Like every other year, there are changes taking effect this year regarding federal income tax filings for individuals. With 2011 W-2 forms now out and people focused on getting their taxes done in the next two and a half months, taxpayers should be mindful of many of these changes.
For starters, is it important for people to remember that once again they have two extra days to file their tax returns this year beyond the traditional April 15 date. With April 15 falling on a Sunday this year and April 16 being Emancipation Day in Washington, D.C., people have until Tuesday, April 17 to file if they need it. This could be beneficial in helping to ease the last-minute crunch.
When filing your 2011 return, take the following into consideration:
New forms: There are two new forms for people to be aware of this year — Form 8949 and Form 8938. Form 8949 is for reporting capital gains and losses. Brokers will need to provide the basis for securities acquired after 2010. Form 8938 is to report foreign financial assets on a tax return.
Roth IRA conversions: For those who converted traditional IRAs to Roth IRAs in 2010 and did not elect to pay the tax on it in 2010, half of that conversion income is now taxable in 2012.
CHET contributions: As in the past, there are tax savings available for contributions up to $10,000 ($5,000 for single filers) who fund Connecticut Higher Education Trust (CHET) college accounts. With the higher Connecticut 2011 tax rates, this contribution can result in more tax savings.
Roth IRA planning tip: There are income limitations on who can contribute directly to a Roth IRA; however, there is no income limitation on who can convert from a traditional IRA to a Roth IRA. Depending on your income level, you might want to consider making a non-deductible contribution to an IRA, then converting the account to a Roth. (If you have other IRAs or earnings during the transition period, there may be some taxable income to report).
For 2012 we will see the loss of a number of tax credits to which individuals and families may have grown accustomed over the past several years, including:
• Residential energy credit.
• Educators expense deduction (for K-12 level).
• Tuition and fees deduction.
• Sales tax deduction.
• Mortgage insurance deduction.
• Charitable contributions for IRAs.
These credits led to substantial tax savings in past years and the loss of them could impact people financially this year. That is why consulting a tax professional for advice on how to potentially make up these losses could be something people may want to explore.
There is some good news on the maximum 2012 contribution limits to retirement plans and Health Savings Accounts. HSAs will allow small increases this year — $50 more for individuals (to a maximum $3,100) and $100 for families (to a maximum of $6,250). Those with 401K and 403B retirement accounts will see the maximum annual contributions rise to $17,000 this year, up $500 from a year ago. For individuals 50 and older, an additional $5,500 can be contributed.
Finally, people need to be aware of major changes to come in 2013. If the “Bush tax cuts” expire at the end of this year and Congress does not act to continue them, there will be increases in the top federal tax rate (up from 35 percent to 39.6 percent), long-term capital gains tax rate (increasing from 5 and 15 percent to 10 and 20 percent), and the 15 percent qualified dividends rate would cease to exist. These scheduled changes, along with the new taxes to pay for health care that are effective in 2013, are significant.
Taxpayers need to know about what is on the horizon to do effective tax planning. It is always better to start sooner rather than later.