Tax Saving Strategiesfor the 2012 Filing Season

Updated Dec.12, 2011

Select 2011 Tax Law Changes

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• 2011 tax changes less drastic than 2010

• One wide-ranging change – replacement of Making Work Pay Credit

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

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*MAGI

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

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*Pertains to MAGI

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

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*MAGI

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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Copyright © 2011 American Institute of CPAs

Copyright © 2011 American Institute of CPAs

Thank you