Transcript Tax Saving Strategies for the 2012 Filing Season Presentation

Tax Saving Strategies
for the 2012 Filing Season
Updated Dec.12, 2011
Select 2011 Tax Law Changes
• 2011 tax changes less drastic than 2010
• One wide-ranging change – replacement
of Making Work Pay Credit
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Expiring Provisions
• Increased Alternative Minimum Tax (AMT) Exemption Amounts
• State/Local Sales Tax Deduction
• Mortgage Insurance Premiums Deduction
• School Teacher Expenses
• Qualified Charitable Distributions from IRAs
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The Basics
• Standard Deduction
• Standard Deduction Additions
• Itemizing Deductions
• Charitable Deductions
• Alternative Minimum Tax (AMT)
• AMT Exemption Amounts
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Standard Deduction
Filing Status
Standard Deduction
Single
$5,800
Married Filing Separately
$5,800
Married Filing Jointly
$11,600
Qualifying Widow(er)
$11,600
Head of Household
$8,500
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Standard Deduction Additions
• Additional standard deduction for taxpayers
age 65 and older or blind:
- $1,450 (single or head of household)
- $1,150 (married filing jointly,
married filing separately or
qualifying widow/er)
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Itemizing Deductions
• Alternative to standard deduction
• Use when total itemized deductions
exceed standard deduction
• Wide range of itemized deductions
• No phaseout rules
• Bunching tax breaks
• AMT consideration
• Benefits of advance planning
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Charitable Deductions
• Qualified donations only
• Deductible up to 50% of AGI (for itemizers)
• Documentation requirements
• Donations of more than $75 and $250 or more (additional substantiation rules)
• Donations of appreciated property
• Clothing, household items and automobiles (requirements and substantiation rules)
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Alternative Minimum Tax (AMT)
• Additional tax for certain taxpayers
• AMT triggers:
- Higher-than-average dependency exemptions
- Large deductions for state and local income taxes
- High real estate taxes
- Miscellaneous itemized deductions and medical expenses
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AMT Exemption Amounts
• Exemption amounts:
- Single $48,450
- Married/Filing jointly $74,450
• Phaseout when AMT income exceeds:
- $112,500 (single)
- $150,000 (married filing jointly)
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Tax Strategies & Incentives
• Family
• Education
• Job
• Home
• Investments
• Retirement
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Family Tax Incentives
• Kiddie Tax
• Child Tax Credit
• Adoption Credit
• Health Savings Accounts
• Health Flexible Spending Arrangements
• Dependent Care Tax Credit
• Long-term Care Premium
• Shifting Income
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Kiddie Tax
• Income shifting to children less beneficial
• $1,900 investment income threshold
• Exception if parents deceased
• Applies to:
- All children younger than age 18
- Most children who are age 18
- Most full-time students between ages 19-23
- Child who is married filing separately
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Child Tax Credit
• $1,000 credit per qualifying child
• Child:
- Under age 17
- Qualified dependent
- U.S. citizen, resident or national
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Adoption Credit
• Up to $13,360 per eligible child
• Employer reimbursement of up to $13,360
• Different rules for U.S. and foreign adoptions
• Special-needs child – full credit regardless of actual expenses
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Health Savings Accounts
• Individuals covered
• Tax advantages – contributions, earnings and withdrawals
• Consequences of non-qualified withdrawals
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Health Flexible Spending Arrangements
• Tax-free contributions from wages
• Fully accessible for qualified medical expenses
• Wide range of reimbursable medical expenses (non-prescription drugs,
except insulin, not reimbursable in 2011)
• Terms and limits determined by company plan
• Use or lose feature
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Dependent Care Tax Credit
• Child must be under age 13 and a dependent
• 20% to 35% of qualifying expenses (up to $2,100)
• AGI factor
• Earned income requirement and joint return if married
• Up to $3,000 of expenses ($6,000 if two or more dependents)
• Reduced by certain employer-provided day care ($5,000/$2,500 limits)
• Applicable to other dependents
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Long-term Care Premium
• Tax deduction for portion of insurance costs
• Age-based deduction amounts:
- Age 40 or under - $340
- Age 41 to 50 - $640
- Age 51 to 60 - $1,270
- Age 61 to 70 - $3,390
- Age 71 or over - $4,240
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Shifting Income
• Kiddie tax
• Gift tax:
- Up to $13,000 not subject to gift tax ($26,000 if election by spouse/use
other spouse’s exclusion)
- Cash gifts and present interests in property requirement
• Family business (hiring your minor children):
- Legitimate work, adherence to rules/laws and reasonable wages
- Social Security and Medicare tax advantages if under age18
- Kiddie Tax not applicable
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Education Strategies
• Tax Credits
• American Opportunity Tax Credit
• Lifetime Learning Credit
• Student Loan Deduction
• Higher Education Tuition and Fees Deduction
• Qualified Tuition Programs (529 Plans)
• Prepaid Tuition Plans
• U.S. Savings Bonds
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Tax Credits
• American Opportunity Tax Credit and Lifetime Learning Credit
• Credit vs. deduction
• Mutually exclusive credits in certain circumstances
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American Opportunity Tax Credit
• Applies to first four years of college/postsecondary school
• Recognized educational credential requirement
• $2,500 per student per year maximum
• Qualified tuition and related expenses
• Allowed against AMT
*MAGI
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Lifetime Learning Credit
• Worth up to $2,000 per year
• Not limited to any number of years
• Applies to undergraduate, graduate and professional-degree expenses
• Available to each taxpayer – not each student
• No educational-credential requirement
*Pertains to MAGI
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Student Loan Deduction
• Deduct loan interest up to $2,500
• No limit on repayment period
• No need to itemize
• Qualification requirements
• Phaseout ranges apply
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Higher Education Tuition and Fees Deduction
• Up to $2,000 or $4,000 deduction
• Available every qualifying year
• Covered expenses similar to American Opportunity Tax Credit and Lifetime
Learning Credit
• Broad availability
• Barred in certain circumstances
• Phaseout ranges apply
*MAGI
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Qualified Tuition Programs (529 Plans)
• Tax-advantaged way to save for college expenses
• Money in plan grows tax free
• Tax-free qualified withdrawals
• State income tax breaks in certain circumstances
• Wide range of qualified expenses (no dollar limit)
• Gifts from family members
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Prepaid Tuition Plans
• State-instituted plans
• Plan inception date and child’s age key factors to amount contributed
• Tuition costs covered — not room, board or books
• In-state vs. out-of-state school
• Tax treatment similar to 529 Plan
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U.S. Savings Bonds
• Tax benefits for qualified higher-education expenses
• No dollar limit on exclusion
• Series EE bonds (issued after 1989) and Series I bonds
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Job Strategies
• Unreimbursed employment-related costs
• Deduction – greater than 2% of AGI
• Job search expenses
• Line-of-work requirement
• Possible disallowance if long-term
unemployment period
• Not applicable to first job
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Homeowner Strategies
• Deductions
• Selling Your Home
• First-time Homebuyer Credit
• Home Energy Incentives
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Deductions
• Mortgage interest:
- Deduct up to $1 million of home-acquisition loans
- Deduct up to $100,000 of home-equity loans
- No restrictions on use of proceeds
- Special rules on deducting points
• Real estate taxes:
- No limits on number of homes or dollar amount
- Prepay/delay decision
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Selling Your Home
• Exclude up to $250,000 in capital gains ($500,000 if married
filing jointly or surviving spouse in certain cases)
• Home owned/used as principal residence at least two (aggregate)
of five years preceding sale
• Temporary absences from residence
• Special rules for specific homeowners
• Repay/recapture First-time Homebuyer Credit
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First-time Homebuyer Credit
• Limited credit for 2011 home purchases
• Credit repayment for some home purchasers
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Home Energy Incentives
• Nonbusiness Energy Property Credit
- 10% and 100% credits for certain improvements and expenditures
- Dollar limits for specific types of property
- $500 maximum lifetime credit
- Wide range of improvements
• Residential Energy Efficient Property Credit
- Wide range of costs
- Two types of 30% credits
- Dollar limit, principal residence and kilowatt-capacity considerations
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Investment Strategies
• Dividends
• Capital Gains Tax
• Offset Capital Gains with Losses
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Dividends
• Top tax rate of 15% for qualified dividends
• 0% for taxpayers in 10% or 15% tax bracket
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Capital Gains Tax
• 15% maximum tax rate on net capital gains
• 0% for taxpayers in 10% or 15% income tax bracket
• Asset must be held more than one year before sale
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Offset Capital Gains with Losses
• Capital losses netted against capital gains
• $3,000 in capital losses can be deducted against ordinary income
• Ability to carry losses forward
• Keep track of losses – unused, and short and long term
• Beware of wash sale rule
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Retirement Strategies
• Employer Sponsored Plans
• Individual Retirement Accounts (IRAs)
• Conversion to Roth IRA
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Employer Sponsored Plans
• Pre-tax contributions help reduce tax bill
• Employer matches and earned income – tax deferred
• $16,500 maximum contribution (younger than age 50)
• $5,500 additional catch-up contribution
(age 50 or older)
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Individual Retirement Accounts (IRAs)
Two types: Traditional and Roth
• $5,000 maximum annual contribution for either
• $1,000 additional catch-up contribution (age 50 or older)
• Contribution restrictions
• Traditional IRA: deductible contributions – modified AGI and employer-sponsored
plan considerations & distribution requirements
• Roth IRA: nondeductible contributions and tax-free withdrawals
• Tax-free earnings until distribution
• Open/contribution deadline: April 17, 2012
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Conversion to Roth IRA
• No dollar limit on conversion amount
• Conversion results in taxable income
• No early-distribution penalty under
certain conditions
• No modified AGI requirement
• Opportunity to reverse conversion
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Key Takeaways
• Partner with your CPA
• Ask questions when considering advice
• Plan for tax savings year-round
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Thank you
Copyright © 2011 American Institute of CPAs
Copyright © 2011 American Institute of CPAs