Tax Filing Benefits- For Individuals


So, it’s almost tax time again! And what an interesting filing season it will be. With the uncertainty of if or when the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“the Act”) would be passed, many taxpayers were anxiously waiting with bated breath toward the end of 2010. As it turns out, the Act passed on December 17 and extended a number of beneficial provisions that you will definitely want to know about, whether filing your individual tax return or business return. This article deals with benefits for individuals. See the article on the flip-side of this magazine for benefits geared toward businesses.

First off, everyone gets a pay raise in 2011! The usual 6.2% withheld from an employee’s paycheck for Social Security (OASDI) is reduced by 2% to 4.2%. What does this mean? Your take-home pay will increase. For example, an individual earn- ing $70,000 per year will receive an additional $1,400 in take- home pay. The benefit is available up to the maximum OASDI withholding on $106,800 of income. Therefore, a two-person household in which both persons earn more than $106,800 will stand to receive an additional $4,272 in 2011.

Income tax brackets will remain the same for 2011 and 2012: prior to passage of the Act, income tax rates were slated to increase to as high as 39.6%. Rates on capital gains and dividends, which were also expected to increase, will now also receive the same favorable treatment as they had in 2010, i.e., 0% tax on qualified dividends and capital gains for those who would otherwise have been in the 10% or 15% tax brackets, and 15% for all others in higher tax brackets.

A great opportunity exists for making charitable contributions in 2011 and 2012: the sun-setting provisions of the 2001 Tax Act would have reintroduced limitations on itemized deductions under the Pease rule. The 2010 Act extends the full phase-out of limitations on itemized deductions for two more years which means for 2010 through 2012 your itemized deductions (mortgage interest, property taxes, charitable contributions, etc.) will not be subject to an Adjusted Gross Income (AGI) phase-out limitation.

The American Opportunity Tax Credit was extended through 2012: this allows for a credit of 100% of the first $2,000 of qualifying educational expenses and 25% of the second $2,000. Educational expenses can include course materials and a portion of this credit can be refundable; however, the credit may not be available if your AGI is too high.

Energy credits are still available in 2011 but instead of al- lowing a 30% deduction as was the case in 2010, the credit is based on 10% of qualifying expenses and now has a limit of $500. If you already received a credit in excess of $500 for energy improvements, you are unfortunately ineligible for an additional credit. However, expenses incurred for solar electric or solar hot water property will continue to receive a 30% credit with no limit.

The Alternative Minimum Tax relief patch is extended through 2011. For estate tax planning, the applicable estate tax exclusion is set at $5 million for 2011 and 2012 with a top estate and gift tax rate of 35%. The gift tax credit also increased to $5 million for 2011 and 2012.

An important note for individuals with rental properties: If you own rental properties individually (i.e., not as a business), you will be required to send a Form 1099-MISC to any person that you paid $600 or more in 2011. This means you should be collecting the Form W-9 (which contains that person’s taxpayer ID, name and address) in order to have the information available at year-end. As of this date, this requirement will also apply to any person making payments for property or payments to corporations aggregating $600 or more after December 31, 2011. As of the date this article was written, a bill has been introduced in the Senate to make changes to the Form 1099 rules. Stay tuned!

Finally, because of the Emancipation Day holiday on April 15 in the District of Columbia, individual tax returns (and certain other returns) are due on April 18 this year.

See the G side for tax benefits for businesses and Circular 230 disclosure…