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Are you up to date in your understanding of mortgage interest deductions for your taxes? Here are some new tips for your tax checklist.
Grant Thornton, an international tax advisory and consulting firm, offered some tips and reminders for this year’s tax season – and, looking forward, some advice on things to think about as you plan for next year. I found the information on the mortgage interest deduction helpful. There’s also a few items for small business owners included. Take a look:
For your personal finances:
What’s new for 2011?
- You can deduct interest on a mortgage of up to $1.1 million – For many years, courts and the IRS interpreted the tax code to limit your deduction to the interest on up to $1 million in debt used to buy, build or improve your home, while allowing you to deduct interest on an additional $100,000 in home equity debt only if it was not used to acquire the home. So you could deduct interest on up to $1.1 million in mortgage debt only if $100,000 was not used to purchase or build the home. The IRS recently changed its position and has now ruled that debt used to buy, construct or improve a home can be treated as both acquisition and equity indebtedness. This means you can now deduct $1.1 million in mortgage interest even if all of it was used to purchase or build the home.
- Payroll tax deduction – The employee portion of the Social Security tax was reduced in 2011 from 6.2 percent to 4.2 percent. This lower rate applied all the way up to the Social Security wage limit of $106,800, and employers reduced withholding accordingly. If you’re self-employed, your self-employment taxes were also lowered from 15.3 percent to 13.3 percent on income subject to Social Security. But this reduction does not affect the deduction for self-employment taxes on your 2011 tax return.
What can I do right now to affect my 2011 return?
- Contribute to an IRA – You can still get an above-the-line deduction on your 2011 return by contributing to an individual retirement account (IRA) now. You can make contributions that are deductible on your 2011 return any time before the April 17, 2012, filing deadline — and even set up the account now if you don’t have one. Contribution limits for 2011 are $5,000 plus a $1,000 catch-up for those 50 and older. If you were an active participant in your employer’s retirement plan, contributions to an IRA offer deductions only at income levels below $110,000 for joint filers and $66,000 for singles.
- Reconsider a Roth IRA rollover – The $100,000 income limit on rollovers from an IRA or 401(k) to a Roth IRA disappeared in 2010. This type of rollover allows you to pay tax on the conversion in exchange for no taxes in the future (if withdrawals are made properly). Many people made conversions last year while asset values were depressed. If you were one of them, re-examine the rollover. If the value decreased, you have until your extended filing deadline to reverse the conversion. That way you may be able to perform a conversion later and pay less tax.
What should I start thinking about for 2012?
- Increase retirement contributions – The IRS has increased the amount of money you can set aside for certain retirement accounts in 2012. Contributing the maximum amount to traditional retirement accounts like 401(k)s and IRAs is still one of the simplest and best tax planning options. The 2012 contribution limit for a 401(k) has increased from $16,500 to $17,000. Those 50 and older can make an additional catch-up contribution of up to $5,500 to their 401(k). The limit on an IRA contribution remains $5,000 for 2012, but the income limits for the phase-out of contribution deductions for participants in employer-sponsored retirement plans has increased. Taxpayers 50 and older also can make catch-up contributions of up to $1,000 to their IRAs.
- Take advantage of unique gift tax opportunity – The year 2012 may present a unique estate and gift planning opportunity. Estate and gift tax rules were recently amended to provide a top rate of 35 percent and an exemption of $5 million. These are the lowest rates and largest exemptions in recent memory (besides the temporary repeal of estate tax in 2010), but they aren’t scheduled to last. Barring congressional action, in 2013 the top estate and gift tax rate will be 55 percent and an exemption of $1 million – so now is the time to act.
- Prepare for possible income tax increases in 2013 – The 2001 and 2003 tax cuts are scheduled to expire at the end of 2012 – threatening to raise tax rates on many types of income. This may be the year to reverse your normal tax strategy and accelerate taxes into 2012 to avoid the rate increases. There are many strategies for deferring deductions and recognizing income, but the key is to be flexible. It may not make sense to accelerate tax. We don’t know whether the tax cuts will be extended again, who they will be extended for or when the extension might occur. You want to prepare your strategies for harvesting gain and recognizing income, but wait to pull the trigger until the outlook is clearer. Remember that deferring tax for several years may still yield a better result, even if rates go up.
- The IRS has new information on your business – A new law took effect last year that gives the IRS more information on what business owners earned in 2011. For the first time, banks and credit card companies must tell the IRS how much your business received in total payment card receipts during the 2011 calendar year. So when you file your 2011 return, keep in mind that the IRS knows exactly how much your business earned through debit and credit card transactions, plus any payments received from online payment processors like PayPal.
- Expense business investments – The rules for deducting investments in your business have changed for 2012. Last year, 100 percent bonus depreciation allowed businesses to fully deduct the cost of eligible equipment placed in service in 2011. This year bonus depreciation reverts to 50 percent – meaning you can deduct half the cost of eligible equipment placed in service in 2012, while the other half will be depreciated using normal rules. But Congress has talked about extending 100 percent bonus depreciation for 2012, so check with a tax adviser for the latest information. To qualify for bonus depreciation, the property you place in service must be new and generally have a useful life of 20 years or less under the modified accelerated cost recovery system (MACRS).
- Understand new reporting requirements in 2012 – Business owners with employees face new reporting requirements this year. For the first time, employers will be required to provide the IRS and employees with the total cost of 2012 group health coverage. This information must be reported on the Form W-2, which is used to report employee wages and withholding. The Form W-2 for 2012 is not due until Jan. 31 2013, but you should start collecting the information on the cost of health coverage now to meet the reporting deadline next year.
For business owners:
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