With the Bush-era tax cuts set to expire at the end of this year and
Congress debating how to balance the budget, 2011 may look like a calm tax year
before the storm. But many Americans will find that personal and political
factors, from moving back home to live with parents to new reporting
requirements, make the process more complicated than it first appears. Here are
10 things you should know before
filing 2011 taxes:
1. You’re probably in for a refund.
Let’s start with the good news: About 3 in 4 Americans receive tax
refunds each year, and the average refund is around $3,000. According to a
TD Ameritrade survey, most taxpayers plan to use
the windfall to pay off debt, save, or invest the money. Just 14 percent will
use the money to splurge on a luxury item. Knowing that refund is coming might
offer some motivation to file early. “If you file early, you get your
money early, but if you owe, you do not have to pay early,” explains Mark Steber, chief tax officer at tax services provider
Jackson Hewitt and chairman of the IRS’s Electronic Tax
Administration Advisory Committee.
2. Refunds arrive faster for those who file electronically.
While most people opt to file electronically, about 3 in 10 Americans still
stick with the old-school paper method, and that can cost them time. Electronic
filers receive their refunds faster, usually in less than 10 days, and they can
opt for direct deposit into their bank account for even faster access to their
money. And thanks to an alliance between tax software companies and the IRS,
anyone who earned less than $57,000 in 2011 can use name-brand tax software and
file their taxes for free. Visit www.irs.gov/freefile
to get started.
3. Major life changes can mean major tax changes.
Anyone who got married, had a baby, got divorced, or experienced any other
major lifestyle shake-up that affects the number of people in their household
will need to update their taxes accordingly, says Steber, because those types
of changes have a major impact on one’s tax status. In fact, choosing the wrong
tax status can have a major impact on one’s tax refund
(or liability), and it’s not always as easy as it sounds. For example, new
parents sometimes make the mistake of forgetting to add their latest
addition as a dependent, or married couples living separately might not realize
they can still file jointly.
4. If you’re supporting a family member, you might be eligible for a
“If you’re taking care of a dependent parent and providing more than
one-half of their support, then they may qualify as a dependent, like with a
new child,” says Steber. As baby boomers age, that situation will likely
become increasingly common, he adds. Specific costs, such as medical expenses
or home renovations to make room for a live-in parent, could qualify as
deductions, too. Parents welcoming home adult children could find themselves in
a similar situation; Steber suggests getting customized advice from a tax
professional to check on any potential tax benefits.
5. Independent income often means you can deduct business expenses.
Steber notes that many Americans, particularly those who experienced
layoffs, have launched their own small businesses. “Tax law is favorable
to that,” he says, and often miles driven, meals, and other expenses
related to the business can be deducted from one’s income. Of course, anyone
claiming those expenses needs to keep track of receipts.
6. A new tax year means different numbers.
When it comes to income limits for certain tax breaks, exemptions, and tax
brackets, the numbers are constantly changing, which means you can’t just copy
new income numbers into last year’s return. Barbara Weltman, a tax expert and
author of J.K. Lasser’s 1001 Deductions and Tax Breaks, points out
that the Alternative Minimum Tax exemption amount is higher this year ($48,450
or $74,450 if married filing jointly) and the home-energy credit amount has
also changed, for example.
Weltman adds that because eligibility for various types of tax-advantaged
accounts, such as the Roth IRA, depends on a income level that is indexed to
inflation, people may qualify to make a Roth IRA contribution this year when
they haven’t in the past, particularly if their income didn’t increase (or they
lost their job). “Look at all the breaks available to you and don’t assume
you can’t [make contributions] this year,” she suggests.
7. Reporting requirements have been ratcheted up a few notches.
Mark Luscombe, principal federal tax analyst for the tax firm CCH, notes
that a new form–Form 8949–as well as a change to Form 1099-B means that
investors (and their brokers) have additional reporting duties for 2011 for any
sales or exchanges of capital assets, and the IRS will check to make sure the
new information matches that on taxpayers’ returns. “If you’re not
careful, you’re likely to be audited if the forms don’t match,” he warns.
Any foreign assets, if the value of all foreign assets of a single taxpayer
living in the United States is over $50,000 on the last day of 2011 or $75,000
at any time during 2011 (or $100,000 and $150,000 respectively for married
couples filing jointly), also have to be reported on a new form (Form 8938).
Small business owners receiving payments through PayPal, Amazon, or similar
services should also know that those online payment processors will begin
reporting income to the IRS for the first time this year. The rule applies to
anyone who earns over $20,000 a year and exceeds 200 separate payments.
8. Taxes are due for 2010 Roth conversions.
In 2010, many taxpayers converted their traditional individual retirement
accounts into Roth IRAs, which allows money to grow tax-free. That’s because in
2010, high earners (anyone earning over $100,000) were allowed to make the
conversions for the first time. The IRS allowed taxpayers to pay the taxes owed
in the conversion in two separate chunks, in 2011 and 2012, to ease the strain.
“That means anyone who converted in 2010 and elected to defer the tax now
must pay that first chunk, explains Luscombe.
9. It’s time to pay up for that 2008 homebuyer’s credit, too.
Weltman points out that anyone who took advantage of the first-time
homebuyer’s credit in 2008 must pay back part of that credit, which was
essentially an interest-free loan, now. (Taxpayers who picked up the credit in
2009 or 2010 are not required to repay it.) The IRS offers an account
look-up tool to make it easier.
10. We should all prepare for a big shake-up.
In retrospect, filing 2011 taxes might seem like a piece of cake compared to
what’s in store for taxpayers. The upcoming Congressional debates over how to
balance the budget, the presidential election, and the expiration of the Bush tax cuts along with dozens of other provisions
that are set to expire this year, suggest many changes are on the horizon. Says
Steber: “2013 will be a crazy time for taxes.”
By Kimberly Palmer | U.S.News & World Report LP – Wed, Feb 22, 2012 1:47 PM EST