Last Minute Tax Tips (Fidelity)

Tax tips and opportunities for 2011 returns
Fidelity Viewpoints — 03/14/12
What to watch for and take advantage of before April 17.

Tax season is once again upon us, and knowing what you can and can’t deduct is probably top of mind for most Americans. On a positive note, Congress avoided a year-end flurry of tax-law changes in 2011, which may make filing returns this year somewhat less complicated. Still, taxpayers can expect a few challenges—as well as some opportunities—as the April 17 filing deadline approaches.

New forms and procedures are causing some confusion over the reporting of capital gains and self-employment deductions, while tax deferrals taken in previous years by some homebuyers and Roth IRA (individual retirement account) owners are now coming due.

However, many of the limits on tax-saving provisions have increased, and taxpayers might be able to capitalize on a number of deductions that are often overlooked. Plus, many investors may be able to contribute to an IRA and reduce their 2011 taxable income right up to the filing deadline, which has been extended by two days because of a holiday observed by the District of Columbia.

To help you sort through the clutter as you delve into your 2011 tax return, here’s a list of items that are likely to affect a wide array of taxpayers this season.

Last-minute moves to consider
Contributing to a qualified retirement plan remains one of the most effective ways to lower current-year income tax for many taxpayers. It’s too late to contribute 2011 dollars to a 401(k) plan or similar workplace savings plan, but other options are available until April 17, including:

Individual retirement accounts (IRAs).
For Roth IRAs, taxpayers who qualify can contribute up to $5,000 for 2011 if their modified adjusted gross income is below $107,000 (single) or $169,000 (married filing jointly). If you’re age 50 or older, you can contribute up to $6,000 for the year.

Keep in mind that contributions to a Roth IRA are not tax deductible. A Roth IRA’s primary advantage is that all qualifying retirement withdrawals are tax free.

Simplified employee pension plan (SEP-IRA).
A SEP-IRA is for self-employed people and small business owners. Contributions are made by the employer only and are generally tax deductible as a business expense. If you’re self-employed, you can contribute up to 20% of your 2011 income ($49,000 maximum) to a SEP-IRA.

Health savings account (HSA).
The 2011 limits for tax-deductible contributions to an HSA are $3,050 for individuals and $6,150 for families ($1,000 higher in each category for people age 55 and older). HSAs require participants to have high-deductible health insurance, and contributions must be used for qualified medical expenses.

Changes to make note of
A couple of reporting procedures and several increases in deductibility and eligibility limits are getting most of the attention this year. They include:

Cost-basis reporting.
If you invest in stocks or mutual funds, you’ve probably heard about the new IRS rules for reporting the cost basis on shares you sell. Cost basis is what you paid for your shares, including any required adjustments. It’s used to calculate your profit (or loss) when you sell. There are several methods for determining cost basis, and you can decide which one makes sense for you.

For tax purposes, it’s your responsibility to report to the IRS your capital gains or losses when you sell securities or mutual fund shares. The IRS has updated Schedule D and incorporated a new form (Form 8949) which requires you to list specific transactions in detail. To make it easier for the IRS to check the accuracy of your reporting, the agency is phasing in a requirement that financial services companies have to report cost-basis information directly to the IRS.

For 2011, the only cost-basis information reported to the IRS will be for the sale of stocks acquired in 2011. Cost basis for your mutual fund shares won't be reported to the IRS in 2011, but you’ll still have to report the cost basis for those shares on your tax return, and specify that those shares are "noncovered."


Self employment tax.
For 2011 only, self-employed taxpayers get a break on their Social Security tax. Instead of paying a rate of 12.4%, the Social Security component of their self-employment tax is 10.4% on the first $106,800 of income. The Medicare tax component stays at 2.9%. If you qualify for this tax break, you’ll have to follow a slightly different procedure for arriving at your self-employment tax deduction on the first page of your tax return.

Deduction and exemption increases.
The perennially troublesome alternative minimum tax(AMT) has gotten its perennial patch. The 2011 exemption increases to $48,450 for single filers, $74,450 for joint filers, and $37,225 for married taxpayers filing separately.

If you choose not to itemize your deductions, you can claim the standard deduction. The 2011 amounts for most taxpayers increased to $5,800 (up $100 from 2010) for single tax filers, to $11,600 for married filing jointly (up $200 from 2010), and to $8,500 for head of household (up $100 from 2010).

The 2011 mileage rate for business use of your car is 51 cents a mile before July 1, 2011, and 55½ cents after June 30. That compares to 50 cents in 2010. The rates for miles driven for moving and medical purposes also increased.

Important reminders
Sensitive to the weak economy, Congress gave taxpayers two opportunities in recent years to defer a potentially significant portion of their tax bill. The downside of those opportunities has now arrived.

2010 Roth IRA conversions.
Taxpayers who converted assets in a traditional IRA to a Roth IRA in 2010 had the option of a one-year deferral of the tax due on the conversion. If you took advantage of the opportunity, you must now, with your 2011 taxes, pay half of the tax owed on the conversion, and the remaining half in 2012.

First-time homebuyer credit.
Congress helped first-time homebuyers with a tax credit of up to $7,500 in 2008. The catch was that the credit was essentially a 15-year interest-free loan. The first of the 15 repayments was due with 2010 tax bills, and the second is due this year. If you’re having trouble raising the cash for the payment, consider increasing your paycheck withholding this year to avoid a similar crunch next year.

Don’t miss these often overlooked deductions
Sales tax option.
For several years, taxpayers who itemize deductions have been able to choose between deducting their state income tax payments or their state and local sales tax payments. In states without an income tax, the choice is easy. In most other states, the math has usually worked out in favor of deducting the income tax.

But many taxpayers overlook the impact of large purchases, such as a car, boat, or RV. To save you the hassle of collecting your receipts for thousands of small purchases, the IRS allows you to deduct a sales tax estimate based on your income and where you live. The tax on a vehicle purchase (and, in some cases, a major home improvement) is counted in addition to the estimated amount, which can tip the calculation in favor of the sales tax deduction.

Energy-efficiency credits.
These have been around for a few years, but they can still be effective at saving tax dollars. In general, making energy-saving improvements to your home by installing energy-efficient windows, doors, roof, heating system, and other items may allow you to claim a tax credit equal to 10% of the cost, up to $500 (lifetime), depending on the type of improvement made. The credit is even higher if you install an alternative energy system. Learn more about available credits on the government’s Energy Star website.

Unreimbursed work expenses.
Many people fail to deduct work-related expenses, perhaps because they can only deduct the amount that exceeds 2% of adjusted gross income. But the eligible items can add up. A few of the potential deductions are depreciation on a computer or mobile phone required for your job, professional society dues, employment-related education, and uniforms. For a complete list, see IRS Publication 529, Miscellaneous Deductions. Plus, there’s a special deduction of up to $250 for teachers who use their own money to buy school supplies.