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Alert: 2011 Tax Notes
TAX RATES - The 2011 federal income tax rates for individuals will remain the same as 2010, with a 35% top rate. The 15% rate on long-term capital gains and qualified dividends is extended through 2012. The Alternative Minimum Tax "patch" sunsets December 31, 2011.
DEDUCTION PHASEOUTS - The phase-out for itemized deductions (3% of adjusted gross income above certain income levels) and personal exemptions have been eliminated through 2012.
ESTATE PLANNING - The 2010 Tax Relief Act increased the estate and gift tax lifetime exclusion to $5 million and reduced the top federal rate to 35%. For those who pass away in 2011 or 2012, the executor has the option to elect "portability" for federal purposes. The deceased spouse's unused exclusion amount is transferrable and can be used to reduce tax on the surviving spouse's estate as well as other taxable gifts made during life. States have NOT adopted the federal portability provision. The Tennessee inheritance exemption remains at $1 million.
GENERATION-SKIPPING TAX - The 2010 Tax Relief Act allows for a $5 million exemption for GST tax. GST gifts exceeding the $5 million lifetime exemption in 2011 or 2012 are subject to a 35% rate. GST exemption is not portable between spouses.
GIFTS - In 2011 and 2012, there is a unified gift and estate tax exclusion of $5 million. Any amount unused during a taxpayer’s life is available to reduce the taxpayer’s estate tax. In 2013 the exclusion amount drops back to $1 million. For Tennessee gift tax purposes, the annual exclusion amount for gifts given to Class A donees remains at $13,000. Class A donees include family members, siblings, lineal descendants/ancestors, in-laws, step-children, and in some cases, nieces and nephews. This is a good time to consider large gifts that further your estate plans.
BUSINESS INCENTIVES - 100% first-year bonus depreciation is allowed for qualifying new (not used) property placed in service during 2011. 50% first-year bonus depreciation applies to qualifying new (not used) property placed in service in 2012. The placed-in-service deadlines for both the 100% and 50% bonus depreciation is extended for certain assets. Several business tax credits, such as the research and development, energy-efficient improvements, new markets, and employer wage credit for activated reservists and guards, are available for the 2011 tax year.
CHARITABLE CONTRIBUTIONS - Tax-Free IRA distributions of up to $100,000 can be given to charities by taxpayers aged 70-1/2 or older for 2011.
TEMPORARY EMPLOYEE/SELF-EMPLOYED PAYROLL TAX CUT - In 2011, employees received a 2% payroll/self-employment tax cut on wages earned up to $106,800. Maximum saving in 2011 was $2,136. This provision has been extended through February 29, 2012. If this tax cut is not extended through the balance of 2012, any tax underwithheld will be paid with the individual's 2012 Form 1040.
FOREIGN ACTIVITY REPORTING - Any U.S. person with an interest in, or signature authority over, a foreign financial account greater than $10,000 at any time during the year is required to file the TDF 90-22.1 (FBAR). This form is filed separately from Form 1040 no later than June 30 following the calendar year for which it applies. Furthermore, for the 2011 tax year, individuals who hold any interest in a specified foreign financial asset above stated thresholds are required to file Form 8938. Single taxpayers living in the U.S. must have more than $50,000 on the last day of the tax year or more than $75,000 at any point during the year. The thresholds for married, filing jointly taxpayers are double those of single taxpayers. A significant penalty is levied for failure to file. So be sure to alert us immediately if you have any foreign interests. PLEASE NOTE - if you have a life insurance contract with a cash surrender value component from a foreign insurer, e.g., ManuLife Financial (Canada), you hold an interest in a specified foreign financial asset.
FEDERAL TAX REFUNDS - The IRS has released a smartphone application, IRS2GO, that will allow you to check the status of your federal income tax refund and subscribe to receive filing season tax updates.
OVER-THE-COUNTER MEDICINES - Other than insulin, over-the-counter drugs no longer qualify for tax-free reimbursement under plans like an FSA, HSA or MSA unless you have a prescription from a physician. Penalties for misuse of the accounts are 20%.
RENTAL INFORMATION REPORTING - The expansion of the 1099 reporting requirements for taxpayers receiving rental income has been repealed for those who are not considered engaged in the trade or business of renting property.
MISCLASSIFIED INDEPENDENT CONTRACTORS - The IRS has set up the Voluntary Classification Settlement Program for businesses that misclassify employees as independent contractors. This program will give partial relief from employment taxes for taxpayers.
KIDDIE TAX - For 2011, children under the age of 18 with unearned income (investment income) greater than $1,900 may be subject to their parents' tax rate. The child's unearned income in excess of $1,900 is taxed at whichever rate is the greater of the two rates. Dependent children between the ages of 18 and 24 whose earned income is less than 50% of their total support will also pay tax at their parent's marginal rate, if higher than their own, on investment income in excess of $1,900.
ENERGY INCENTIVES - Tax credits are available through 2011 for use of energy-efficient items. Builders of energy-efficient new homes may be eligible to receive a credit of up to $2,000 for reducing energy consumption by 50%. Credits for energy-efficient home improvements are available for 2011 with a lifetime limit of $500. The personal (non-business) energy credit is permitted only on property or improvements completed on the taxpayer’s main home.
DEPRECIATION/VEHICLE DEDUCTIONS - The Section 179 expense allowance for qualified property is $500,000 in 2011, with a phase-out for acquisitions in excess of $2,000,000. The maximum cap on depreciation of SUVs used for business is $25,000. Section 179 limits will decrease significantly in 2012. The standard mileage rate is 51¢ for January 1 through June 30, 2011 and 55.5¢ for July 1 through December 31, 2011. The medical and moving rate is 19¢ for January 1 through June 30, 2011 and 23.5¢ for July 1 through December 31, 2011. The charitable mileage rate remains at 14¢.
RETIREMENT CONTRIBUTIONS –
SOCIAL SECURITY – The cap on wages subject to social security is $106,800 for 2011 and $110,100 for 2012. The "Nanny Tax" threshold for paying FICA taxes on domestic employees is $1,700 of wages paid in 2011. Schedule H is filed with Form 1040 to pay domestic employee taxes. Quarterly state unemployment tax reports may be required on domestic employees.
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