What´s New for 2011 Tax returns

What´s New for 2011 Tax returns

Kisch & Co. CPAs
30 Tuval St., Ramat-Gan 52522 Israel
Tel: +972 3 612 6742    Fax: +972 3 612 6743
                                                                                                                  
January 2012
 
 
What´s New for 2011 Tax returns
By Murrel Kohn, CPA (USA, Isr)
 
 
1) Due Date of Filing U.S. Tax Returns:
Forms 1040, 1040A and 1040EZ are to be filed by April 17, 2012; Americans residing abroad and foreign filers have until June 15, 2012 to file their tax returns.  However, if any tax is due, interest at the current rate of 3% (adjusted quarterly) is charged from April 17, 2012 until paid.
 
2) Reporting Capital Gains and Losses on the new Form 8949 Sales and Other Dispositions of Capital Assets: In most cases you must detail all sales and exchanges of capital assets, including stocks, bonds, etc. and real estate  on the new Form 8949. You then report certain totals from this form on Schedule D.
 
3) Report of Foreign Bank and Financial Accounts (FBAR):  
As we all know in recent years the IRS has significantly increased enforcement regarding Americans with assets and income outside the US. This of course also includes Americans living in Israel with assets and income in Israel. The FBAR report - Form TDF 90-22.1 must be filed if  the aggregate value of a US person's financial accounts located outside the US exceeds $10,000 during the tax year.
 
Financial accounts include all:
  Bank accounts – savings, checking, and timed deposits
  Securities accounts – accounts maintained for the purpose of buying, selling, holding, or trading stocks or other securities,
  Other financial accounts, including: mutual funds (Keren Ne'emanut קרן נאמנות ), pension plans (Kupot Gemel קופות גמל) and retirement plans, life insurance policies having a cash value and annuity policies.
  Foreign trust accounts
Since the FBAR requirements are Treasury and not IRS, Form TD F 90-221 must be received and not just postmarked by the annual June 30th deadline. No extensions are permitted.  Civil penalties for a willful failure to comply with the FBAR requirements are very severe, up to the greater of $100,000 or 50% of the amount in the account at the time of the violation. Even a non-willful failure to file can lead to steep civil penalties of $10,000 per year.
 
4) FATCA (Foreign Account Tax Compliance Act): New Form 8938 for 2011 Tax returns
Form 8938 Statement of Specified Foreign Financial Assets - Form 8938 is required when the total value of specified foreign assets exceeds certain thresholds. For example, a married couple living in the U.S. and filing a joint tax return would not file Form 8938 unless their total specified foreign assets exceed $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year .
The thresholds for taxpayers who reside abroad are higher. For example in this case, a married couple residing abroad and filing a joint return would not file Form 8938 unless the value of specified foreign assets exceeds $400,000 on the last day of the tax year or more than $600,000 at any time during the year .  
 
Failing to file Form 8938 when required could result in a $10,000 penalty, with an additional penalty up to $50,000 for continued failure to file after IRS notification.  A 40 percent penalty on any understatement of tax attributable to non-disclosed assets can also be imposed.
 
Form 8938 is filed together with the individual’s income tax return.  If no tax return is required then Form 8938 is not required to be filed. All of these new regulations clearly illustrate the IRS's aggressive commitment to ensuring full disclosure of foreign financial information by American citizens and residents, including non-residents who elect to file jointly with their US spouses.
 
5) Form 8621 Reporting of Investment in a Passive Foreign Investment Company (PFIC):
Form 8621 will be required from shareholders in any PFICs, such as for a Keren Ne'emanut (קרן נאמנות).  For most people investments in foreign mutual funds are considered investments in PFICs. As the rules of reporting and taxation are too complex to elucidate herein, please contact us if you have or are considering investing in a mutual fund established outside the U.S.
 
6) The reduced tax rates enjoyed through 2011 will continue for another year.  This includes the 15% qualified dividend and long-term capital gains rate as well as the lowered tax brackets.  
 
7) Maximum tax rate for regular and alternative minimum tax on qualified dividends and net capital gains is reduced to zero (from 5%) for taxable income up to the amounts shown in the chart below, except for minor exceptions.
 
Filing Status                                        2011                   2012_
Single                                                  $ 34,500           $35,350
Married Filing Jointly                          $ 69,000           $70,700
Married Filing Separately                    $ 34,500           $35,350     
Head of Household                             $ 46,250           $47,350    
 
Non-Residents not in the U.S. for more than 180 days are exempt from most capital gains, except real estate.
 
8) Use Form 8615 to report your child´s investment income if more than $ 1,900 and when to report child´s investment income on parent´s return, if the child is:
 
A)   Under 18 at year-end.
B)   18 at year end and had earned income less than half of child´s support.
C)   A full time student over 18 and under 24 at end of year and earned income in less than half child´s support.
    
9) Alternative Minimum Tax (AMT) exemptions for 2011 and 2012:

 

FILING STATUS

AGI EXEMPTED AMOUNT

2011                          2012

Single and Head of Household

$48,450                  $33,750

Married Filing Jointly

$74,450                  $45,000

Married Filing Separately

$37,225                  $22,500

 

10) For 2011 and 2012- Increased IRA deduction of $5,000 for each spouse filing jointly ($6,000 if age 50 or older at year end).  Ask for other increases when there is a retirement plan.

 

11) Standard Deduction:

FILING STATUS

STANDARD DEDUCTION

2011                  2012

ADDITION IF 65 OR OVER PER PERSON

2011                2012

Single

$5,800              $5,950

$1,450         $1,450

Head of Household

$8,500              $8,700

$1,450         $1,450

Married Filing Jointly

$11,600          $11,900

$1,150         $1,150

Married Filing Separately

$5,800              $5,950

$1,150         $1,150

 

12) Personal exemptions: $3,700 (in 2011) and $3,800 (in 2012) per person.

 

13) Filing requirement thresholds as per table below:  Self-employed individuals must file if their net self-employed income is $400 or more for the year, regardless of the amounts in the table below.

 

FILING STATUS

GROSS INCOME*

2011                2012

IF 65 OR OVER

2011                2012

Single

$9,500             $9,750

$10,950       $10,950

Head of Household

$12,200           $12,500

$13,650       $13,650

Married Filing Jointly

$19,000           $19,500

$20,150 -      20,150-

21,300           21,300

Married Filing Separately

$3,700               $3,800

$3,700           $3,800

 

* Includes exempt income such as foreign earned income, Social Security benefits, municipal bond interest, etc.

 

14) 2011 Standard mileage rates for computing expenses per table below:

 

BUSINESS

MEDICAL/MOVING

CHARITY

$0.51

$0.19

$0.14

 

15) If itemizing deductions, you may elect to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction permitted for state and local income taxes.

16) Self-employment tax: If you are a US citizen living in Israel and operating an unincorporated business (working as an  (עצמאי  then you are subject to US self-employment tax on your net business income in addition to your Israeli Bituach Leumi payments. Although there is a tax treaty between Israel and the U.S. that eliminates double taxation – there is no similar agreement between the two countries regarding social security payments.

Of this self-employment tax 50% is deductible above the line and 50% is used in arriving at taxable net income, therefore, the effective rate is 12.42% (13.3% X 93.35% (100-[13.3/2]) on income up to $106,800 in 2011.  The Medicare tax of 2.9% applies to all amounts above this ceiling. The effective Medicare tax rate is 2.86% (2.9% X 98.55% (100-[2.9/2]).

17) Refundable Child Credit Eased - Currently, a taxpayer receives $1,000 tax credit for each qualifying child under the age of 17. To the extent the child credit exceeds the taxpayer´s tax liability the taxpayer is eligible for a refundable credit (the additional child tax credit). The earned income generally needed to claim the additional child tax credit remains at $3,000 in 2011.

18) Deduction for Higher Education Tuition and Related Expenses. The 2010 Tax Relief Act extended the tax deduction for qualified education expenses through December 31, 2011. The deduction is capped at $4,000 for individual taxpayers whose adjusted gross income is $65,000 or less and married joint filers whose income is no more than $130,000. 

19) American Opportunity Tax Credit for Higher Education Tuition ExpensesThe 2009 Recovery Act enhanced the Hope higher education credit for 2009 and 2010. The 2010 Tax Relief Act extended this AOTC for an additional two years, through December 31, 2012. You can claim maximum refund of $2,500 per eligible student per year (Can be yourself, your spouse or your dependents).

20) Form 5471Information Return of U.S. Persons With Respect to Certain Foreign Corporations is used by certain U.S. citizens and residents who are officers, directors, or shareholders in certain foreign corporations. This tax form, with its many schedules, is used to satisfy the reporting requirements of Sections 6038 and 6046, and is filed together with the individual’s annual tax return.  There is a $10,000 penalty for late filing.

 

REMINDERS

A)    No matter where they live all U.S. citizens and residents must report their world-wide income, including wages and self-employed income, even though it might be exempt as foreign earned income (Sec. 911 exemption for 2011-$92,900; 2012-$95,100).

B)    U.S. Social Security benefits received by Israeli residents are not taxable in the US due to the U.S.-Israel Tax Treaty.

C)    U.S. citizens and residents may deduct on their U.S. tax returns charitable contributions to Israeli recognized charities up to 25% of their Israeli sourced income in accordance with the U.S.-Israeli Tax Treaty.

D)    The estate of persons dying in 2011 will have a $5 million exemption and in 2012- $5.12 million, and similarly for the gift and generation-skipping tax. The maximum estate, gift and generation-skipping tax rate for 2011 and 2012 is 35%.