The Tax Benefit

Eligible taxpayers may deduct up to $4,000 of qualified education expenses for eligible students. This benefit must be evaluated along with other educational tax benefits such as the American Opportunity Credit and the Lifetime Learning Credit.

What is the benefit?

• Up to $4,000 if: Married Filing Joint (MFJ) and your modified Adjusted Gross Income (AGI) is less than $130,000 ($65,000 if Single)
• Up to $2,000 if: MFJ and your modified AGI is between $130,000 – $160,000 ($65,000-$80,000 if Single)

Who/What is not eligible?

• Clients that can be claimed as a dependent on someone else’s return
• Filing status of married filing separately
• Personal expenses including room and board
• Double benefits are not allowed. In other words, if you use the same expense to qualify for another education tax benefit, it will not qualify.

Navigating the maze of education tax benefits can be complicated and often requires running through different scenarios. Feel free to call if you wish a review of your situation.

• Forgetting a W-2 or 1099. The IRS does an effective job in comparing W-2s and 1099s they receive from organizations to the amounts you claim on your tax return. If they do not match, rest assured you will receive a notice in the mail asking for clarification.
• Duplicate Dependent Reporting. If more than one tax return claims the same person as a dependent, the second return will be rejected. The IRS does not try to determine which tax return is correct. They leave that up to you.
• Forgetting a Name Change. If you fail to change your name with Social Security after marriage and you file a tax return with your “new” last name, be prepared for either a rejected tax return or an adjusted tax return.
• Other Missing Information. When preparing your tax return, often the return is held up because key information is missing. These missing items range from property tax and mortgage interest statements, to 1099s and W-2s.
• Signing the e-file Authorization Form. Your tax return cannot be e-filed without proper authorization. After reviewing your return, a properly signed Form 8879 must be received.

• The Child Tax Credit remains at $1,000.
• The Alternative Minimum Tax (AMT) higher exclusion patch is all set for 2011. This patch saves an estimated 21 million taxpayers a higher tax bill.
• Qualified teachers may continue to deduct up to $250 of out-of-pocket classroom expenses.
• You may continue to take the sales tax deduction as an itemized deduction instead of deducting state income taxes.

The current plan is to replace this system with the Modernized e-File (MeF) System. Full shutdown of the “legacy” e-file system is currently scheduled for October of 2012.

What is MeF?

MeF is a web based system that will provide faster tax filing acknowledgements, improved error explanations, year round electronic filing and “real time” filing with better ability to include attachments like .pdf’s to your tax return.

What’s happening this year?

The MeF system was available in 2011 to file 2010 Form 1040s and 21 other related forms and schedules. Approximately 8 million tax returns were processed last year within the MeF system. For 2011 tax returns, 128 new forms are being added to the system and all states must begin to make their processing compliant to the new system.

What do you need to Know?

The new MeF system has not been tested with the anticipated tax return volume expected this year. While no problems are anticipated, there may be an impact on e-filed tax returns. Hopefully, it will mean more accurate e-filling and better/quicker processing of refunds.

Personal Exemptions

The personal exemption for each qualifying dependent in 2011 is:

Note: The exemption phase-out calculation for clients above certain income thresholds does not apply in 2011.

Standard Deductions

Standard Deductions in 2011 for those who do not itemize are presented here. Unlike 2010, most Standard Deductions increase slightly versus last year.

If 65 or over and/or blind add:

Note: The deduction phase-out calculation for clients above certain income thresholds does not apply in 2011.

Standard Mileage Rates

The standard mileage rates for 2011 are:

1099-B Broker reporting

Investment companies are now required to report the cost of investments you sold during the year to the IRS. This “basis” will be used by the government to audit your reported gain or loss on the sale of these investments.

New 1099-Ks

If you used PayPal or similar credit card processing service for Ebay or other similar transactions you may receive a 1099-K that recaps these transactions. This form is also being sent to the IRS to try to report previously underreported small business activity.

If you receive either of these forms it is important to make sure the amounts reported on them are correct. Any errors should either be corrected on your tax return or be brought to the attention of the supplier for re-issuance.

Here are some of the key measures:

• No More “Too Big to Fail” Bailouts. The federal government will now have the power to seize and liquidate failing financial firms while limiting taxpayer financial exposure. Large financial institutions also face stricter capital, leverage and liquidity requirements.
• New Consumer Protection Bureau. The bill establishes a new Consumer Protection Bureau with the task of monitoring mortgages, credit cards and other loan products.
• New Financial Stability Oversight Council. The Council is designed to serve as an “advanced warning system” to expose risks that might threaten the economy.
• Oversight of Derivatives. Derivative trades must snow pass through clearing houses or swap repositories to increase market transparency and allow better oversight.
• The “Volker” Rules. These rules are designed to limit big, insured banks’ activities in speculative derivatives and stock investments. The rules also require big banks to sell off much of their interest in hedge funds and private equity.
• Reduced Fees on Debit/Credit Cards. The law will curb the fees retailers are required to pay banks and credit unions on debit and credit card transactions.
• Oversight of Credit Rating Agencies. New rules require more objective review and accountability for ratings from the firms that rate financial products.

Many of these rules will take years to implement, and there is divided opinion over the effectiveness of the bill. It will be years before we will understand the full effect of this historic bill’s passage.

Tip 1: Keep Sales Tax Receipts for Major Purchases. In 2009 you could opt to deduct either state income taxes OR the state and local general sales taxes paid as an itemized deduction on your Federal Tax Return. This option goes away without an extension. So if you purchase a large item like an automobile make sure to keep the receipt…just in case.

Tip 2: Teachers, Document Your Expenses. The $250 out-of-pocket expense deduction on your taxes is not currently available in 2010 without a law change, but don’t assume it will not occur. Continue to save your receipts.

Tip 3: Save Energy Efficient Purchase Documents. Many of the credits available for purchasing new energy efficient improvements for your home have also expired. But again, save the receipts as many of these provisions may also be extended through 2010.

Tip 4: Don’t plan on Property Tax Standard Deduction. Many taxpayers who did not itemize last year were able to receive an increased Standard Deduction up to $1,000 for Property Tax payments. This provision has not yet been extended into 2010.

Tip 5: Hold off on That Direct IRA Contribution to Charity. The tax-free distribution directly from individual retirement accounts (IRAs) to qualified charities for seniors has not yet been extended through 2010.

Most experts agree that these provisions will be extended into 2010, but until they are all we can do is be prepared.

There is a minimum required distribution from retirement accounts for those aged 70 1/2 years old or over. In 2009, this distribution requirement was waived for one year due to the sharp decline in reinvestment values during the recession. In 2010, the minium distribution is required once again. If not sure how much you must take out of your accounts, please call.

Tip 2: Time to Review Capital Gains

At the end of 2010 the long-term capital gains tax rates are going up. The current rate of 15% (0% if you are in the 15% or lower income tax bracket) will be reset to earlier levels. The amount will, in all likelihood, be 20%.

Tip 3: Plan for less in Dividends

Through 2010 tax rates on ordinary dividends are taxed at long-term capital gains rate (15% maximum). Starting next year these same dividends will be taxed as ordinary income (up to 39%).

Tip 4: Unemployment Benefits Taxed Once Again

In 2009, the first $2,400 of unemployment benefits an individual received was federal tax-free. This provision does not apply to 2010 so plan ahead.