It’s time to file various tax returns once again. Among the tax deadlines you may be required to meet in the next few months are the following:
September 15 – Due date for the Partnership Returns and Third Quarter Estimated Tax Payments for Individuals
October 17 – Due Date for Personal Returns, S Corporations and C Corporations Tax Returns. Also, it is the last chance to re-characterize 2010 ROTH IRA Conversion
October 31 – Payers must file information returns, such as Form 1099s, with the IRS. This deadline is extended to March 31 for electronic filing.
2012 HSA Limitations
Health Savings Accounts (HSAs) were created as a tax-favored framework to provide health care benefits mainly for small business owners, the self-employed, and employees of small- to medium-sized companies who do not have access to health insurance.
The tax benefits of HSAs are quite favorable and substantial. Eligible individuals can make tax-deductible (as an adjustment to AGI) contributions into HSA accounts. The funds in the account may be invested (somewhat like an IRA), so there is an opportunity for growth. The earnings inside the HSA are free from federal income tax, and funds withdrawn to pay eligible health care costs are tax-free. The dual benefit of tax-deductible contributions into and tax-free withdrawals from HSAs (and existing Medical Savings Accounts) is truly unique, as no other tax-deferred type of account currently offers such a benefit.
The 2012 inflation-adjusted deduction for individual self-only coverage under a high deductible plan is $3,100, while the comparable amount for family coverage is $6,250. For 2012, a high-deductible health plan is defined as a health plan with an annual deductible that is not less than $1,200 for self-coverage and $2,400 for family coverage, and the annual out-of-pocket expenses (including deductibles and copayments, but not premiums) must not exceed $6,050 for self-only coverage or $12,100 for family coverage.
Electric Vehicle Credits
If the high cost of gasoline has you looking for alternative transportation options, an electric vehicle might be the answer and may qualify for one of the following federal tax credits that are currently available to help reduce the cost of an electric vehicle.
Plug-in Electric Drive Motor Vehicle Credit. This credit for qualified plug-in electric drive motor vehicles ranges from $2,500 to $7,500, depending on the battery capacity. The credit will be phased out for each manufacturer after it sells 200,000 vehicles.
Plug-in Electric Vehicle Credit. This credit is available for certain low-speed electric vehicle and two- or three-wheeled vehicles. The credit equals 10% of the vehicle’s cost, up to a $2,500 maximum credit for purchases made before 2012.
Credit for Conversion Kits. This credit equals 10% of the cost of converting a vehicle to a qualified plug-in electric drive motor vehicle that is placed in service before 2012. The maximum credit is $4,000.
Safeguarding Tax Records
With the 2011 hurricane season officially under way and highly destructive tornadoes striking throughout the country earlier this year, it’s a good time to review some IRS suggestions for safeguarding tax records. The IRS suggests taxpayers keep a set of backup records in a safe place away from the original set. This is more easily accomplished now that many financial institutions provide statements electronically and other financial information is readily available on the Internet. Even if the original records are on paper, they can be scanned into an electronic format. Next, taxpayers should photograph or videotape important personal or business assets. Finally, emergency plans should be reviewed and updated, since personal and business situations change over time as do preparedness needs.
Deducting Interest on Home Loans
The political debate on tax reform touches many topics, including the federal tax deduction for interest on home loans. There is no way to determine if this deduction will continue or at what level, but we thought it would be a good time to review current federal law on deducting residential interest.
Interest paid on qualified residence debt is deductible, but limitations apply. Qualified residence debt can be either
- home acquisition indebtedness, or
- home equity indebtedness.
Qualified residence interest expense incurred on up to $1 million ($500,000 for married filing separately) of home acquisition indebtedness is fully deductible for regular tax purposes as an itemized deduction. Taxpayers generally can deduct interest on up to $100,000 ($50,000 for married filing separately) of home equity indebtedness. However, there are restrictions on the deductibility of qualified residence and home equity interest for AMT purposes.
Mortgage interest is only deductible when paid by the taxpayer who is the legal or equitable owner of the property. Thus, a taxpayer cannot deduct interest he or she pays on the mortgage of another person. This may occur, for example, if parents make mortgage payments for their adult children. Similarly, a taxpayer who holds a mortgage generally cannot deduct the interest if it is paid by another person.
A qualified residence (for determining if the underlying debt is qualified residence debt) can be the taxpayer’s principal residence and one other residence selected by the taxpayer for the tax year. In other words, if the taxpayer has several vacation homes in addition to a principal residence, the taxpayer can designate a different vacation home as the second qualified residence for different tax years. A residence is defined as
- a house,
- a condominium,
- a mobile home,
- a boat,
- a house trailer, or
- other property that under all the facts and circumstances can be considered a residence.
Vacant land used for occasional camping does not qualify as a residence.
Planning Tip: Taxpayers with more than two homes should consider keeping a mortgage on their principal residence and one other residence selected as a qualified residence and paying off debt on any house(s) for which interest will not be deductible.
Spouses who file a joint return may treat their common principal residence, as well as property that otherwise qualifies as a second residence, whether it is owned jointly or by one spouse only, as a qualified residence. Conversely, spouses who file separate returns may each take into account only one residence as the qualified residence, regardless of how the properties are owned. However, a deduction for a second residence is available if both spouses consent in writing to one of them taking into account both the principal and the second residence.
A residence under construction can be treated as a qualified residence for up to 24 months, but only if the residence actually becomes a qualified residence when it is ready for occupancy. However, the land a home is constructed on does not qualify as a residence under the above rule until construction begins. Interest on debt to acquire a lot that is incurred before construction begins would be personal interest. However, that interest could be deductible if a home equity loan is used to acquire the lot.
Please contact us to discuss the tax treatment for interest on your home loan or any other tax compliance or planning issue.
When Are Gifts Taxable?
The new federal estate and gift tax provisions signed into law late last year have received considerable attention and may have created some confusion concerning the taxability of gifts. So, we thought it would be a good time to review some basic information on the annual gift tax exclusion.
Most gifts are not subject to the gift tax. For example, there is usually no tax when you make a gift to your spouse or a charity. If you make a gift to someone else, the gift tax usually does not apply until the cumulative value of the gifts you give to that person during the year exceeds the annual gift tax exclusion. In 2011, the annual federal gift tax exclusion amount is $13,000. A federal gift tax return generally does not have to be filed unless you give someone, other than your spouse or a qualifying charity, money or property worth more than the annual gift tax exclusion.
If federal gift tax is due, it typically will be paid by the person making the gift. The person receiving the gift does not pay federal gift tax or federal income tax on the value of the gift received. However, the person making the gift will not be able to deduct the value of the gift on his or her federal tax return, other than gifts that are deductible charitable contributions.
Thus far, we have indicated that gifts
- for not more than the annual exclusion during the calendar year,
- made to your spouse, or
- made to a qualifying charity, generally are not subject to the federal gift tax.
In addition to these provisions, tuition or medical expenses you pay directly to an educational or medical institution for someone else are not subject to federal gift tax, either.
Caution: You cannot first give the money to an individual for the purpose of paying the end recipient. To avoid federal gift tax liability, the money must be paid directly to the institution.
Gift-splitting is a technique available to married persons wanting to individually make a non-taxable gift of up to $26,000 in a single year. For split gifts, the donor’s spouse must elect to split the gift with him or her. The gift is considered to be made half by the donor and half by the spouse. When a taxpayer elects to split a gift, a federal gift tax return must be filed to show that the spouses agree to use gift-splitting, even if the split gift is less than the annual exclusion ($13,000 in 2011).
Application of and aspects concerning the gift tax, including the impact of the $5 million unified estate and gift tax exclusion (not covered in this article), can be daunting. So, please contact us to discuss the tax aspects of gifting or any other tax compliance or planning issue
This newsletter provides business, financial, and tax information to clients and friends of our firm. This general information should not be acted upon without first determining its application to your specific situation. For further details on any article, please contact us at 770-591-8887.