Be prepared for tax changes

Not many of us look forward to preparing our annual tax returns. However, being aware of tax rule changes and making sure we find every deduction could help minimize the tax bite. While there was no major tax bill, there are tax revisions that could affect you.

The first-time home buyer credit offered buyers a maximum credit of $7,500 in 2008 with the requirement that the money be repaid over the course of 15 years. The second installment of that repayment — $500 for those who claimed the maximum credit — is due in their 2011 tax bill. The 2009 stimulus bill changed the program, giving home buyers a credit of up to $8,000 and eliminating the 15-year repayment requirement. However, buyers who received the credit in either version of the program, but sold the house they purchased or stopped using it as their primary residence in 2011, may have to repay the entire credit this year.

Roth IRA conversions are allowed at any income level since 2010. Anyone can convert their traditional individual retirement accounts into Roth IRAs; however the taxes are due in the year you convert.

In 2011, the child tax credit was supposed to return to $500 from the $1,000. Instead the credit is still $1,000. Taxpayers must earn more than $3,000 in order for the credit to be refundable.

Long term capital gains were supposed to revert to 20 percent but the extension of the Bush Tax Cuts keeps them at a maximum of 15 percent tax rate. The holding period is the still one year. Any short-term gain would get taxed at your marginal rate as ordinary income. For those planning to claim capital gains or losses on 2011 returns, be aware the new Form 8949 requires filers to report acquisition and sale dates, sales price, and cost basis on assets sold. Brokerage firms should send their clients 1099-B forms, which will include the required information.

The earned income credit is a refundable tax credit for lower income working families and individuals. The credit is $464 with no qualifying children up to $5,751 for three or more qualifying children. The maximum credit was for two children until 2009 and is schedule to return back to only two children in 2013.

For 2011, a married couple may have to pay Alternative Minimum Tax if they had a taxable income greater than $74,450; a single filer with a taxable income greater than $48,450 might incur the tax depending on their individual circumstances.

Home energy credits are reduced and the energy-efficiency standards have been tightened. For example, windows and doors must meet Energy Star program requirements to be eligible. For 2011, homeowners can generally claim a credit worth 10 percent of the cost of certain energy-saving improvements, such as adding insulation or energy-efficient exterior windows and doors. The maximum credit for 2011 is $500. This is a reduction from the previous two years, when the credit was equal to 30 percent of expense, up to a combined total of $1,500. Also any home energy credit claimed from 2006 through 2010 must first be subtracted; hence only homeowners who did their first energy-saving renovations in 2011 are likely to receive any benefit.

Child earnings: In 2011, children claimed as a dependent on your return must file their own taxes if they have earned income greater than $5,800, self-employment net earnings greater than $400 or unearned income (like dividends and interest) greater than $950. A child’s unearned income, greater than $1,900 is taxed at the parent’s rate.

The pre-tax or tax deductible contribution limits for health savings accounts is $6,150 for families and $3,050 for an individual.

Foreign financial assets are reported on a new Form 8938. The foreign asset disclosure form is separate and different from the foreign bank account report. Taxpayers with foreign assets may need to file both documents.

Gone for 2011 is the Making Work Pay Credit. For the past few years we enjoyed $400 per year single and $800 married filing joint credit against our tax liabilities.

Student loan interest is deductible up to $2,500 however there are income limitations. The Hope Tax Credit was extended to 2011 and 2012 up to $2,500 for tuition and related expenses but has income limitations and other restrictions.

While this may sound more complicated than usual, just wait, the current tax law expires this December.

Patricia Kummer has been an independent Certified Financial Planner for 25 years and is president of Kummer Financial Strategies, Inc., a Registered Investment Advisor in Highlands Ranch. She welcomes your questions at www.kummerfinancial.com or call the economic hotline at 303-683-5800. Any material discussed is meant for informational purposes only. Please consult a tax accountant for your situation.