Several important tax changes took effect in 2011 that will impact federal income tax returns filed this April. While some of the changes are straightforward, such as the standard mileage rates, others, including the tax handling of foreign financial assets, may be more complicated. Following is a list of the tax law changes for 2011 Federal tax returns.
Alternative Minimum Tax
The alternative minimum tax (AMT) exemption amount increases for tax year 2011 to the following levels:
- $48,450 for singles and heads of household (up from $47,450 in 2010)
- $37,225 for married filing separately (up from $36,225)
- $74,450 for married filing jointly, and qualifying widows or widowers (up from $72,450)
Alternative Motor Vehicle Credit
The alternative motor vehicle credit cannot be claimed for a vehicle bought after 2010, unless it is a new fuel cell motor vehicle.
Capital Gains and Dividends
Lower rates for long-term capital gains and dividends remain in effect for 2011 and 2012. The rate on long-term capital gains and dividends remains at zero for those taxpayers in the 15% income tax bracket and below; the rate is 15% for taxpayers in the 25% bracket and above. Most taxpayers will use new Form 8949 to report capital gain and loss transactions. Schedule D, the form that has been traditionally filed to show these transactions, is now used as a summary sheet.
Child Tax Credit
The 2010 Tax Relief Act extended the credit of $1,000 per eligible child through 2012.
Designated Roth Accounts
Taxpayers who rolled over an amount from a 401(k) or 403(b) plan to a designated Roth account during 2010 and did not elect to report the taxable amount on a 2010 return must report half on the 2011 return and the rest on the 2012 return.
Due Date of Tax Return
Because April 15 is a Sunday and April 16 is the Emancipation Day holiday in the District of Columbia, tax returns are due on Apr. 17, 2012.
For individuals who died after 2010, the federal estate tax provides a $5 million exemption and a maximum 35% rate. These estate tax rules are scheduled to end following 2012.
First-Time Homebuyer Credit
In order to claim the first-time homebuyer credit for 2011, a taxpayer (or their spouse, if married) must have been "a member of the uniformed services or Foreign Service, or an employee of the intelligence community on qualified official extended duty outside the United States for at least 90 days during the period beginning after Dec. 31, 2008, and ending before May 1, 2010." For more, check out Top Tips For First-Time Home Buyers.
Foreign Financial Assets
For tax years beginning after Mar. 18, 2010, certain taxpayers may have to file the new Form 8938 with their returns. Form 8938 is used to report the ownership of specified foreign financial assets (including any financial account maintained by a foreign financial institution) if the total value exceeds a specified threshold. The threshold amount varies depending on if the individual resides in the U.S. and if the tax return is filed jointly with a spouse. It is a separate form and does not replace existing requirements for reporting foreign assets to the Treasury Department using Form TD F 90-22.1.
Health Savings Accounts and Archer MSAs
Beginning in 2011, the additional tax on health-savings account and Archer medical savings account distributions not used for qualified medical expenses has increased to 20% (up from 10% for HSAs and 15% for Archer MSAs). Also, starting in 2011, only prescribed drugs and insulin are considered qualified medical expenses.
Income Tax Rates
The 2011 rates carry over from 2010, but the income brackets are higher to account for inflation. The 2011 tax rate schedule can be found on page 273 of IRS Publication 17 "Your Federal Income Tax: Tax Guide 2011 For Individuals."
Mailing Your Return
The mailing address for paper returns may have changed because the IRS has changed the filing location for several regions. Taxpayers are advised by the IRS to read the "Where Do You File?" page at the end of the 1040 instruction booklet.
Making Work Pay Tax Credit
The making work pay tax credit has expired and cannot be claimed on the 2011 return.
Energy Tax Credits for Homeowners
The "25(C)" credit for energy-efficient improvements has been extended, but the amount of the credit has been reduced to a maximum of $500 per taxpayer per lifetime. Taxpayers who took the maximum $1,500 credit in 2010 are not eligible.
The amount one can deduct for each exemption has increased to $3,700 (up from $3,650 in 2010).
Repayment of First-Time Homebuyer Credit
Taxpayers who must repay the credit may be able to do so without using Form 5405.
Unlike 2010 conversions, all income resulting from a 2011 conversion must be included in that year's return. For 2010 conversions, half of the resulting income must be reported in the 2011 return, and the rest in the 2012 return.
Self-Employed Health Insurance Deduction
For 2011, qualified self-employed taxpayers and S corporation shareholders can use the self-employed health insurance deduction to reduce income tax liability. The taxpayer must not be eligible to participate in an employer-sponsored health plan, and the insurance plan must be set up under the taxpayer's business. Premiums paid for health insurance for the taxpayer, spouse and dependents typically qualify for the deduction. The deduction is taken on Form 1040 Line 29. The deduction from self-employment income for determining self-employment tax, available for tax year 2010, no longer applies.
Standard Deduction Increased
The standard deduction for certain taxpayers who do not itemize their deductions on Schedule A of Form 1040 has been increased. The amount of the deduction depends on the taxpayer's filing status. The standard deduction for most people is $5,800 for single or married filing separately, $11,600 for married filing jointly or for qualifying widow or widower with a dependent child and $8,500 for heads of household.
Standard Mileage Rates
The standard mileage rate for the business use of a car, van, pick-up or panel truck has increased to 51 cents a mile for the first half of 2011, and 55.5 cents per mile for the second half.
The Bottom Line
The Internal Revenue Service's website provides detailed information on these important tax law changes. If you have questions about these changes or about your 2011 tax return, please consult a qualified tax professional.
Please note: While every attempt has been made to provide timely and accurate information, this article should not be considered a definitive tax guide, nor should it replace the advice of a qualified tax professional.