Remember Roth IRA conversion taxes
Anyone, regardless of income, can convert a traditional individual retirement account to a Roth IRA. But when that option first became available in 2010, a special feature that year allowed individuals who converted to a Roth IRA to spread the taxes due on converted amounts equally over the 2011 and 2012 tax years. That means your first Roth conversion tax bill will be included on your 2011 return filed in 2012. Make sure you have that cash on hand, and plan now for the 2012 conversion bill.
Claim your American Opportunity
The American Opportunity Tax Credit was a centerpiece of the 2009 stimulus bill. The new education tax break expanded the existing Hope Credit, providing a credit of up to $2,500 of the cost of qualified tuition and related expenses, and up to $1,000 of the credit could come back to the taxpayer as a refund.
The American Opportunity Credit was originally supposed to end in 2010, but it was extended through 2012. However, this could be the credit's last year. Congress is looking for ways to cut the federal deficit, and allowing tax breaks to expire is an easy way to save some dollars. If you have eligible education expenses, be sure to claim the American Opportunity Credit while you can.
Note health care info on W-2
When you get your 2011 W-2, you might notice some new information on the form. Box 12 is where employers will report the cost of your workplace's group health insurance coverage. This amount is both the amount the business pays as well as the premiums paid via payroll deductions by the workers.
Don't freak out. The amount, which will be designated by the code DD, is not taxable income. It's informational only, designed to help Uncle Sam confirm taxpayers have coverage. Under the health care reform law, the Affordable Care Act, the data will help to enforce the eventual individual coverage if it survives a Supreme Court hearing as well as the so-called Cadillac tax on more expensive workplace insurance plans.
However, if you don't see anything in Box 12, don't freak out about that either. The IRS ruled that reporting 2011 health care data is optional for employers.
Pay attention to Form 1099-K
If you get a Form 1099-K in 2012, don't toss it. The new form records payments received in 2011 by credit card or through third-party networks such as PayPal. This added income reporting mechanism was created as part of the Housing Assistance Tax Act of 2008 and is finally taking effect for the 2011 tax year because of concerns that some small businesses do not report all of their income. Previously, the Internal Revenue Service had to take taxpayers' word that all income was reported because the agency didn't have access to credit card or online payment details. The 1099-K changes that.
Be ready for basis reporting
Beginning with the 2011 tax year, brokers must report an asset's basis, the value that is used to determine profit when you sell, to the IRS. That amount will show up on the 1099 forms you receive in 2012 for 2011 stock transactions. Additional basis reporting will be phased in, in 2012 and 2013. You might have heard of this new requirement when your investment managers asked which type of basis reporting you preferred they use. Generally, brokers must report the sale of securities on a first-in, first-out basis unless the customer specifically identifies which securities are to be sold.
Most tax experts will tell you to pay no tax before its time. However, impending income tax rate changes might make 2012 the exception to that traditional tax adage. The top ordinary income tax bracket in 2012 is 35 percent of annual taxable income. If Congress doesn't act, the highest tax rate will go to 39.6 percent in 2013. So, if you're in the top tax bracket, you might want to accelerate income into 2012 and pay taxes at the lower rate.