has been extended under current rules through 2012. After 2012 the deduction will return to its former limitations including one that restricts the deduction to only the first sixty months of repayments.
Employer-provided education assistance benefits continue through 2012 as under current law. After 2012, the exclusion of these benefits returns to the old rules which means the education must be work related.

Foreign Financial Asset Reporting
Effective for tax years beginning after March 18, 2010, individual taxpayers with a "specified foreign financial asset" will have to file a disclosure statement with their income tax return if the value of all such assets is greater than $50,000. A "specified foreign financial asset" includes:
- a depository or custodial account at foreign financial institutions;
-stocks or securities issued by foreign persons; or
-any other financial instrument or contract held for investment that is issued by or has a counterpart that is not a US person, and any interest in a foreign entity.
The form for foreign financial asset reporting has not yet been released but does exist in draft form as Form 8938. The penalty for not disclosing this on your applicable return is $10,000 per tax year. An additional $10,000 penalty applies for each 30 day period, or fraction thereof, of noncompliance if the failure to disclose continues for more than 90 days after the IRS has notified the taxpayer of noncompliance. The failure to disclose penalty has a maximum penalty of $50,000.
There also exists a new accuracy-related penalty of 40% on underpayment of tax attributable to a taxpayer's failure to disclose interest on foreign bank accounts.

Section 179
Effective for tax years beginning in 2010 and 2011, the Sec. 179 deduction has been a maximum of $500,000 per year with a phase-out level beginning at $2,000,000. In addition, "qualified real estate improvements" are now eligible for Sec. 179 with a limit of $250,000. This $250,000 is part of the $500,000 mentioned above.
"Qualified real estate improvements" include:

Qualified leasehold improvements that have qualified for the bonus depreciation since late 2001;
Qualified restaurant improvements that have enjoyed a 15-year MACRS life for the past few years; and
Qualified retail establishment improvements that have enjoyed a 15-year MACRS life last year.

Gifting your home to your child:
The transfer of your home to your children has never been easier. Some parents who approach retirement age desire to make a gift of the family residence to their grown children. The drawback to this was that when a home had appreciated in value, for tax purposes it was better for children to receive it by inheritance than by gift. Current tax law eliminates this problem for many by enabling a child who receives a home by gift to use the $250,000/$500,000 exclusion to eliminate the gains tax that otherwise would be due, provided the child uses the home as his/her principal residence for at least 2 years.

President Obama Wants a Jobs Bill Now
In an address to a joint session of Congress in September of 2011, President Obama proposed a $477 billion jobs bill that he says will immediately put people back to work. The new jobs package consists of mostly small-business growth and hiring incentives.
The White House has named the proposals to reduce the payroll tax, American Jobs Act. The tax bill that passed in December 2010 included a 2% reduction in the employees portion of the payroll tax (from 6.2% to 4.2%). The President's proposal essentially doubles down on that approach by cutting employee payroll taxes in half (from 6.2% down to 3.1%) on the first $5 million of payroll in 2012. Further, and probably most challenging for accountants an employers, he proposed temporarily eliminating payroll taxes on wages for new hires OR raises for existing workers (for us to the first $50 million in increased payroll).
Additionally, the proposition includes two other proposals of note: tax credits up to $4k for hiring the long term unemployed (those looking for a job for over six months) and extended 100% expensing.
President Obama repeatedly called on Congress to immediately take up his proposal and even called on the new super committee to agree on ways to pay for his jobs measure. He also said the package should be fully paid for (not withstanding it's rather hefty -approx. $447 billion- price tag) and promised he would offer his own deficit-reduction plan to pay for it, which is scheduled to be released on September 19, 2011.

Hurricane Irene Sept. 15 Tax Extension
The Internal Revenue Service announced that it is granting taxpayers whose preparers who were affected by Hurricane Irene until September 22 to file returns normally due September 15th. The taxpayer's preparer must be located in an area that was under evacuation order or severe weather warning because of Hurricane Irene, even if the preparer is located outside of the federally declared disaster areas.

This relief, which primarily applies to corporations, partnerships, and trusts that previously obtained a tax filing extension, is available to taxpayers regardless of their location.

Budget Control Act of 2011
On August 2, 2011, President Obama signed into law S. 365, the Budget Control Act of 2011. The bill allows the President to increase the debt ceiling and reduce the deficit roughly $1 trillion through 2021. The bill, however, does not include any revenue hikes, and instead calls for a joint committee to find an additional $1.5 trillion in deficit reduction (which may feature fundamental tax changes) in recommendations to be presented and voted on by Congress before the Christmas holiday this year.

Energy Credits for 2011 - Lower but Still Worth While!
Washington, DC (July 27, 2011) -- The generous residential energy credit offer by the IRS in 2009 and 2010 is no more. The maximum credit of $1500.00 has dropped to $500.00 for installation of energy savers in existing primary residences in 2011.
Since no one knows whether or not there will be any credit at all to be claimed on many energy saving items in 2012, now could be the best time to move ahead with changes you've been considering to make your home more energy efficient.

For 2011, tax credits are available for:

Biomass stoves ($300)
HVAC systems (up to $300)
Insulation (10% of the cost, up to $500)
Roofing (10% of the cost, up to $500)
Water Heaters ($300) and
Windows ($200)
Doors and Skylights (10% of the cost, up to $500)

Through 2016, tax credits of 30% of the cost, with no upper limit, are available for geothermal heat pumps, solar energy systems, wind energy systems and fuel cells. Vehicle tax credits are available for some vehicles.

These are only federal tax credits - state, local, or utility incentives may also be available that will put more money back in your pocket after making an investment in energy efficiency. Keep in mind however, that the cap listed refers to the total amounts of credits a homeowner may claim from 2006 - 2011, not just in 2011. If a homeowner has already claimed $500.00 or more under this credit, he or she may not claim any additional credit for improvements made in 2011.

Long Term Capital Gains
Under current law, in tax years beginning on or after January 1, 2013, long term capital gains will be taxed at a top rate of 20%. Taxpayers should consider selling (or otherwise disposing of) appreciated property and recognizing the taxable gain in 2011 and/or 2012. Taxpayers who have realized capital gains deffered on an installment note may want to reconsider accelerating the unrecognized gain in 2011 and/or 2012.

WashSale Rule: Capital losses are denied to the extent that a taxpayer has aquired (or has entered into a cotract or option to aquire) a "substantially identical" stock or security within a period beginning 30 days before the sale and ending 30 days after the sale of a stock that was sold at a loss ("loss stock"). The disallowed loss on the loss stock is added to the cost basis of the new stock, and the holding period of the loss stock is carried over to the new stock. The rule also applies to the ETF's, index funds, IRAs, and taxable investment accounts. It does not apply to "collectables".

When exploring a ROTH IRA conversion, consider the tax rate in the year of conversion vs. the tax rate in the years of withdrawal, the owner's ability to use outside assets to pay the income tax on the conversion and the need for the IRS to meet annual living expenses.

Inherited IRAs
An IRA is treated as inherited if the individual for whose benefit the IRA is maintained the IRA upon death of the original owner. Under the tax law, the IRA assets can be distributed based upon the life expectancy of the benefciary if the beneficiary is a living person or a trust that meets certain requirements, such as that it is irrevocable, all beneficiaries are natural persons, and the oldest possible beneficiary can be determined.

Spouse as Beneficiary: A surviving spouse named as a beneficiary of the deceased spouse's IRA may roll it over into a new or existing IRA in the spouses own name. The spouse is then treated as the owner and may delay taking required minimum distributions (RMDs) until he/she turns 70.5 and then takes distributions based in his/her life, ofter allowing for a greater stretch out period.

IRS Changes Innocent Spouse Rules
In Notice 2011-70, the IRS announces that it will no longer deny any individual's request for equitable releif under S 6015 (f) simply because the individual filed the request more than 2 years afetr the IRS first acted to collect the liability. A taxpayer whose equitable relief request was previously denied solely due to the two-year limit may reapply if the collection statute has not expired.

Tax Relief Unemployment Insurance Reauthorization and Job Creation Act:
On 12/17/10 President Obama signed the Tax Relief Unemployment Insurance Reauthorization and Job Creation Act of 2010. This law extends the tax credits for energy efficiency in 2011 BUT at a lower level. The levels revert back to those in effect in 2007 and 2007, which were 10% of the cost of the improvment, up to $500.00 with a $200.00 maximum for windows.

Sales & Use Tax Rate Change:
The general State sales and use tax rate for North Carolina is scheduled to reduce from 5.75% to 4.75% effective July 1, 2011.

Storm Victims:
In North Carolina, storm victims who suffered losses due to the tornados and other extreme weather conditions afflicting the state this year were granted a waiver of late filing penalties for tax returns submitted to the state's Department of Revenue.

Dependency Exemption:
A non-custodial parent can claim the dependency exemption for a child when the custodial parent signs a written declaration that they, the custodial parent, will not be claiming the child as a dependent for the designated tax year. When the custodial parent does not release the dependency exemption, the custodial parent is deemed to be the taxpayer who is entitled to claim the child.

Senior Simplification Act:
A bipartisan pair of US Senators from Florida, Democrat Bill Nelson and Republican Marco Rubio, have introduced a bill that would simplify the tax-filing requirements of senior citizens. The Senior Simplification Act would create a new form, 1040SR, to allow for easier filing for Social Security benefits, as well as dividends, capital gains, and interest.

Starting in 2010

From 2010 through 2013, eligible small business employers (with less than 25 employees and average annual wages of less than $50,000.00) will receive a 35 percent tax credit on the contribution to their employees' health insurance premiums.
Parents can cover children up to the age of 26 under their tax-qualified employer-provided health plans
Long term capital gain rates for the 2010 tax year are 0% and 15%
On September 27, 2010, President Obama signed The Small Business Job Act. It changes the maximum Section 179 in 2010 and 2010 to $500,000.00.
If you purchased a new automobile in 2010, let your tax preparer know. There are some tax credits available.
The American Opportunity credits are allowed for the first four years of post secondary education in a degree or certificate program. The definition of qualified expenses includes tuition, fees, and course materials.
The refundable adoption credit in 2010 is $13,170.00 per child.
Retirement savers credit is available for single taxpayers with income that does not exceed $27,750.00, married $55,500.00, and head of household $41,625.00.
For children subject to the Kiddie Tax, unearned income over $1,900.00 is taxed at the parent's highest marginal tax rate if the parent's rate is higher than the child's rate.
The annual gift tax exclusion is $13,000.00 per donee. The lifetime exclusion for gifts remain at $1,000,000.00.
The traditional IRA and ROTH IRA's combined contribution limit is $5,000.00 ($6,000.00 for ages 50 and older).
The election to claim state and local general sales tax instead if state and local taxes as an itemized deduction expired for tax years after 12/31/2009.
For tax years after 12/31/2009, taxpayers are no longer able to claim real property taxes as part of their standard deductions.
2010 begins the 15 year repayment for taxpayers who took advantage of the first time home buyer credit in 2008. The amount of the recapture each year is 6 2/3% of the credit claimed.
ROTH conversions may be elected to be taxed in 2010 or ratably spread over 2 years; 50% in 2011 and 50% in 2012. Review with your tax preparer due to schedule tax increases in 2011 and 2012.
Energy efficient improvements in 2009 and 20100 to a dwelling unit owned and used by the taxpayer as a principle residence are set to expire December 31, 2010 are an aggregate not exceeding $1500.00.
For tax years beginning on or after January 1, 2010, most tax exempt organizations whose gross annual receipts are normally $50,000.00 or less can file the e-Postcard. The threshold was previously set at $25,000.00 or less. (However, supporting organizations of any size must file the standard Form 990 or, if eligible, Form 990EZ)

Starting in 2011

States will receive funding to establish the web-based state insurance exchanges, which will be called Small Business Health Options Programs (SHOP). These exchanges will allow small businesses to form alliances and purchase insurance policies together at reduced rates.
Small business employers will be eligible to receive federal funding from 2011 to 2015 for providing their employees with wellness programs
A $2,500 annual cap on expenses will be applied to flexible spending accounts.
The marriage tax penalty is back
The previous child tax credit of $1,000.00 has been reduced to $500.00.
Estates with a fair market value of $1,000,000.00 or more will be required to file Form 706. The top rate for 2011 is 55% for federal taxes.
Employers must disclose on each employee's W-2, the value of health insurance coverage sponsored by the employer. This is NOT an inclusion of income. It is just a disclosure to inform the IRS.
Non-qualifying distributions made after 12/31/2010 incurs a penalty of 20% for HSA's.
Over the counter medication can no longer be reimbursed under HSA's.
Schedule E is for reporting rental property income and expenses, we will have to file 1099's reporting payments of $600.00 or more.

Starting in 2012

The IRS has announced the 2012 inflation adjusted amounts for health savings accounts under tax code Section 223. The annual limit will be $3100.00 for an individual with self-only coverage and $6250.00 for family coverage under a high deductible plan.

Starting in 2013

Estates and trusts will owe a 3.8 percent unearned income Medicare contribution tax (formerly called Medicare Tax) on the lesser of their undistributed net investment income or any adjusted gross income over the highest tax bracket threshold (currently $11,200). So a trust with AGI of $20,000 would owe $334.40. ($20,000 minus $11,200 equals $8,800, which is multiplied by .038).
Limits on tax-subsidized medical expenses will be imposed by raising the itemized medical expense deduction floor from 7.5 percent to 10 percent.
An additional 0.9 percent tax will be imposed on earned income over $200,00 for individuals and $250,000 for families
Individuals with and AGI over $200,000 (or families with AGI over $250,000) will pay a 3.8 percent earned income Medicare contribution tax on the lesser of

Their net investment income* for the tax year or
Any excess of their AGI over $200,000 for individuals/ $250,000 for families

*Net investment income includes interest, dividend,
royalties, rent, income earned from a trade or business,
self employment, estates, trusts, and gains from
disposing of property. Distributions from retirement plans,
pensions, and retirement accounts are exempt from the
additional tax.

An additional 0.9% hospital insurance will be imposed on individual taxpayers wages (including self employment) received with respect to employment in excess of: $250,000.00 for joint filers, $125,000.00 for married filing separate, and $200,000.00 for all other taxpayers. This tax is only paid by the employee. It is not matched nor paid by the employer.
New Medicare contribution tax on unearned income of individuals, estates, and trusts for joint taxpayers with income of $250,000.00, married filing joint $125,000.00, and $200,000.00 for all others.
Adjusted gross income for medical expenses as an itemized deduction increases from 7.5% to 10%. If the taxpayer, or spouse, has attained age 65 by the end of 2013, the effective date is delayed by 1/1/2017.

IRS.gov (April 27, 2010)
As a result of changes made by the recently enacted Affordable Care Act, health coverage provided for an employee's children less than 27 years of age is now generally tax-free to the employee, effective March 30, 2010.

Tips for Taxes

Earned Income Tax Credit (EITC): The Earned Income Tax Credit is a financial boost for workers earning $48,362 or less a year. Four of five eligible taxpayers filed and received their EITC last year. Talk to your tax preparer to see if you qualify.

Life Insurance: If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds, which were paid to you because of the insured person's death, are not taxable unless the policy was turned overto you for a price.

Scholarship or Fellowship Grant: If you are a candidate for a degree, you can exclude amounts you receive as a qualifies scholarship or fellowship. Amounts used for room and board do not qualify.

Non-cash Income: Taxable Income may be in a form other than cash. One example of this is bartering which is an exchange of property or services. The fair market value of goods and services exchanged is fully taxable and must be included as income on Form 1040 of both parties.

Tax Tips for the Disabled

Standard Deductions: Taxpayers who are legally blind may be entitled to a higher standard deduction on their tax return.

Gross Income: Certain disablility related payments, Veterans Administration disability benefits, and Supplimental Security Income are excluded from gross income.

Impairment Related Work Expenses: Employees who have a physical or mental disability limiting their employment may be able to claim business expenses in connection with their workplace. The expenses must be necessary for the taxpayer to work.

Credit for the Elderly or Disabled: This credit is generally available to certain taxpayers who are 65 and older as well as to certain disabled taxpayers who are younger than 65 and are retired on permanent and total disability.

Medical Expenses: If you itemize your deductions using Form 1040, Schedule A, you may be able to deduct medical expenses.

Earned Income Tax Credit (EITC): EITC is availible to disabled taxpayers as well as to the parents of a child with a disability. If you retired on disability, taxable benefits you receive under your employer's disability retirement plan are considered earned income until you reach minimum retirement age. The EITC is a tax credit that not only reduces a taxpayer's liability, but may also result in a refund. Many working individuals with a disability who have no qualifying children, but are older than 25 and younger than 65 do, in fact, qualify to EITC. Additionally, if the taxpayer's child is disabled, the age limitation for the EITC is waived. The EITC has no affect on certain public benefits. Any refund you receive because of the EITC will not be considered income when determining whether you are eligible for benefit programs such as Supplimental Security Income and Medicaid.

Child or Dependent Care Credit: Taxpayers who pay someone to care for their dependent or spouse so they can work or look for work may be entitled to claim this credit. There is no age limit if the taxpayer's spouse or dependent is unable to care for themselves.

Medical and Dental Expenses
If you itemize your deductions on Form 1040, Schedule A, you may be eligible to deduct expenses you paid in 2010 for medical care, including dental, for yourself, your spouse, and your dependents. Here are 6 things the IRS wants you to know about medical, dental, and other benefits.

You may deduct only the amount by which your total medical care expenses for the year exceed 7.5% of your adjusted gross income. You do this calculation on Form 1040, Schedule A in computing the deductable amount.
You can only include the medical expenses you paid during the year. Your total medical expenses must be reduced by any reimbursement. It makes no difference if you receive the reimbursement or if it is paid directly to the doctor or hospital.
You may include qualified medical expenses you pay for yourself, your spouse, and your dependents, including a person you claim as a dependent under a multiple support agreement. If either parent claims a child as a dependent under the rules for divorced or seperated parents, each parent may deduct the medical expenses he or she actually pays for the child. You can also deduct medical expenses you paid for someone who would have qualified as your dependent except that the person did not meet the gross income or joint return test.
A deduction is allowed only for expenses primarily paid for the prevention or alleviation of a physical or mental defect or illness. Medical care expenses include payments for the diagnosis, cure, mitigation, treatment, or prevention of disease or treatment affecting any structure or function of the body. The cost of drugs is deductable only for drugs that require a prescription except for insulin.
You may deduct transportation costs primarily for and essential to medical care that qualify as medical expenses. The actual fair for a taxi, bus, train, or ambulance may be deducted. If you use your car for medical transportation, you can deduct actual out of pocket expenses such as gas and oil, or you can deduct the standard mileage rate for medical expenses. With either method you may include tolls and parking fees.
Distributions from HSA's and withdrawls from Flexible Spending Arrangements may be tax free if you pay qualified medical expenses.

Tips about Tip Income

If you work in an occupation where tips are part of your total compansation, you need to be aware of several facts relating to your federal income taxes. Here are 4 things the IRS wants you to kow about tip income:

Tips are taxable. Tips are subject to federal income, social secuity, and medicare taxes. The value of non-cash tips, such as tickets, passes, or other items of value, is also income and subject to tax.
Include tips on your tax return. You must include in gross income all cash tips you receive directly from customers, tips added to credit cards, and your share of tips you receive under a tip-splitting arrangement with fellow employees.
Report tips to your employers. If you receive $20.00 or more in tips in any one month, you should report all of your tips to your employer. Your employer is required to withhold ferderalincome, social security, and medicare taxes.
Keep a running daily log of your tip income. You can use the IRS publication 1244, Empoyee's Daily Record of Tips and Report to Employer, to record your tip income.

Has the economy gotten you down lately....

Generally as you sell your primary home for less than you paid for it, you cannot deduct the loss. However, you can deduct a loss if the property is rented out or used for business. Thus, if you are renting out your home or using part of your home for business when you sell it, you can deduct a loss.
It could be an excellent year for a corporation to consider a conversion to a Sub S status if the values are low, reducing the built-in gain.
Now is a good time to convert IRAs to ROTH IRAs. Values are down, so the conversion will be less.
Use excess itemized deductions and personal exemptions to make tax-free withdrawals from retirement plans.

As of January 1, 2011, the standard mileage rates for the use of a car will be:

$.51 cents per mile for business miles driven;

$.19 cents per mile driven for medical or moving purposes;

$.14 cents per mile driven in service of charitable organization

As of July 1, 2011, the standard mileage rates for the use of a car will be:

$.555 cents per mile for business miles driven;

$.235 cents per mile driven for medical or moving purposes;

$.14 cents per mile driven in service of charitable organization

As of January 1, 2012, the standard mileage rates for the use of a car will be:

$.555 cents per mile for business miles driven;

$.23 cents per mile driven for medical or moving purposes;

$.14 cents per mile driven in service of charitable organization

Four Tips For Great Record Keeping

There are many records you have that may help document items on your tax return. You'll need this documentation should the IRS select your return for examination. Here are 4 tips from the IRS about keeping good records!

Normally, tax records should be kept for a minimum of 3 years
Some documents - such as relating to a home purchase or sale, stock transactions, IRA, and business or rental property - should be kept longer
In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, however, you should keep any and all documents that may have an impact on your Federal return.
Records you should keep include bills, credit card and other receipts, invoices, mileage logs, canceled, imaged, or substitute checks, proofs of payment, and any other records that support deductions or credits you claim on your return.

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