There are 65 tax provisions scheduled to expire December 31, 2011 and another 37 scheduled for December 31, 2012.   Some of these credits may be extended by Congress, but no one knows which ones, if any, will continue.  Probably the one receiving the most press was the Social Security payroll tax cut.

The payroll tax cut scheduled to expire December 31, 2011, has been extended through February 2012.  This temporarily extends the two percentage point payroll tax cut for employees, continuing the reduction of their Social Security withholding rate from 6.2% to 4.2% through February 29.  According to government publications, this reduced withholding rate will have no effect on an employee's future Social Security benefits.  However, included in the terms negotiated by Congress just before Christmas, the law also includes a new "recapture" provision for any employee or self-employed taxpayer who earns $18,350 or more during January and February.  Keep detailed records of earnings, including paystubs, for 2012 so we can accurately prepare next year's tax return.  It has no effect on the employer's contribution rate which remains at 6.2%.

Many of the familiar schedules have new questions on them this year.  Schedule C (business income), Schedule F (farm income) and Schedule E (rental income) all ask if the taxpayer made any payments during the year that would require the filing of Forms 1099.  The follow up question asks if the taxpayer did or will file all required forms.  It is probably safe to assume that a "yes" answer to the first question and a "no" answer to the second will result in further inquiries from the IRS as to why the taxpayer is not complying with the federal tax laws.  Penalties for failure to file required Forms 1099 have been significantly increased.  Generally, if a taxpayer pays $600 or more for services in the course of his/her trade or business they must issue a 1099 to the recipient of the income.  A form also should be filed if a taxpayer pays interest to an individual in the course of his/her business.

Business owners who accept credit cards will also receive a new form this year, a 1099-K, to report the amount of credit card sales or third party payments.   Please bring all 1099-K's received to your tax appointment.  

MIleage rates for business, medical and moving miles also changed in mid-year.  Effective July 1, the standard mileage allowance for business miles increased form $.51 per mile to $.555 per mile.  The $.555 is also in effect for 2012.

New initiatives have been made for business owners to properly classify workers as either employees or independent contractors.  If you have any questions on the proper classification of workers, it is important to understand the rules and file the correct documents.  The subject is too extensive to cover here, so please ask during your tax appointment if you have questions.

New forms have also been created by IRS to report foreign financial assets.  The defintion of a foreign asset includes foreign real estate, such as a time share in Bermuda, and the existence of a foreign trust, such as that created for a US citizen to own a time share in Mexico.  Foreign stocks owned in a US based brokerage account do not trigger the additional reporting.

The 1099-B forms you receive from your broker dealer this year will also look different and contain different information.  Brokers are now required to track a taxpayer's cost of stocks issued in 2011 or later and mutual funds in 2012 or later and report these costs to IRS when the taxpayer sells the investment.  While this is a much needed reporting tool, the transition period may be rather rocky.  There are three "types" of sales this year and each type could be short or long term.  Each type requires the filing of a Form 8949, a new form this year.

The energy tax credit has been revamped and is now a maximum $500 LIFETIME credit.  The credit is now 10% of the cost, down from 30% and a maximum of $1500 in 2009-2010.  There are also caps on many items such as windows and furnaces.  Credits claimed in 2009-2010 will count against the $500 maximum credit allowed.  More details can be found at www.energystar.gov.  Also, be sure to get the manufacturer's certification letter to include in your records which proves the improvements made qualify for the credit.

Reporting the value of employee health insurance coverage on an employee's W-2 is being phased in.  For 2011, the reporting will be optional for employers.

And then some of the things remain the same:

The income limitations to convert a traditional IRA to a Roth IRA have been eliminated effective January 1, 2010 (prior law prohibited conversions if adjusted income was greater than $100,000).  An individual can establish a Roth IRA and make a conversion even if he/she is not eligible to make regular Roth contributions because of income limitations.   There are many issues to factor in before making a decision, and your individual tax situation and investment strategy should be carefully considered before making a conversion.   

The American Opportunity Credit, scheduled to expire at the end of 2010, was extended through 2012 for the first four years of post-secondary education in degree or certificate programs.  Course materials are considered qualifying expenses for this credit.  So unlike the other credits which allow one to include the cost of tuition only, the cost of books and supplies as well as tuition can be included in the total cost when calculating this credit.  Please separate the cost of tuition from books and supplies to aid in the calculation of which credit is best.  Expenses for room and board are still not included in any of the credits. Also available are the Lifetime Learning Credit and Tuition and Fees Deduction,  The Tuition and Fees Deduction is set to expire at the end of 2011.

State and local sales tax continue to be deductible as an itemized deduction, but only through 2011..

For educators, the educator expense deduction has been extended also, but only through 2011.  Unreimbursed expenses for books, supplies and supplementary materials used in the classroom can be deducted "above the line" .

Mortgage insurance premiums paid on mortgages taken out or refinanced in 2007 or later may be deductible.  Only mortgage insurance contracts taken out in 2007-2010 will qualify for this deduction.  This credit also expires at the end of 2011.

To deduct any charitable donation of money, taxpayers must have a bank record or a written confirmation from the charitable organization showing the name of the organization, the date of the donation and the amount.  Written documentation is also required for any property donated.

Since 2012 is an election year, look for many discussions on changes to the tax code.  Actual changes that are signed into law will be updated here mid-year and again at year end.

Last revised January 5, 2012