Many 2010 tax breaks still in place for 2011

CAROLE FELDMAN

Asso­ci­ated Press

There are tax breaks for col­lege stu­dents, job hunters and vic­tims of nat­ural dis­as­ters. If much of it seems famil­iar, that’s because it is.

With all the talk about tax reform, there weren’t many changes to tax law in 2011.

“For most peo­ple the num­bers are chang­ing but the basic con­cepts are the same,” said Jeff Schnep­per, author of “How to Pay Zero Taxes” (McGraw-Hill, 2011).

Still, don’t be complacent.

As always, tax fil­ers should be sure to take all the deduc­tions and cred­its for which they’re eli­gi­ble. And because of adjust­ments to things like the stan­dard deduc­tion and per­sonal exemp­tion, “some of the breaks they didn’t qual­ity for last year, they may qual­ify this year, espe­cially if they didn’t get a raise,” said Bar­bara Welt­man, con­tribut­ing edi­tor to J.K. Lasser’s “Your Income Tax 2012.”

That’s because many deduc­tions and cred­its phase out at higher incomes.

The one tax break that almost every worker got, regard­less of income, was the 2 per­cent­age point reduc­tion in Social Secu­rity pay­roll taxes in 2011. And there was noth­ing to file. “The sav­ings were imme­di­ate,” Schnep­per said, show­ing up as more take-home pay.

Con­gress passed a two-month exten­sion of the Social Secu­rity tax reduc­tion just days before it was to expire at the end of 2011, and said it would nego­ti­ate to keep it in place for the full year.

But things like the Alter­na­tive Min­i­mum Tax patch were already in place long before the end of the year, mean­ing it should be a smooth start to the tax fil­ing season.

Tax rates are the same as in the 2010 tax year, rang­ing from a low of 10 per­cent to a high of 35 per­cent. The lower long-term cap­i­tal gains rates of 0 per­cent and 15 per­cent are good through the end of 2012.

And those with higher incomes won’t see their per­sonal exemp­tions and item­ized deduc­tions reduced.

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Three bits of advice from Mark Ste­ber, chief tax offi­cer for Jack­son Hewitt Tax Ser­vices, to tax­pay­ers begin­ning to think about 2011 returns: “You need to be orga­nized, you need to col­lect your records, you need to elec­tron­i­cally file.”

Adds Inter­nal Rev­enue Ser­vice spokesman Terry Lemons, “Give your­self some time. Don’t wait until the absolute last minute. Don’t rush and don’t panic.”

Last year, the IRS received more than 145 mil­lion returns. More than 75 per­cent of fil­ers were enti­tled to a refund, aver­ag­ing $2,913.

Of those returns, about 112 mil­lion were filed electronically.

Welt­man expects elec­tronic fil­ing to increase fur­ther because of IRS rules requir­ing e-filing by paid pre­par­ers who do more than 10 returns.

Elec­tron­i­cally filed returns tend to have fewer errors, and give the tax­payer the con­ve­nience of fil­ing at any time, day or night, with­out hav­ing to wait at the post office, she said. It also can mean quicker refunds, par­tic­u­larly if you use direct deposit.

“It’s a win-win for the gov­ern­ment because it costs less to process,” Welt­man said. “It’s a win-win for tax­pay­ers because they get their money back faster.”

She said secu­rity has been good, although in Novem­ber, the Trea­sury Inspec­tor Gen­eral for Tax Admin­is­tra­tion called on the IRS to improve the way it tracks per­for­mance and secu­rity issues in its new e-filing sys­tem, sched­uled to be fully in place by 2013.

“Peo­ple can file elec­tron­i­cally with con­fi­dence,” Lemons said. “Pro­tect­ing tax­payer data is our top priority.”

This year, Tur­b­o­Tax and H&R Block have appli­ca­tions that allow peo­ple to file the sim­plest tax returns, those using form 1040EZ, on iPhones or androids. Both com­pa­nies say fil­ing on smart­phones is safe and secure.

“We’ve done the work to mit­i­gate the fact of your file being com­pro­mised,” said Bob Meighan, a vice pres­i­dent at Tur­b­o­Tax. Data on returns filed through the company’s Snap­Tax app are encrypted and stored on the Tur­b­o­Tax server, not the phone; if you lose your phone before you file, you’ll have to re-enter the infor­ma­tion. Once you’ve filed, you can check on the sta­tus of the return and get a copy through TurboTax’s website.

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Tax­pay­ers this year will ben­e­fit from an increase in the per­sonal exemp­tion, to $3,700. The stan­dard deduc­tion, avail­able to those who don’t item­ize, rose to $11,600 for mar­ried cou­ples fil­ing a joint return; $5,800 for sin­gles and mar­ried indi­vid­u­als fil­ing sep­a­rate returns; and $8,500 for heads of house­hold. Those who are 65 or older or who are blind may be eli­gi­ble for a higher stan­dard deduction.

The Alter­na­tive Min­i­mum Tax thresh­old increases to $74,450 for a mar­ried cou­ple fil­ing a joint return, $48,450 for sin­gles and heads of house­hold, and $37,225 for mar­ried indi­vid­u­als fil­ing sep­a­rately. The AMT orig­i­nally was passed to make sure that peo­ple weren’t using loop­holes to avoid pay­ing taxes. Since it is not auto­mat­i­cally adjusted for infla­tion, mil­lions more tax­payer would be affected if Con­gress didn’t approve a patch every year or two to effec­tively make an infla­tion adjust­ment. Tax­pay­ers with incomes above the thresh­old could be liable for the AMT, which excludes some deductions.

That said, make sure you claim deduc­tions to which you are enti­tled. Meighan said peo­ple tend to under­es­ti­mate the value of items donated to char­ity, for instance, think­ing that if they deduct too much it could lead to an audit. Tur­b­o­Tax uses a pro­gram called It’s Deductible to help peo­ple assess the value of their dona­tions, and there are other pro­grams online, too. Take pho­tos of the items you donate, includ­ing the tags if the items are new.

“Words don’t really describe the con­di­tion,” Meighan said. “Pic­tures don’t lie.”

If you drive to drop off your items to a char­i­ta­ble orga­ni­za­tion, or com­mute to a soup kitchen to vol­un­teer, you can also deduct 14 cents a mile. “Keep a log of it,” he said.

And you can deduct mileage if you move to take a new job — or a first job, pro­vided you meet a dis­tance test. The rate for the first half of 2011 is 19 cents per mile, and for the last half, 23.5 cents a mile. You can deduct the cost of lodg­ing if you had to stay overnight on the way to your new home, but not the price of meals. You can find more infor­ma­tion in IRS pub­li­ca­tion 521.

For peo­ple who col­lected unem­ploy­ment before find­ing that new job, those ben­e­fits are tax­able. “Hope­fully, they’ve had taxes with­held,” Meighan said. Oth­er­wise, they could get hit with a big­ger tax bill.

With­hold­ing is vol­un­tary. If you’re still unem­ployed and want taxes with­held this year, use Form W-4V.

Unem­ployed peo­ple might find them­selves eli­gi­ble for some tax breaks they didn’t get when they were work­ing. Their reduced income may make them eli­gi­ble for the earned income tax credit, or edu­ca­tion cred­its and deduc­tions. The IRS says the Amer­i­can Oppor­tu­nity Credit could be par­tic­u­larly rel­e­vant because it’s par­tially refundable.

But you don’t have to be unem­ployed to qual­ify for edu­ca­tion tax breaks.

“More often than not, we found that peo­ple miss the Amer­i­can Oppor­tu­nity Credit,” said Kathy Pick­er­ing, exec­u­tive direc­tor of the Tax Insti­tute at H&R Block. It’s a max­i­mum credit of $2,500 toward the cost of tuition and other higher-education expenses, and can be used for the first four years of col­lege if the stu­dent is enrolled at least half-time.

There is also a tuition and fees deduc­tion, as well as a deduc­tion for inter­est paid on stu­dent loans.

They all phase out at higher incomes.

Cred­its directly reduce the income tax you owe. Deduc­tions reduce the income on which your taxes are computed.

Tax­pay­ers who spent money mak­ing their homes more energy effi­cient, such as installing insu­la­tion, new win­dows or water heaters, can get up to a $500 credit. The credit for installing solar, wind or other alter­na­tive energy equip­ment is 30 per­cent of the cost.

There’s also some tax relief for peo­ple who lost prop­erty or suf­fered dam­ages in hur­ri­canes, wild­fires, tor­na­does and other nat­ural dis­as­ters in 2011. Losses over and above what was cov­ered by insur­ance may be deductible if they exceed 10 per­cent of your adjusted gross income. How­ever, the first $100 of loss from each par­tic­u­lar event isn’t deductible; sub­tract that before apply­ing the 10 per­cent rule.

It’s still not too late to take advan­tage of one tax-reducing option: con­tribut­ing to an indi­vid­ual retire­ment account. You can do that up until the tax fil­ing dead­line — April 17th this year because of the Eman­ci­pa­tion Day hol­i­day in Wash­ing­ton, D.C. Make sure to check with your state to see if its dead­line has been extended as well.

Any funds moved from a tra­di­tional IRA to a Roth IRA must be reported as income. For 2010 only, you had the option of defer­ring half the amount to 2011. If you chose that option, don’t for­get to report it on your 2011 tax return.

If you have money left in flex spend­ing accounts, check with your employer on the final day to sub­mit receipts for 2011 expenses.

And don’t fret if you need more time to file. You can always file for an extension.

“You don’t have to give a rea­son,” Welt­man said. “But pay as much as you think you owe,” to min­i­mize any late pay­ment penalties.

And for those who don’t have the money to pay?

Lemons said the IRS has a “safety net for strug­gling tax­pay­ers,” includ­ing install­ment agree­ments and other options.

“You should really go ahead and file your tax return even if you can’t pay,” he said. “If you can’t pay us, con­tact us.”

Posted by AP News on Jan 19 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.