Tax changes of 2011 to note!

Tax season is nearly over for the 2011 tax year: just about 10 days remain until Tax Day (remember that you have until April 17, 2012, to file your 2011 individual federal income tax return).

If you haven’t yet filed, here’s your chance to get caught up on what was new for the 2011 tax season:

1. There is no Schedule M and no Making Work Pay Credit.                         

    The Making Work Pay Credit which was available for taxpayers in 2009 and 2010 is not available for 2011. That means there is no Schedule M to file and there is no additional credit for the year.

2. There is a payroll tax cut for employees. 

For 2011 (and now, for 2012), employees who receive a form W-2 received a tax break of 2% on FICA contributions during the year: instead of paying in at 6.2% for Social Security taxes, contributions were 4.2% for Social Security taxes. Contributions for Medicare remained the same. The break is automatic (meaning no forms or schedules to fill out) and it will not affect your 2011 federal income tax return since it’s tied to Social Security payroll taxes. The benefit maxed out when you hit the Social Security cap ($106,800 for 2011). Taxpayers who didn’t pay into the Social Security system during the year will not receive a benefit.

3. There is a payroll tax cut equivalent for self-employed taxpayers. 

If you self-employed, you will receive the benefit of the payroll tax cut when you file your federal income tax return in the form of an adjustment to your SE (self employment) tax due. Your SE tax will be reduced by 2%; the SE tax rate of 12.4% is reduced to 10.4%.

4. There’s a new form in town, the federal form 1099-K. The federal form 1099-K, Merchant Card and Third Party Network Payments, is making its debut for the 2011 tax season. Taxpayers who have a credit card merchant account, Paypal account or similar account and otherwise meet the criteria will receive form 1099-K from their service provider.

5. You might see your health care benefits on your form W-2. 

Employers with more than 250 workers must beginreporting on the value of health care benefits paid on an employee’s behalf on forms W-2 in 2012. Some are already doing this for 2011 so if it pops up on your form W-2, don’t panic. The amount appears in Box 12, using code DD. It does not affect your taxable income.

6. Standard deductions haven’t changed much. 

The standard deduction rates are largely the same for 2011. They are $5,800 for single taxpayers or those married taxpayers filing separately, $11,600 for married taxpayers filing jointly and $8,500 for taxpayers filing as head of household. The additional standard deduction allowed for senior citizens and taxpayers who are legally blind is $1,150 for married taxpayers filing jointly and $1,450 for single taxpayers.

7. Personal exemptions haven’t changed much either. 

The personal exemption amount for 2011 is $3,700, an increase from $3,650 in 2010.

8. Brokers are now reporting your cost basis for certain stocks on your 1099-B. 

The 2011 federal form 1099-B,Proceeds From Broker and Barter Exchange Transactions, has new boxes for the date you bought a stock; your cost or basis (including adjustments for commissions and splits); whether your gain or loss was short or long term; and even if the transaction was a wash sale. The new requirements are only required for stock bought on or after Jan. 1, 2011; mutual funds bought on or after Jan. 1, 2012; and bonds, options and private placements bought on or after Jan. 1, 2013.

9. Yet, again, there’s band-aid relief for Alternative Minimum Tax (AMT).

There’s no real reform for AMT… again. What we do have is a small boost in the AMT exemption for 2011 to $74,450 for taxpayers filing jointly, $48,450 for single taxpayers and those filing as head of households, and $37,225 for married couples filing separately. Remarkably, it’s still not adjusted for inflation.

10.  You must check the box, if applicable, for Report of Foreign Bank and Financial Accounts (FBAR). 

No, this isn’t new but the IRS has made FBAR reporting a compliance issue. While FBAR forms aren’t due until June, you may need to to check the applicable box on Schedule B when you send in your return. And this time, the IRS swears that they really, really mean business.

So, there you have it: those are the most noteworthy changes taxpayers realized in the 2011 tax year. It’s a quick and dirty summary. Your situation may require a bit more detail so if you have any questions, check with your tax professional.

When should you file for Social Security?

Although Social Security has been around for more than seven decades, most Americans admit they really don’t have a basic understanding about the rules that affect the size of their retirement benefit.

Social Security is pretty straightforward provided you’ve never been married and accumulate at least 40 quarters working in jobs where federal employment tax (FICA) was deducted from your paycheck. When you reach your “full retirement age” (FRA) you will receive a benefit based upon the amount you paid into the system.(2) If you begin receiving Social Security benefits prior to your FRA, your benefit will be reduced. (3) For every year (starting with your FRA year) that you postpone the start of Social Security, you will receive “delayed retirement credit” (DRC). Your annual benefit will be increased 8% each year plus each year’s cost of living increase (COLA)- until you reach age 70.

However, things get complicated very quickly when you are married- especially if both spouses have worked and qualify for Social Security. While most couples simply want to know how they can maximize the total Social Security income that they receive, this is easier said than done. For one thing, not only can you file for Social Security based on your own work history, you can also file for a benefit based on what your spouse earned. (If you’re divorced, you may be eligible for a benefit based on your ex-spouse’s record.)(4)

With Social Security, timing is everything. Should both members of a couple file for benefits in the same year, or would it make more sense for one spouse to start before the other? Which one? If Spouse ‘A’ begins before his/her FRA, how might this affect the benefit that Spouse ‘B’ is eligible to receive? What if Spouse ‘A’ waited to file until s/he reached FRA? Although getting a bigger monthly check sounds good, postponing the start of Social Security until you reach age 70 means you’ll collect benefits for fewer years. Nonetheless, why should certain married individuals consider this option?

And that’s just the tip of the iceberg. Here’s the problem: If you make the wrong choices, they affect the amount of Social Security income you will receive for the rest of your life.

Take this couple, we’ll call them Wilma and Fred. Here are the important facts:

Current Age: Wilma, 62

Full Retirement Age (FRA): 66

Benefit at FRA: $800/month

Current Age: Fred, 65

Full Retirement Age (FRA): 66

Benefit at FRA: $2,000/month

A few things to keep in mind:

-The maximum “spousal” benefit you can receive is 50% of what your partner is entitled to at her/his FRA. In this example, Wilma’s maximum spousal benefit is $1,000–half the amount Fred would receive if he filed for Social Security at age 66. However, if Wilma files for her own and/or a spousal benefit before she has reach her FRA (66), the amount will be reduced. Likewise, Fred’s maximum spousal benefit is $400/month.

-If you file for a spousal benefit before reaching your FRA, you are deemed to be filing for a benefit based on your own record, as well. That is, prior to your FRA, you cannot apply for just a spousal benefit in order to allow your own to earn DRCs. However, once you reach your FRA, you can.

-You cannot apply for a spousal benefit until your spouse has filed to begin receiving Social Security.

Wilma and Fred are planning to retire next year. They’ll need some extra monthly income, so they’re thinking of having Wilma apply for Social Security. Fred would postpone filing for benefits until he is 70 because this would result in substantially more income. (Assuming the COLA is 3% for each of the next four years, by age 70 Fred’s benefit would increase to $3,036/month- 50% more than what he would receive at his FRA.)

Scenario No. 1:

Next year Wilma files for Social Security based on her own record. Since she is 63 years old, her benefit will be 20% less than what she would receive if she waited until reaching her FRA. (3)

She is not eligible for a spousal benefit because Fred hasn’t filed yet.

Total Social Security income as a couple: $640/month.

Option No.1: “File-and-Suspend.” Social Security created this strategy specifically for this situation. Here’s how it works: Now that Fred has reached his FRA, he files for Social Security benefits to begin and then immediately tells Social Security to stop them. This allows his benefit to earn delayed retirement credits. However, the fact that Fred filed means Wilma is now entitled to a spousal benefit.

Since she is below her FRA, Wilma’s spousal benefit will be reduced to 37.5%- instead of 50%- of Fred’s FRA amount, or $750. She does not get this in addition to her own benefit. Instead, she will receive whichever benefit is higher- the one based on her own work history or her spousal benefit. Thus, Wilma will receive a benefit of $750/month. (Technically, $640 of this is earmarked as coming from the payroll tax Wilma paid herself.)

Total Social Security income as a couple: $750/month.

Four years later:

Fred turns 70 and requests that his Social Security benefits resume. Thanks to DRCs, his monthly check will be $3,036.

Annual COLAs of 3% mean that Wilma’s monthly check will have grown to $844.

Total Social Security income as a couple: $3,880/month.

Next week: An alternate option for Wilma and Fred that would result higher total income.

 1. See www.socialsecurity.gov/

2. See http://www.socialsecurity.gov/pubs/ageincrease.htm

3. See http://www.socialsecurity.gov/retirement/1943.html

4. To determine if you are eligible to file for benefits based on the work record of an ex-spouse, see http://ssa-custhelp.ssa.gov/app/answers/detail/a_id/299/session/L3RpbWUvMTMyNDg2NzI1NS9zaWQvb1dOS3Z3TWs%3D

Source: By Gail Buckner