February, 2012
Payroll Tax Break Extended through 2012
With just days to spare before paychecks were set to decrease, Congress voted to extend the payroll tax break through 2012. The employee portion of Social Security taxes, which was cut from 6.2% to 4.2% under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 remains at 4.2% through 2012.
Valentine’s Day: Love and Taxes
While you might not have a love affair with the Internal Revenue Service, here are a few tips for married couples to remember as we begin this tax season:
Your filing status is determined based on your status at December 31st. If you were married on the 31st, you are considered married for the entire year. Likewise, if your divorce is finalized on December 31st, you are considered single or head of household for the entire year.
Married couples obtain a $500,000 capital gain exclusion from the sale of their principal residence, assuming they have lived there for two of the last five years. Singletons receive $250,000.
Married couples may be subject to a marriage penalty or bonus on their 2011 tax returns. A married penalty occurs when the combined income of the two spouses puts the couple in a higher tax bracket than if they had been single. The marriage bonus does the opposite.
In 2011, married couples were able to gift up to $26,000 to another individual tax-free. Singletons could gift $13,000.
Changes to Your 1040
Although income tax rates for 2011 remain consistent with 2010, there are new tax forms to be aware of this filing season.
Form 8938 ‘Statement of Specified Foreign Financial Assets’ is a new form whose purpose is to enable individuals to report their foreign financial assets if the total value exceeds a preset threshold. Foreign financial interests can include, but are not limited to financial accounts maintained by a foreign institution, a capital or profits interest in a foreign partnership, or an interest in a foreign trust. The form, if required, must be attached to the taxpayer’s tax return. This form is separate, and in addition to Form 90-22.1 Report of Foreign Bank and Financial Accounts.
Form 8949 ‘Sales and Other Dispositions of Capital Assets’ is a new form and will be filed in addition to Schedule D ‘Capital Gains and Losses’. Many transactions that historically would have been reported on Schedule D will now be reported on Form 8949 and summarized on Schedule D.
Value of Health Insurance Coverage Reported on some 2011 Form W-2s
For the calendar year 2012, companies that file more than 250 W-2s are required to report the value of health insurance that an employee received. We have seen many companies comply with this law early and report the information on the employees’ 2011 Form W-2s. Rest assured that the health insurance figure is for informational purposes only and is not considered taxable income.
Taxability of Frequent Flyer Miles
Citibank surprised many customers this tax season by issuing Form 1099s which reported taxable income for frequent flyer miles they had received for opening bank accounts. Since a 2002 ruling by the Internal Revenue Service, the frequent flier miles earned by travelling or using one’s credit card were not considered taxable income. The Internal Revenue Service has not provided guidance on whether Citibank was right or wrong to issue the 1099s. One thing that is clear is that Citibank’s decision to issue 1099s may cost some taxpayers’ money in excess of any interest income that was earned in those bank accounts.
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As always, if you have any questions about these or any other matters, do not hesitate to call me.
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