Tax Tidbits for 2011

By: William J. Harmatuk, CPA (Jun, 2011)

With only six months remaining in the 2011 calendar year, it is a good time to discuss some key tax and financial planning ideas that you may want to consider.

A new law brings back the 100% write-off for heavy SUVs used entirely for business. Under the 2010 Tax Relief Act, if a taxpayer buys and places in service a new heavy SUV after September 8, 2010 and before January 1, 2012 and uses it 100% for business, the taxpayer may write off its entire cost in the year placed in service. A heavy SUV must have a gross vehicle weight (GVW) rating of more than 6,000 pounds.

The IRS previously issued detailed guidance on the 2010 Tax Relief Act's 100% bonus depreciation rules for qualifying new property generally acquired and placed in service after September 8, 2010 and before January 1, 2012. The rules are quite generous. For example, the guidance permits 100% bonus depreciation for qualified restaurant property or qualified retail improvement property that also meets the definition of qualified leasehold improvement property.

For 2011, Small employers may establish "simple cafeteria plans." Beginning after December 31, 2010, small employers (those having an average of 100 or fewer employees on business days during either of the two preceding years) may provide employees with a "simple cafeteria plan." An employer that uses this type of plan gets a safe harbor from the nondiscrimination requirements for cafeteria plans as well as from the nondiscrimination requirements for certain types of qualified benefits offered under a cafeteria plan, including group term life insurance, benefits under a self-insured medical expense reimbursement plan, and benefits under a dependent care assistance program.

IRS further delays health insurance coverage information reporting for small employers. The new health reform legislation generally requires employers to report the cost of health insurance they provide to employees on their W-2 forms. Last fall, the IRS made this new reporting requirement optional for all employers for the 2011 Forms W-2. More recently, the IRS announced that the reporting requirement will continue to be voluntary for small employers (i.e., those filing fewer than 250 Forms W-2) at least through 2012, or until further guidance is issued by IRS.

The IRS has announced another settlement offer for voluntarily disclosing of unreported offshore income. This is the second voluntary disclosure initiative designed to bring offshore money back into the United States and assist people with undisclosed income from hidden offshore accounts to get current with their taxes. It is available through August 31, 2011. The IRS has released details of the voluntary offer called the 2011 Offshore Voluntary Disclosure Initiative (OVDI) in the form of fifty-three frequently asked questions. Similar to the first offer, the taxpayer has to pay back taxes and penalties but will avoid criminal prosecution. The offshore penalty is different under the new offer from the general rule. The general rule is a penalty of 25% based on amounts in foreign bank accounts, but can be as low as 12.5% or 5% for some taxpayers.

Beginning this year, the cost of over-the-counter medicines can't be reimbursed with excludible income through a health flexible spending arrangement (FSA), health reimbursement account (HRA), health savings account (HSA), or Archer MSA (medical savings account), unless the medicine is prescribed by a doctor or is insulin. This new rule applies to amounts paid after 2010. However, it does not apply to amounts paid in 2011 for medicines or drugs bought before January 1, 2011. Also, for distributions after 2010, the additional tax on distributions from an HSA that are not used for qualified medical expenses increases from 10% to 20% of the disbursed amount, and the additional tax on distributions from an Archer MSA that are not used for qualified medical expenses increases from 15% to 20% of the disbursed amount.

Some individual planning considerations would include energy credits, investment basis reporting issues and information pertaining to tax matters in connection with assisting elderly parents.

You can claim a tax credit for energy saving home improvements you make this year, but stricter rules apply for 2011 than for 2010. You can only claim a 10% credit for qualified energy property placed in service in 2011 up to a $500 lifetime limit with no more than $200 related to windows and skylights. A roadblock for 2011 is that the credit you claim for any year can't exceed $500 less the total of the credits you claimed for all earlier tax years ending after December 31, 2005. The amount you claim for windows and skylights in a year can't exceed $200 less the total of the credits you claimed for these items in all earlier tax years ending after December 31, 2005. The credit is equal to the sum of: (1) 10% of the amount you pay or incur for qualified energy efficient improvements (such as insulation, exterior windows or doors that meet certain energy efficient standards) installed during the year; and (2) the amount of the residential energy property expenses you paid or incurred during the year.

Additionally, the credit for residential energy property expenses can't exceed: (a) $50 for an advanced main circulating fan; (b) $150 for any qualified natural gas, propane, or hot water boiler; and (c) $300 for any item of energy efficient property (advanced types of energy saving equipment, such as electric heat pumps, meeting specific energy efficient standards).

There are new basis and character reporting rules required of investment brokers. Generally effective January 1, 2011, every broker will be required to file an information return reporting the gross proceeds of a "covered security" such as corporate stock and must include in the report the customer's adjusted basis in the security and whether any gain or loss with respect to the security is short-term or long-term. The reporting is generally done on Form 1099-B, "Proceeds from Broker and Barter Exchange Transactions." A covered security includes all stock acquired beginning in 2011, except stock in certain regulated investment companies (i.e., mutual funds) and stock acquired in connection with a dividend reinvestment plan (both of which are covered securities if acquired beginning in 2012).

As more and more of us enter the phase of life when we need to assist our elderly parents, below are some of the tax aspects of caring for them as they become elderly or incapacitated:

  1. Dependency exemption. You may be able to claim the cared-for individual as your dependent, thus qualifying for an exemption. To qualify, (a) you must provide more than 50% of the individual's support costs, (b) they must either live with you or be related, (c) they must not have gross income in excess of the exemption amount, which is $3,700 for 2011 ($3,650 for 2010), (d) they must not themselves file a joint return for the year, and (e) they must be a U.S. citizen or a resident of the U.S., Canada, or Mexico. If the support test ((a), above) can only be met by a group (several children, for example, combining to support a parent), a "multiple support" form can be filed to grant one of the group the exemption, subject to certain conditions.
  2. Medical expenses. If the individual qualifies as your dependent, you can include any medical expenses you incur for them along with your own when determining your medical deduction. If they don't qualify as your dependent only because of the gross income or joint return test ((c) and (d), above), you can still include these medical costs with your own. The costs of qualified long-term care services required by a chronically ill individual and eligible long-term care insurance premiums are included in the definition of deductible medical expenses. There's an annual cap on the amount of premiums that can be deducted. The cap for long-term deductible premiums is based on age, going as high as $4,240 for 2011 ($4,110 for 2010) for an individual over 70.
  3. Filing status. If you aren't married, you may qualify for "head of household" status by virtue of the individual you're caring for. If the person you're caring for (a) lives in your household, (b) you cover more than half the household costs, (c) he qualifies as your dependent, and (d) he is a relative, you can claim head of household filing status. If the person you're caring for is your parent, he need not live with you, as long as you provide more than half of his household costs and he qualifies as your dependent.
  4. Dependent care credit. If the cared-for individual qualifies as your dependent, lives with you, and physically or mentally cannot take care of himself, you may qualify for the dependent care credit for costs you incur for his care to enable you and your spouse to go to work.
  5. Exclusion for payments under life insurance contracts. Any lifetime payments received under a life insurance contract on the life of a person who is either terminally or chronically ill are excluded from gross income. A similar exclusion applies to the sale or assignment of a life insurance contract to a person who regularly buys or takes assignments of such contracts and meets other qualifying standards.

We have certainly not had a chance to cover all of the planning strategies and we realize that this can be quite overwhelming so we suggest that you consult your Dermody, Burke and Brown advisor to discuss, maximize and implement some of the above tax planning benefits.

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