2016 Tax Changes (Wall Street Journal)

By 

LAURA SAUNDERS

January 8, 2016

A new year usually brings tax changes, and 2016 is no exception.

The good news is that last month, in the nick of time, Congress enacted permanent extensions of several popular provisions, including the American Opportunity tax credit, a higher-education benefit; the IRA charitable transfer provision for people 70 1/2 and older; certain mass-transit benefits; a child tax credit; and the ability to deduct state sales taxes instead of income tax on the federal return.

No longer will people using these benefits have to bite their nails waiting for lawmakers to re-enact them—especially if a provision has already expired, as happened several times over the past decade.

Here are other changes to be aware of:

Affordable Care Act penalty tax. For people who don’t have ACA-approved health insurance, the payment is rising steeply once again. Such taxpayers often owe a “shared responsibility payment” that is either a flat assessment or a percentage of income, whichever is higher. Roberton Williams, a tax specialist with the Tax Policy Center in Washington, says the percentage method will apply to virtually all higher-income households and even many single filers earning above $40,000.

In 2016, the flat assessment more than doubles. It is now $695 per individual, up from $325 last year, with a maximum of $2,085 per household. The percentage-of-income payment rises to 2.5% of income from 2% last year, with a projected maximum of about $13,400 per household.

Members of some groups aren’t subject to the payment, including certain religious groups and people covered by Medicare or Medicaid. The Tax Policy Center has posted anACA penalty calculator on its website.

Tax rates haven’t changed for 2016, but brackets have reset upward because of inflation indexing. 

Tax brackets. Because the U.S. tax code is progressive, higher income is taxed at higher rates—after deductions, exclusions and other adjustments. Tax rates haven’t changed for 2016, but brackets have reset upward due to inflation indexing. The top statutory rate of 39.6% now kicks in above $466,950 of taxable income for married couples filing jointly and $415,050 for singles.

“It’s good to know your top bracket, because it lets you estimate the value of a deduction,” says Greg Rosica, a partner with the accounting firm EY. In other words, $100 of a write-off could save as much as $28 of tax for someone in the 28% bracket.

A glance at the tax tables also serves as a reminder of the code’s unequal treatment of married couples versus single people who are above the 15% bracket. This anomaly raises tax bills substantially for some couples, especially if both partners have similar incomes, and lowers them for others. To find out if you are affected, see the Tax Policy Center’s marriage tax calculator.

Investments. The favorable rates on long-term capital gains (for investments held longer than a year) and certain dividends also haven’t changed for 2016, but inflation adjustments have lifted the brackets.

This year the 0% rate, which applies to both types of income, ends at $37,650 of taxable income for single filers and $75,300 for couples. Meanwhile, the top rate of 20% kicks in at $415,051 for single filers and $466,951 for couples.

In addition, some investors owe a 3.8% surtax on their net investment income. The threshold is $250,000 of adjusted gross income for married couples and $200,000 for singles.

This levy can cast a wider net than it appears to at first glance. That is because a taxpayer’s adjusted gross income is often much larger than taxable income, as it excludes Schedule A write-offs such as for mortgage interest, state taxes and charitable gifts. In addition, the thresholds aren’t indexed for inflation, so more investors could owe this surtax in 2016.

Mileage deductions. Lower gas prices are a boon, but they translate to lower mileage deductions on tax returns. For 2016, the business rate is 54 cents per mile driven versus 57.5 cents per mile last year.

The write-off per mile driven in the service of a charitable group is 14 cents this year, and the rate per mile driven for moving or medical purposes is 19 cents. Be sure to keep records to document these deductions.

Estate and gift tax. For 2016, the estate and gift tax exemption rises to $5.45 million per individual, up slightly from the 2015 level. This means the exemption per couple is now nearly $11 million, and only some 4,400 people will owe this tax for 2015, according to estimates by the Tax Policy Center.

The annual gift exclusion of $14,000 isn’t changing for 2016. This provision allows a giver to make tax-free transfers of up to $14,000 a year to each recipient, and one partner of a married couple can transfer up to $28,000 per recipient if the other spouse doesn’t use the break.

Corrections & Amplifications: 
The 28% tax bracket for single filers begins at $91,151. An earlier version of the chart accompanying this article incorrectly gave the figure as $90,151. (Jan. 8)

Write to Laura Saunders at laura.saunders@wsj.com

Middle Class Tax Breaks (Kiplinger Magazine)

Slide Show | December 2015

9 Tax Breaks for the Middle Class

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If you believe that tax breaks are for millionaires and companies with offshore subsidiaries, you’re probably paying too much to the IRS.

In recent years, lawmakers have enacted dozens of tax incentives targeted at middle-class families. Taking full advantage of these tax breaks is particularly important for dual-income couples because there’s a good chance they’ll get hit by the marriage penalty—when two individuals pay more in taxes as a married couple than they would pay if they were both single. And they work together: Lowering your adjusted gross income (AGI) with one strategy could make you eligible for other tax breaks.

The tax code offers a slew of incentives for starting a family, saving for retirement and educating yourself and your kids.

Take a look at these nine options and make sure you're not missing out.

Breaks for Saving for Retirement

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Anyone with earned income (meaning income from work rather than investments) can contribute to a traditional IRA, but not everyone who contributes can claim a tax deduction. That's a no-no for the rich if they're covered by a retirement plan at work.

Here's how the deduction rules operate for traditional IRAs: First, there's a limit on how much you can contribute each year—$5,500 ($6,500 if you'll be at least 50 years old by the end of the year) or 100% of your earned income, whichever is less. If you're not enrolled in a 401(k) or some other workplace retirement plan, you can deduct your IRA deposits no matter how high your income. But if you're enrolled in such a plan, the right to the IRA deduction is phased out as 2015 income rises between $61,000 and $71,000 on a single return or between $98,000 and $118,000 if you're married and file jointly with your spouse. The limits only apply if one spouse participates in an employer plan. If neither does, there are no income limits for taking a deduction.

Spouses with little or no earned income can also make an IRA contribution of up to $5,500 ($6,500 if 50 or older) as long as the other spouse has sufficient earned income to cover both contributions. The contribution is tax-deductible as long as income doesn't exceed $173,000 on a joint return. You can take a partial tax deduction if your combined income is between $183,000 and $193,000.

Breaks for Saving for Retirement

Save and Be Credited

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If you are single and have adjusted gross income of $30,500 or less, or you are married and have AGI of $61,000 or less, you can make out even better on a retirement contribution through the Saver's Tax Credit.

The credit is a potential bonanza for part-time workers who fall within the income limits. You can claim a tax credit worth 10% to 50% of the amount you put in, up to a maximum credit of $1,000 ($2,000 for joint filers). Contributions to a workplace plan, such as a 401(k) or 403(b), as well as contributions to a traditional, Roth or SEP IRA, are eligible for this credit.

The lower your income, the higher the percentage you get back via the credit. Some key exceptions: Taxpayers under age 18, full-time students and those claimed as dependents on their parents' returns are not eligible, regardless of their income.

And here's the beauty of a credit compared with a deduction: While deductions reduce the amount of your income that can be taxed, credits reduce the amount of tax you owe—dollar for dollar. You’ll need IRS Form 8880.

Save and Be Credited

Get Paid (More) for Working

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The government provides an incentive for people to work: the Earned Income Tax Credit.

For 2015, the maximum EITC ranges from $503 to $6,242, depending on your income and how many children you have. This program, originally conceived in the 1970s, has been expanded several times, and some states (and even municipalities) have created their own versions.

Part of what makes it popular: When the federal EITC exceeds the amount of taxes owed, it results in a tax refund—a check back to you. In essence, you're no longer a taxpayer. But, you have to act to claim the credit by filing—a step many don't take.

The income limits on this program are fairly low. If you have no kids, for example, your earned income and adjusted gross income (AGI) must each be less than $14,820 if you're single and $20,330 if you're married filing jointly. If you have three or more kids and are married, though, your earned income and AGI can be as high as $53,267. The exceptions are considerable—more complicated than we can list here—but the Center for Budget and Policy Priorities has a helpful online calculator to help you determine eligibility.

Get Paid (More) for Working

Your Child, Your Credit

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With a new baby also comes a $1,000 child tax credit to lower- and middle-income earners, and this is a gift that keeps on giving every year until your dependent son or daughter turns 17.

You get the full $1,000 credit no matter when during the year the child was born (which is why people make gags about speeding deliveries as the New Year approaches).

Unlike a deduction that reduces the amount of income the government gets to tax, a credit reduces your tax bill dollar for dollar. So the $1,000-per-child credit will reduce your tax bill by $1,000. The credit begins to disappear as income rises above $110,000 on joint returns and above $75,000 on single and head-of-household returns—although there's no limit to how many kids you may claim on a return, as long as they qualify.

And for some lower-income taxpayers, the credit is "refundable," meaning that if it’s worth more than your income tax liability, the IRS will issue you a check for the difference, as with the EITC.

Your Child, Your Credit

Get Credit for That Child’s Care

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You may also qualify for a tax credit that will reduce the cost of child care. If your children are younger than 13, you’re eligible for a 20% to 35% credit for up to $3,000 in child-care expenses for one child or $6,000 for two or more. The percentage decreases as income increases. Eligible expenses include the cost of a nanny, preschool, before- or after-school care and summer day camp.

Another way to reduce child-care expenses is to participate in your employer’s flexible spending account for dependent-care expenses. With these accounts, money is deducted from your gross salary before income, Social Security and Medicare taxes. You can contribute up to $5,000 per year.

You can’t claim the child-care credit for expenses covered by a flexible spending account. In general, families that earn more than $43,000 will save more with a flexible spending account, says Laurie Ziegler, an enrolled agent in Saukville, Wis. However, even then, you may be able to use the child-care credit to offset expenses not covered by your flex account. If you paid for the care of two or more children and contributed the maximum, you can use the dependent-care credit to cover up to an additional $1,000 in child-care costs.

Get Credit for That Child’s Care

Zero Tax on Capital Gains

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For most people, long-term capital gains (and qualified dividends) are taxed at 15 or 20%—a bargain by historical standards.

That's why some people get so exercised about a rule that allows hedge-fund managers to pay tax at the capital-gains rate rather than at rates for ordinary income, which top out at 39.6%.

But investors in the two lowest income tax brackets pay no tax at all on their capital gains and dividends. That could be a boon to retirees, who have a higher standard deduction than younger taxpayers and who are not taxed on some or all of their Social Security benefits, and the unemployed, who may have had to tap their investments to make ends meet.

To take advantage of the 0% capital-gains rate for 2015, your taxable income can't exceed $37,450 if you are single; $50,200 if you are a single head of household with dependents; or $74,900 if you are married filing jointly. Note that this is taxable income. That's what's left after you subtract personal exemptions—worth $4,000 each in 2015 for you, your spouse and your dependents—and your itemized deductions or standard deduction from your adjusted gross income.

Zero Tax on Capital Gains

American Opportunity Credit

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This tax credit, which has been extended through 2017, is available for up to $2,500 of college tuition and related expenses (but not room and board) paid during the year. The full credit is available to individuals whose modified adjusted gross income is $80,000 or less ($160,000 or less for married couples filing a joint return). Single taxpayers with MAGI above $90,000 and married couples with MAGI above $180,000 are ineligible for the credit.

The American Opportunity Credit is juicier than the old Hope Credit—it has higher income limits and bigger tax breaks, and it covers all four years of college. And if the credit exceeds your tax liability (whether derived from the regular income tax or the alternative minimum tax), up to 40% of it is refundable. For example, suppose you owe $1,900 in federal taxes and qualify for the full credit. The nonrefundable portion of the credit will reduce your tax bill to $400, and the first $400 of the refundable portion will lower your bill to zero. You’ll receive the remaining $600 as a tax refund.

American Opportunity Credit

Lifetime Learning Credit

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If you want to get additional education—for virtually any reason and at virtually any school—you can tap the Lifetime Learning Credit. The credit is calculated as 20% of up to $10,000 of qualified expenses, so you can get back $2,000 per year.

The income limits for the Lifetime Learning Credit are $65,000 if single and $130,000 if married, and you can’t claim both this credit and the American Opportunity Credit for the same student in the same year. Also, no double dipping allowed: Expenses paid with funds from other tax-favored tuition programs, such as a Coverdell ESA, don’t count when figuring either credit.

Lifetime Learning Credit

More Education Breaks for Middles

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If neither the American Opportunity Credit nor the Lifetime Learning Credit works for you, there are still other ways the government offers favorable tax treatment for learning—and limits the breaks to the middle class and below.

1) Got a student loan around your neck? You can deduct up to $2,500 of interest paid on the loan each year, so long as your modified adjusted gross income (MAGI) is less than $80,000 ($160,000 if filing a joint return). The former student can deduct this even if it's actually Mom and Dad who are paying the bill.

2) Interest on savings bonds is usually subject to federal income tax. However, interest on Series EE and I bonds issued after 1989 can be tax-free when used to pay for qualified education expenses, if you meet certain requirements. This benefit phases out when your 2015 MAGI is between $115,751 and $145,749 for those filing jointly, and between $77,200 and $92,199 for single filers.

Year End Tax Savings for Retirees (USA Today)

Year-end tax tips for retirees (and those about to be)

Rodney Brooks, USA TODAY 8:49 a.m. EST November 5, 2013

It seems to come faster each year. It's time to begin thinking about your taxes.
What you've done during the year can be pretty important come April. But the implications for people in retirement and those planning for retirement can be huge.
"Managing taxes year-to-year is a great way for retirees to save money in retirement and thereby increase their income throughout retirement," says Jonathan Clements, director of financial education at Citi Personal Wealth Management.
With a good financial adviser, tax planning should be a year-round process, if it's to be effective, not a last-minute rush. But we'll still offer a list of year-end tax strategies. To start, Clements offers five "smaller things you should think about."
1. Minimum distribution. If you are 70½ or older, you must take a minimum distribution from your IRA. Not doing so could result in big penalties. You can delay it until March. But that could cause another problem: You'll still have to take another distribution that year. Don't wait, he says. Take the distribution this year.
2. Take advantage of the catch-up. If you're 50 or older, you're allowed to make additional "catch-up" contributions to your IRA or 401(k). That means once you reach the maximum contribution, you can put an additional $1,000 into your IRA and an additional $5,500 into your 401(k). Making catch-up contributions to a traditional IRA or a 401(k) reduces your taxable income, and therefore, your taxes.
3. Begin to limit the number of accounts. "If you are approaching retirement or in retirement, you should look to simplify your finances," Clements says. "As you get older, you may struggle to keep up with all those accounts. If you narrow it down to one or two, you make easier for yourself, and you make it easier for your heirs."
4. Utilize the gift-tax exclusion. "If you have more (money) than you need, take advantage of the $14,000 gift tax exclusion," he says. "Giving money away is the easiest way to shrink your taxable estate."
5. Beware of risk. "A big decline in the market will be a bigger issue for you," Clements says. Also, particularly after this year, stocks may be worth more, and you may have far more in (capital gains) taxes than you intended.
"One of the great things about being retired is you have a lot of control over your tax bill," Clements says. You can decide how big your tax bill will be. "Take a large amount out of your IRA, or take less. Sell that mutual fund this year or next. One way you can have more income over time is to be careful about when you realize taxable income."
For example, he says, one mistake people make is having a year with no taxable income, odd as that sounds. "You just retired, you are 63, haven't claimed Social Security and have not taken money out of an IRA," he says. You live off your ordinary savings. "You could end up with no taxable income for that year. That would be a terrible, terrible waste. You are missing a chance to get money out of an IRA or sell mutual funds and have a low tax rate."
You could convert a regular IRA to a Roth IRA, says Chris McIntire, president of McIntire Retirement Services in Perrysburg, Ohio. "I had a client who could convert $20,000 from his IRA to a Roth, and that still kept him in the 10% federal tax bracket."
Other tax-saving suggestions:
• Roth conversions. "We encourage people to do Roth conversions before they start Social Security," McIntire says. "People who have large IRAs may want to. If they are in a 15% tax bracket, they can pay taxes at known rates as opposed to unknown rates (later in retirement)."
Converting to a Roth makes sense for a number of reasons, says Charles Massimo, CEO of CJM Wealth Management in Long Island, N.Y. "There are no minimum distributions. It is a tax-free distribution. A regular IRA is taxed at the ordinary income rate."
• Consider tax-advantaged mutual funds, says Massimo. "Understand the difference between tax-advantaged mutual funds, vs. non-tax advantaged. Non-tax advantaged owners would pay higher taxes. They are probably paying 20% to 30% more in taxes a year if they own a non-tax advantaged fund."
• Sell losers. Some people still have big losses carried forward from the 2007-2009 bear market. "With the tremendous performance of the stock market, this could be a good year to offset some of those capital gains with capital losses," says McIntire.
• Harvest gains. "If they are in the 10% or 15% income bracket, the capital gains could be 0%," he says. "Harvest some of those gains as we get late in the season, and minimize capital gains taxes."
• Switch to an index fund, says McIntire. "You have a mutual fund where a manager does a lot of trading. He may be rebalancing for next year. That would cause capital gains distributions that some people may not want."
• Draw down your IRA before you have to take the minimum distribution at 70½, says Clements. If people wait, he says, "because they are making a large required distribution, it triggers taxes on your Social Security." From 50% to 85% of your Social Security income can be taxable, depending on income, says Clements. "One way retirees can save on taxes is draw down IRAs before they reach 70½. People refer to it as 'tax torpedo.' "
"There are so many ways retirees can save on taxes, using income from a portfolio," says Massimo. "The key is a financial adviser who knows how to do that for them."

Tax Moves You Must Make Before the End of the Year (Accounting Today)

Taxes Going Up- Obama Victory means you need to act now

November 12, 2012

By Margaret Collins

(Bloomberg) The race is on for wealthy Americans to save on taxes before January 1.

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President Barack Obama’s re-election means his administration will push to let tax cuts enacted during the George W. Bush era expire for high earners, as scheduled, at year-end. Obama wants to increase the top federal income tax rate to 39.6 percent from 35 percent, boost rates on long-term capital gains to as much as 23.8 percent, and shrink exemptions from estate-and-gift taxes.
“If you have to put a movie title on what’s going to happen from now until the end of the year it would be: ‘The Fast and the Furious,’” said Jeff Saccacio, a personal financial services partner at New York-based PricewaterhouseCoopers LLP. “The wise, smart people are preparing themselves for a sunset of the Bush tax cuts.”

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Wealthy investors have about a month and a half to examine their investment gains and losses left over from previous years, as well as to consider ways to move income into 2012 and transfer assets to heirs, Saccacio said. Now is the time to start running the calculations, he said.
“Acceleration of investment income is clear,” said Elda Di Re, partner and personal financial services area leader for Ernst & Young LLP in New York. “If anyone was planning on realizing a gain in the next two to three years on either securities or real estate, there’s a considerable amount of money to be saved.”
The Standard & Poor’s 500 Index, which is up 64 percent since Obama took office in 2009, lost 2.4 percent yesterday to 1,394.53, its lowest level since August.
Capital Gains
An investor who sells $100 of stock with a cost basis of $20 in 2012 would see proceeds—after capital gains taxes—of $88, according to an analysis by J.P. Morgan Private Bank. Next year, if Congress doesn’t act, earnings from the sale would drop to $80.96 if rates rise to 23.8 percent. That means the stock price would need to rise by at least 9 percent for an investor to be better off selling in 2013.
Investors shouldn’t accelerate sales of securities just to avoid a higher tax rate, said Saccacio, who is based in Los Angeles. They should consider how long they planned to hold stocks and whether they need to rebalance. Those who decide to sell at current capital gains rates can re-invest in the securities if they remain attractive without violating so-called wash-sale rules under the Internal Revenue Service code that apply to stocks sold at a loss, he said.
Bonuses, Dividends
Closely held businesses that have a choice to pay bonuses or dividends in 2012 or 2013 should do so before year-end, said Joanne E. Johnson, wealth adviser and managing director at New York-based JPMorgan Chase & Co.’s private bank unit. The tax rate on dividends may jump to as much as 43.4 percent next year from 15 percent now with the expiration of Bush-era tax cuts and levies set to take effect from the health-care law.
Employees who have a choice to receive their bonus this year should do so and consider exercising stock options that are set to expire, she said.
While the election provided some clarity, wealthy taxpayers still must be prepared for the unexpected before Dec. 31, Johnson said. “We don’t know what the compromises are going to be,” she said.
Fiscal Cliff
Democrats maintained control of the U.S. Senate in the election results last week as Republicans kept their majority in the House of Representatives. That ensures continued resistance to Obama’s determination to raise taxes for the wealthiest Americans in the effort to reduce the U.S. budget deficit.
Lawmakers may have to address the so-called fiscal cliff of tax increases and spending cuts that would start in January if Congress doesn’t act in a lame-duck session set to begin this month.
House Speaker John Boehner told reporters last week that Republicans are “willing to accept new revenue under the right conditions.” He cited ideas Democrats already have rejected: restructuring entitlement programs and relying on revenue generated by economic growth from a tax-code overhaul.
Some tax-rate increases scheduled to take effect next year don’t depend on fiscal-cliff negotiations, said Di Re of Ernst & Young. The 2010 health-care law, which Republican presidential candidate Mitt Romney had vowed to repeal, applies a 3.8 percent surtax on unearned income such as realized capital gains, dividends and interest in 2013 for married couples making more than $250,000 and individuals earning at least $200,000.
Payroll TaxThe law also increases the Medicare payroll tax levied on wages by 0.9 percentage points for high earners.
Wealthy taxpayers with large carryover losses remaining from 2008 and 2009 may not want to rush to sell securities before year-end, Saccacio said. They may have enough losses to offset future gains even with higher tax rates, he said.
When capital losses exceed gains, the extra generally can be deducted on individuals’ tax returns and used to reduce other income, such as wages, up to an annual limit of $3,000, according to the IRS. If the total loss is more than the cap, the unused portion may be carried over to following years.
The Obama victory also may lead some millionaires who were hesitating to take advantage of current rules on gifts to fund trusts they’ve set up, said Linda Beerman, manager of the wealth strategies group at Atlantic Trust. The firm is the private wealth-management unit of Atlanta-based Invesco Ltd.
Estate Tax
Legislation enacted in 2010 raised the lifetime estate-and- gift-tax exclusion for 2011 and 2012. This year individuals can transfer up to $5.12 million—or $10.24 million for married couples—free of estate and gift taxes. Those levels are scheduled to expire at the end of 2012 and Obama wants to set the estate tax threshold at $3.5 million while dropping the gift-tax exemption to $1 million as it was in 2009.
“People are really rushing here at the end to take advantage of it,” Beerman said.
Wealthy families should consider setting up trusts under current rules that can benefit grandchildren or future generations and set them up in states such as Delaware, which let the entities exist in perpetuity, said Johnson of JPMorgan. The Obama administration has proposed curtailing the benefits of such trusts as well as limiting discounts taken when transferring illiquid assets in its most recent budget proposal.
Decisions about making charitable contributions this year are more complicated, Beerman said. While deductions for donations probably will be more valuable next year if rates are higher, limits on itemized deductions for those with higher incomes are scheduled to be reinstated next year, she said.
“They need to start crunching some numbers,” PwC’s Saccacio said of wealthy taxpayers. “This year, year-end tax planning takes on a heightened significance given the fact that we’re going to have this jump in rates next year unless we have an 11th-hour adjustment.”

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.

Learn from Mitt Romney's Tax Return (WSJ)

WEEKEND INVESTOR
JANUARY 28, 2012.

What You Can Learn From Mitt's Tax Return

By LAURA SAUNDERS
There are some very clear lessons for taxpayers that can be gleaned from Mitt Romney's most recent tax returns that the candidate released recently. WSJ's Laura Saunders spells out the details on Mean Street. How did they do it?

That is the question many Americans are asking of Mitt and Ann Romney's 2010 tax bill, disclosed on Monday evening. While the couple paid almost $3 million in taxes, that amounted to less than 14% of their $21.6 million income.

The Romneys' rate was far lower than the average of 24% paid by the top 1% of U.S. earners, according to the nonpartisan Tax Policy Center.

The couple's 2010 filing presents a rare glimpse into how the ultrawealthy can use the tax code to their benefit, and offers important lessons for others.

The biggest: the powerful tax benefits of capital gains, which are taxed at a top rate of just 15% if the underlying investment is held for more than a year.


GOP presidential candidate Mitt Romney paid a 14% effective income tax rate in 2010 after making $3 million in tax-deductible charitable donations and drawing most of his income from investments. Mitt Romney is working hard to make voters dislike Newt Gingrich and President Obama. But Mr. Romney has yet to crack a tougher nut: persuading voters to like him. Neil King has details on Lunch Break.
."There's a saying in Texas: If you don't have an oil well, get one," says Janet Hagy , a certified public accountant practicing in Austin, Texas. "I tell my clients, 'If you don't have capital gains, get some.'"

Another lesson: Get good tax help. The Romneys' 1040 return is 203 pages long, with different "schedules" and 20 different forms attached, some of them multiple times—not the sort of work typically done by a neighborhood Joe.

Says David Kautter of the Kogod Tax Center at American University in Washington: "The only schedules missing [from the Romneys' return] are the ones for fishermen, farmers and the elderly. Maybe Mitt should get some cows so he can have a 'full house' of schedules."

Some have suggested that, despite their low tax rate, the Romneys might have paid a few thousand extra dollars in tax. Among other things, they take no mortgage-interest deduction—a write-off claimed by 80% of taxpayers who itemize—or deductions for a home office, a car or travel expenses.

But given the complexity of their filings and the public scrutiny they were sure to endure, overpayments were far preferable to underpayments, experts say. The Romneys must file several separate returns for the "blind" trusts the couple set up to manage their investments, any of which could present snags. (The wealthy often do this when they are running for office, in order to avoid the appearance of conflicts of interest.)

Experts who have parsed the returns say the Romneys' advisers have been tax-smart without crossing legal lines. "The trustee has clearly gotten good advice and managed to reduce the Romneys' taxes in many perfectly legal ways," says Tom Ochsenschlager, a former official at the American Institute of CPAs who now teaches at American University.

Former IRS Commissioner Fred T. Goldberg, who examined the filings for the Romney campaign, characterized them differently: "This return reflects a trustee who spent a lot of care and time finding investment opportunities with the potential for substantial appreciation. By their very nature, these investments generate capital gains."

The returns don't disclose everything about the Romneys' finances. The couple isn't required to report their underlying wealth, investment returns or fees as a percentage of invested assets, for example.

But the filings do lift the veil on how the wealthy can use the tax code to their advantage. Here are some lessons the experts have gleaned.

A. Avoid salary, wages and tips to the extent possible. The Romneys reported no such compensation, which is taxable at rates up to 35%. In addition, these types of pay are subject to payroll taxes: a 6.2% Social Security tax (lowered to 4.2% in 2011) and 1.45% in Medicare tax, both of which the employer matches. While the Social Security tax is capped each year at a certain income level ($110,100 for 2012), the Medicare tax isn't.

Some experts believe "carried interest," or profits such as those from investments that Mr. Romney received as a partner at Bain Capital, should be taxed as compensation at rates up to 35%. Currently, those profits usually count as capital gains and are taxed at a top rate of 15%.

B. Muni-bond interest isn't the be-all and end-all. Many wealthy people turn to municipal bonds for tax-free income, but the Romneys reported only $557 of tax-free interest in 2010—and $3.3 million of taxable interest.

Kenneth Brier, an attorney at Brier & Geurden in Needham, Mass., notes that Massachusetts has a flat tax of 5.3%, making munis less attractive there than in high-tax states with graduated rates such as New York or California. And because the Romneys' overall tax rate is so low, the after-tax difference between munis and taxable bonds might not be large enough to justify investing in munis, Mr. Ochsenschlager says.

Some of the taxable interest on the Romney's 2010 return came from U.S. Treasurys; such interest isn't subject to state taxes.

C.Strive for "qualified" dividends. The Romneys' 2010 return reports $3.3 million of qualified dividends, which are taxed at a top rate of 15%. (There is another $1.6 million of nonqualified dividends, taxed like interest income.)

What makes a dividend "qualified"? In general, the dividend must be from a stock held at least two months and paid by any domestic corporation or most foreign corporations. The dividend can't come from a stock that a brokerage firm has lent as part of a short sale, says Robert Willens, an independent tax expert in New York.

D. If you have a "Schedule C" business, think twice before claiming a home-office deduction.The Romneys didn't take one on either of two Schedule C forms, which are for business results reported on personal returns. The Romneys used their Schedule C forms for director's fees and speaking fees.

Not only do home-office deductions raise red flags at the IRS, but they can come back to haunt taxpayers when the home is sold: Part of the gain on the home's sale may not be eligible for the $250,000 or $500,000 tax exclusion because taxpayers who took depreciation deductions in prior years have to reduce the exclusion by that amount.

In addition to raising taxes in many cases, this poses a record-keeping problem, Mr. Ochsenschlager says.

E. Generate income from long-term capital gains. The biggest factor in the Romneys' super-low tax rate is their outsize income from capital gains: $12.6 million in 2010. Most of that consisted of long-term gains, which, like qualified dividends, are taxed at a top rate of 15%.

The benefits don't end there. While the tax code gives wage earners almost no flexibility as to timing, the capital-gains rules offer unparalleled flexibility. Investors can often time when they take a gain or loss, and losses may be used to offset gains so that no tax is due. There are few restrictions: For example, a loss on land held as an investment can offset the gain from a stock.

Net capital losses can shelter up to $3,000 a year of ordinary income from tax, and losses can be carried forward indefinitely to shelter future gains. Canny investors or their advisers often "harvest" losses during market downturns, reacquire the investment after 30 days and use those losses to offset future gains, Mr. Willens says.

On Schedule D of their 2010 return, the Romneys' original long-term capital gain of $16.8 million was reduced by $4.8 million of carried-over long-term capital losses.

F. Know the score on itemized deductions. One way the Romneys resemble many other taxpayers is that they didn't get a medical-expenses deduction. Only expenses above 7.5% of adjusted gross income are deductible; for the Romneys, that hurdle amounted to $1.6 million, while they reported medical expenses of just $14,176.

The Romneys did make tax-wise charitable contributions. They gave away nearly $3 million, almost 14% of their adjusted gross income, about half in cash and half in other forms.

All of their contributions were fully deductible, whereas the biggest givers are subject to limits. Billionaire Warren Buffett, for example, gives away such vast sums each year that much of it can't be deducted from his income tax (though the gifts will be out of his estate).

Making noncash gifts—such as appreciated stock or other assets—often is a smart move for people like the Romneys because they can skip paying capital-gains tax on any appreciation, while getting a full deduction.

For example, say a higher-bracket taxpayer has 100 shares of stock bought years ago for $30 a share that is worth $80 when he donates it. If he sold the stock, paid tax and gave the remaining cash to charity, it would receive $7,250 and he would have a deduction of the same amount. If he gives the stock directly to the charity, it would receive $8,000, and he could deduct the full $8,000. (Some restrictions apply.)

G. Capital gains and dividends can help trigger the AMT. Long-term capital gains and qualified dividends are taxed at 15% and aren't subject to the alternative minimum tax.

The AMT takes away the value of deductions, such as the one for state taxes, when taxpayers are deemed to have too many write-offs. But a large percentage of capital gains and dividends in a taxpayer's overall income mix can cause a taxpayer to owe AMT.

The reason: With capital gains and dividends off limits, deductions loom large relative to other income, and that triggers AMT. The Romneys paid $232,989 in AMT in 2010 and lost the value of their state tax and other deductions, according to Jay Starkman, a CPA in Atlanta. "Without that, their tax rate would have been even lower," he says.

H. Beware of small benefits requiring large tax-prep efforts. The oddest line on the Romneys' 2010 return is a tax credit for $1 of "General Business Credit." Don Williamson of American University's Kogod Tax Center says the credit could be for hiring a disadvantaged youth or qualified veteran and it flowed through from an investment partnership.

But likely it cost far more than $1 just to fill out the three-page Form 8300 for the return. Mr. Williamson says he sees this problem all the time. Often tax-prep fees are disproportionate to an investment's tax benefit or the income it produces, he says—especially with larger investment partnerships.

One other lesson: For the wealthy, offshore investments can save onshore taxes. Robert Gordon, head of Twenty-First Securities in New York, a firm specializing in tax strategies, points out that the Romneys' 2010 return has 17 different filings of IRS Form 8621. Each indicates an investment, perhaps a hedge or private-equity fund, held in an offshore corporation.

These are legal arrangements, Mr. Gordon stresses. They can have significant tax advantages for the wealthy who live in high-tax states—especially Massachusetts, because its flat tax allows no deductions.

Investments held offshore in what is known as a "blocker corporation" can allow U.S. taxpayers to pay less tax than if the same investment were made through an onshore entity, Mr. Gordon says.

He offers an example. Say a partnership based in the U.S. invests $100, $80 of which is borrowed. It earns $5 of profits and has $4 in interest expense, for $1 of net pretax profit. In Massachusetts there isn't an interest deduction, so the entire $5 would be taxable.

If the investment were held in a fund based in the Cayman Islands, however, only $1 would be taxable in Massachusetts. Federal deductions subject to limits would also be preserved, Mr. Gordon says.

Write to Laura Saunders at laura.saunders@wsj.com.

Corrections & Amplifications
Part of the gain on a home sale might not be eligible for an income-tax exclusion of $250,000 or $500,000 if the taxpayer with a Schedule C business has taken depreciation deductions for a home office. An earlier version of this article said the percentage of the sales price attributable to the home office wouldn't be eligible for the exclusion

Saving on Taxes This Year (from WSJ) and Election Economics

Use the IRS to Ease the Bear's Big Bite

By Tom Herman, The Wall Street Journal
Last update: 9:38 a.m. EDT Aug. 19, 2008

Even for many of the nation's most sophisticated investors, this has been an unusually painful year. But there are valuable tax-saving strategies to consider that may help ease the sting.
As painful as it is to lose money, investment losses can reduce taxes significantly. For example, many investors can benefit by using a technique known as "tax-loss harvesting," or selling losers in order to offset gains on their winners -- and, in some cases, regular income, too.
"In these volatile markets, we're constantly harvesting losses" for clients, says Nadine Gordon Lee, president of Prosper Advisors, a wealth-management firm based in Armonk, N.Y.
To be sure, never make any investment move exclusively for tax reasons, warns Bob Gordon, president of Twenty-First Securities and co-author of the book "Wall Street Secrets for Tax-Efficient Investing." "Don't let the tail wag the dog," he says.
But don't make important investment moves without at least considering the tax implications.
Here's a primer on the capital-gains rules, including a peek at what may lie ahead next year.

The Basics

Investors can offset capital losses against gains on a dollar-for-dollar basis, with no upper limit. Suppose you sold a stock early this year that you purchased years ago, and your profit was $5,000. Now, you sell another stock for $5,000 less than you originally paid for it. Put the two together, and your net gain is zero. That means no capital-gains tax on your earlier gain.
Now suppose you have capital losses but little or no gains. If your losses are bigger than your gains, or if you don't have any gains, you typically can deduct as much as $3,000 of your net losses from your other income, such as wages, dividends and interest. (The limit is $1,500 if you're married and filing separately from your spouse.) Additional loss amounts are carried over into future years. Thus, if you were thinking of a selling a loser anyway, this could be a good time to pull the trigger.
These rules once prompted a memorable query from a reader. He had amassed $2.1 million of stock-market losses and was searching for a woman with large capital gains who would be interested in marriage. "My CPA tells me it is not necessary to live together, and a divorce can be had after the tax loss is used up," he wrote.
Some investors assume there is only one capital-gains tax rate: 15%. Wrong.
The rate can depend on several factors. If you sell a stock or mutual fund you've owned for a year or less, that's considered a short-term gain, and it's typically subject to tax at higher ordinary income-tax rates.
Under a provision that became effective Jan. 1, investors in the two lowest ordinary income-tax brackets may qualify for a long-term capital-gains rate of zero. (Tax-preparation software can help you figure this out.) Separately, the top rate on long-term gains from art and collectibles is 28%.
For more on this and related issues, see IRS Publications 550 and 564 ( irs.gov).
If you're planning to make a gift of stock to your favorite charity, pick your holdings with long-term gains (investments you've held for more than one year), says Tim Hanford, a tax consultant in Bethesda, Md. If you itemize your deductions, you typically can deduct the stock's fair market value -- and you won't owe capital-gains tax on the appreciation.
But don't donate a stock that's dropped in value, Ms. Lee says. Instead, consider selling it, use the loss to save taxes, and donate the proceeds to your favorite charity.

Wash Sales

A wash sale typically occurs if you sell a stock or some other security at a loss and then buy the same thing, or something "substantially identical," within 30 days of the sale. (That means 30 days before or after the sale, not just 30 days after.) Violate this rule, and you can't deduct your loss. Instead, you're supposed to add the disallowed loss to the cost of the new stock, and that becomes your basis in that stock.
To avoid trouble, don't buy the same security, or something substantially identical, within the specified period. Wait until later or pick something else. Even this can get tricky, though, since it's not always clear how to define "substantially identical."
Many readers over the years have asked me whether they could get around the wash-sale rule by selling a stock at a loss in a regular taxable account and then buying it back right away for a retirement account.
No, says the IRS. That violates the wash-sale rule.

The Outlook

Sen. Barack Obama, the Democratic candidate for president, proposes raising the top 15% capital-gains rate to 20% for families making more than $250,000, says Jason Furman, the senator's economic policy director. Mr. Furman says the higher rate would apply to only about 2% of the nation's households. Aides also say the Obama plan wouldn't raise any taxes on couples making less than $250,000 a year, nor on any single people with income under $200,000 -- not income taxes, capital-gains taxes, dividend or payroll taxes.
In contrast, Sen. John McCain, the Republican candidate, strongly opposes raising capital-gains tax rates. He also has called for retaining the current federal income-tax rates and believes that raising taxes in these troubled economic times would be exactly the wrong economic prescription.
Some investment advisers think Sen. McCain, if elected, eventually would compromise with a Democratic-controlled Congress on a higher capital-gains rate.

Should you sell winners to take advantage of this year's low rates? Several investment managers say it's premature to act now, unless you'd planned to sell those stocks anyway, because there's uncertainty about how the elections will come out -- and what the effective date of higher rates might be.

Email: forum.sunday03@wsj.com