What's New for Tax Year 2011 and What's Ahead in 2012?

At the end of 2010, the extension of numerous tax provisions that were set to expire provided some certainty for taxpayers – and tax planners. Following those extensions and several political deadlocks in Washington DC, 2011 was predictably quiet for major tax changes. However, we now quickly are approaching another point of uncertainty that likely will last until after the 2012 elections.

So what’s new for tax year 2011 really is a continuation of the prior year’s tax events with an eye toward what we will be facing in the coming 2012 election year.

Individual income tax rates: The current 10, 15, 25, 28, 33, and 35 percent tax brackets that we have enjoyed since the 2001 Bush tax cuts were extended through Dec. 31, 2012 with the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. Without an extension of these rates, income tax brackets may reset to 15, 28, 31, 36 and 39.6 percent rates at the end of 2012, creating higher tax bills for all taxpayers. There are several alternative proposals floating about, but there really may be no telling until after the November elections how this ultimately will be resolved.

Long-term capital gains/qualified dividends: The 15 percent tax rate (zero percent for taxpayers in the 10 and 15 percent income tax brackets) on long-term capital gains and qualified dividends also have been extended through 2012. If these rates are not extended beyond 2012, long-term capital gains rates would revert to the previous 20 percent/10 percent levels.

Payroll tax cut: The reduction of the employee-share of Social Security payroll tax from 6.2 percent to 4.2 percent was extended in December for the first two months of 2012. This “payroll tax holiday” will continue to be reflected in employee paychecks for the first two months of 2012. Self-employed taxpayers will see that reduction in the Social Security tax rate reflected in their 2011 tax returns, where the self-employment Social Security tax rate will be 10.4% for 2011.

Education-related tax benefits: The American Opportunity Credit, which replaced the Hope education credit, and its associated higher income limitations also are extended through 2012. Other education-related tax benefits that have been extended through 2012 include continuation of the above-the-line tuition and fees deduction, exclusion for employer-provided education assistance, and enhancements to student loan interest deductions and Coverdell Education Savings Accounts.

Expanded Basis Reporting for Stocks and Mutual Funds: Also, in 2011, we will see the beginning of changes to reporting in stock sales on Form 1099-B, with broker-dealers beginning to report to customers and the IRS not only sales proceeds information but also the adjusted basis and holding period for stocks purchased after Jan. 1, 2011.

Certain 1099 Reporting Requirements Repealed: Provisions passed in 2010 would have required taxpayers who receive rental income to file Form 1099 for certain payments made in 2011 related to rental activities, but those requirements for landlords were repealed in April 2011.

Federal personal energy property credits: The Section 25C credit for energy-efficient improvements for homeowners reverts to its earlier limitations, including a reduction in the credit to 10 percent of the cost of non-business energy-efficient property, with a lifetime maximum lifetime credit of $500. So homeowners who already have claimed $500 or more in personal energy property credit will be unable to claim additional credit for qualifying improvements made in 2011.

Business tax incentives: While most small businesses are able to expense many of their asset purchases using the Code Sec. 179 expensing rules, 100% bonus deprecation also is available for qualified 2011 purchases.

Other key current tax provisions extended through 2011 include:

Alternative Minimum Tax “patch” of increased exemption amounts;
Repeal of itemized deduction limitation and personal exemption phase-out;
“Marriage penalty” relief in standard deductions;
Child tax credit of $1,000 and reduced threshold for refundable child tax credit;
Dependent care credit enhancements;
Deduction up to $250 for expenses of elementary and secondary school teachers;
Enhanced earned income credit;
Deduction for mortgage insurance premiums;
State and local tax deduction.

Report of Foreign Bank and Financial Accounts (FBAR): Certain individuals with a financial interest in or signature authority over at least one financial account located outside of the United States may have to file a disclosure statement with their income tax return if the aggregate value of all foreign accounts was in excess of $10,000 at any time during the year.

What’s Ahead in 2012?

As you can see in many of the provisions that previously have been extended for 2011 and 2012, there is quite a bit of uncertainty that likely will exist with regard to tax planning as we progress through 2012, from tax rates to capital gains rates and even the return of the standard deduction and tax bracket “marriage penalty.”

We’ll be watching closely as various proposals make their way through the halls of Congress, and we’ll be working diligently to help you understand the effects of these tax legislation proposals on your individual tax situation. So stay tuned!

Allan T. Lazo | 01/15/2012

Recent Posts:

What's New for Tax Year 2011 and What's Ahead in 2012?