January 16, 2012
On December 23, 2011, President Obama signed the Temporary Payroll Tax Cut Continuation Act of 2011. This legislation extended the temporary reduction in the employee’s portion of the Social Security contribution until the end of February 2012. Employees earning $18,350 or less over these two months will receive an additional 2% of their gross wages in their net pay. Employees earning more than $18,350 in January and February (combined two-month total) will be subject to a “recapture tax” when they file their 2012 tax return. The purpose of the recapture tax is to limit the benefit of the 2% reduction to a pro-rata portion of the full year $110,100 Social Security wage base ceiling. The recapture provision will be repealed if the payroll tax cut extension is extended to the end of 2012. Assuming the 2% reduction gets a full-year extension, the self-employment tax rate for 2012 will be the same as for 2011.
We are required to file all individual, trust and estate income tax returns electronically, with the exception of returns containing certain form(s) not supported for electronic filing, unless you choose to file a paper return. We will assume that you intend to file electronically unless you inform us otherwise.
CHANGES EFFECTIVE IN 2011
¨ The 2011 Form 1040 is due on or before April 17, 2012 because April 15 is a Sunday and April 16 is the Emancipation Day holiday in the District of Columbia.
¨ In most cases, you must report your capital gains and losses on new Form 8949 and report the totals on Schedule D. For securities purchased and sold in 2011, your broker is required to report your cost basis on Form 1099-B. This will be the source of the information needed to complete Form 8949. In future years, your broker will be responsible for reporting your cost basis for any security purchased after 2010 and sold in the tax year.
¨ Self-employed health insurance premiums will no longer be an adjustment in calculating your self-employment taxes. The premiums will remain deductible on Form 1040, line 29 for purposes of calculating your income tax.
¨ The alternative minimum tax exemption has increased from $47,450 to $48,450 for singles and heads of household, from $72,450 to $74,450 for married filing jointly and qualifying widow(er), and from $36,225 to $37,225 for married filing separately.
¨ Standard mileage rates for use of your vehicle are as follows:
January 1, 2011 to June 30, 2011 July 1, 2011 to December 31, 2011
Business $0.51 $0.555
Medical & moving $0.19 $0.235
Charity $0.14 $0.14
¨ If you had foreign financial assets in 2011, you may have to file Form 8938. Generally, if you are a United States resident, and if you have foreign financial assets exceeding $50,000 ($100,000 for a married couple filing jointly) at December 31, 2011, or your foreign financial assets exceeded $75,000 ($150,000 for a married couple filing jointly), you must complete Form 8938. The requirements for filing Form TD F 90-22.1 remain the same, i.e., complete and file the form by June 30 if you own more than 50% of the stock of a corporation that owns one or more foreign bank accounts, or if at any time during 2011 you had a financial interest or signature authority over a financial account in a foreign country. An exception to filing the Form exists if the combined value of the accounts was $10,000 or less during the whole year.
CHANGES EFFECTIVE IN 2012
¨ Maximum earnings subject to Social Security tax increases from $106,800 to $110,100.
¨ For the first two months of 2012, the Social Security tax rate remains 4.2% for employees and 10.4% for self-employed individuals. The employer continues to pay 6.2% for its share of the Social Security taxes. Congress and President Obama are expected to extend the Social Security tax holiday through the end of 2012.
¨ Maximum earnings to receive full Social Security benefits remains at $14,640 for individuals under “Full Retirement Age.” Individuals can earn up to $3,240 per month in the months of the year that they attain FRA without a reduction.
¨ Some of the tax provisions that expired at the end of 2011 included up to $250 school teacher expenses deduction, $4,000 higher education deduction, the mortgage insurance premium deduction, the home energy tax credit, special depreciation benefits, state sales tax deduction in lieu of income tax deduction, AMT patch and charitable contribution of IRA assets.
¨ The estate tax remains with a $5.12 million exclusion and a maximum tax rate of 35%, and the Unified Credit Equivalent for gift tax increases to $5.12 million. Above this amount, Federal gift taxes apply. The top gift tax rate remains at 35%.
¨ The annual gift tax exclusion remains at $13,000. Payments of medical expenses or tuition made directly to the medical provider or to the school are not considered gifts for gift tax purposes. Also note that only the giver of the gift has reporting and tax responsibilities.
¨ The business mileage allowance remains 55.5 cents per mile, effective January 1, 2012. The charitable mileage allowance remains at 14 cents. The medical and moving mileage allowances decreases from 23.5 cents to 23 cents.
¨ The limit on annual contributions to defined contribution plans increases to the lesser of $50,000 or 100% of compensation. The compensation limit increases to $250,000. The employer deduction is limited to 25% of aggregate compensation for all participants (20% of net self-employment income after self-employment tax deduction for self-employed).
¨ Contribution limits for IRAs and other retirement plans are as follows: 2011 2012
Traditional & Roth IRA (under 50) $ 5,000 $ 5,000
Traditional & Roth IRA (50 or older) $ 6,000 $ 6,000
401(k), 403(b) & SARSEP (under 50) $16,500 $17,000
401(k), 403(b) & SARSEP (50 & over) $22,000 $22,500
SIMPLE (under 50) $11,500 $11,500
SIMPLE (50 & over) $14,000 $14,000
As of the date of this letter, our staffing consists of Diane Juergensen, CPA of Yardley, John Garrett of Langhorne and Maureen Austin of Langhorne.
If we prepared your tax return last year and you think it would be helpful, we can provide you with an organizer printout that lists your tax data from 2010 together with blank spaces to fill in your 2011 information. Just give us a call and ask for your organizer. When you have gathered your papers and information, call us at (215) 579-1260 for an appointment. Person-to-person interviews result in a better understanding of the information used in preparing your return, and they also result in better opportunities to identify tax savings for you. We look forward to seeing you again.
Robert H. McLaren Theresa B. McLaren