Newsletter 2011
Newsletter 2011
Individuals
Individuals
Print Full ArticleLast Reviewed: Jan 2012
Last Modified: Jan 2012
Hot Issues for Individuals
Tax Rates. Tax rates are locked in at 2009 levels until the end of 2012. The speculation on Capitol Hill is that the rates will be extended another year and a tax overhaul will occur in 2013 after the election year has passed. With continuing high levels of borrowing to fund day-to-day operations by the US Government and the drama of possible government defaults occurring in Europe it seems inevitable that federal tax increases will eventually happen. Who gets stuck with bigger bills remains to be seen, but high income earners seem to be a favorite target. For the present, we have historically low tax rates to work with. You can't get any lower than zero as the current rate for capital gains for taxpayers in the lower income brackets on regular income. Even the maximum 15% rate for long term capital gains is a good rate for this type of investment income. Enjoy it while it lasts!
Tax Relief for Certain Itemizers. Beginning in 2011 and continuing through 2012 high income itemizers will not be required to reduce their Schedule A itemized deductions total. The same is true for their personal exemptions. These reductions used to cut heavily into these deductions so their removal represents a nice tax break for higher income families.
Energy Improvement Credits. The trend seems to reflect a pull-back of sorts on these credits. For 2012 we are losing Oregon credits for energy efficient appliances and alternate fuel/electric vehicles. The Federal credit for insulation and replacement doors and windows had already dropped to 10% of cost up to $500 for 2011 and is gone for 2012. Generous credits are still available on federal and Oregon returns for solar system installations and Oregon is still offering a credit for energy efficient heating and air conditioning systems.
Retirement Planning. We should all make saving for retirement a priority every year that we have income. That can be hard to do when the budget gets tight, but the tax code definitely helps with good deductions available for your retirement contributions. Maxing out your 401k contributions at work and striving to meet your employer's highest matching contribution is a good place to start. With a 401K plan you never see the retirement savings in your pay check so it all happens automatically and you are not tempted to spend the savings. If you cannot participate in an employer plan (and maybe even if you do) making a traditional IRA contribution is the next best thing. The IRA contribution is fully deductible if your income is not too high. The limits for 2011 are 5000 if you are under age 50 and 6000 if you are above this age. Your 2011 contribution can be made up until April 17, 2012.
Roth Conversions. We get a lot of questions about Roth conversions or making a Roth contribution instead of a regular IRA contribution. The Roth account has its pluses, but we find there are only a limited number of people that will really benefit from a Roth investment over the traditional IRA. Converting an existing IRA to a Roth will also be the right choice for only a very few clients. Please contact one of us before you automatically choose a Roth for your retirement account contribution or make a conversion to see if it really makes sense to do so.
IRA to Charity Distributions. The ability to send your IRA Required Minimum Distribution to a charity and avoid the extra income was available again in 2011 under special legislation and at least one of our sources predicts it will be available again in 2012. If you don't need the income from your IRA and have to take a distribution under the RMD rules this might be a good option for you to consider. If it becomes available in 2012 you can do this for up to $100,000 of IRA distributions.
Debt Forgiveness Income and Foreclosures. We have helped many clients with homes that are underwater deal with the special tax reporting that goes with the loss of a home in these circumstances. We are looking for improvements in the Portland area housing market to eventually come our way. It appears that Portland has suffered far less than many other parts of the country and, we feel, Portland's market will recover quicker because it is a growing population center. With a high inventory of bank-owned homes that still needs to be cleared out, the recovery is probably still years away so we expect clients will continue to suffer through the trauma of losing a home. One piece of good news is the strength of the rental market. If a home is not too far underwater and monthly expenses can be covered or mostly covered by a rent payment it might make sense to reconfigure your living arrangement, rent the home and try to wait out the market. If you go through a short sale or foreclosure or simply abandon your home please bring this to our attention as this requires detailed tax reporting, but usually no extra income to report.
Foreign Asset Reporting. IRS continues its scrutiny of off shore accounts and assets owned abroad. For 2011 we have enhanced reporting rules for clients with substantial assets falling into this category. Please bring these assets to our attention. It's OK to own foreign assets. IRS just wants you to report the income from foreign assets on your US return. Reporting the income may or may not be painful depending on how much income there is, but not disclosing the existence of the asset carries steep penalties so compliance with these rules is important. The details are quite complicated, but in theory you should not have to worry about being taxed twice on foreign income (once by the foreign government and again by the US).
