Don’t overpay when filing 2011 tax return

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Elliot Raphaelson

As in most years, there are several changes in the tax code that may have an impact on your 2011 tax return. Whether you prepare your own return or hire someone to do it for you, you should know what changes have been made. Even if someone else prepares your return, you are responsible for its accuracy.

Certain changes, such as the increase in the standard deduction, will be apparent when you fill out your tax forms.

The maximum 2011 liability for your Social Security is $4,485.60. Make sure your employers have not withheld more than that. If you have worked for more than one employer, it is possible that more has been withheld than your maximum liability. Attach all copies of form W-2 to your return to ensure you are credited with any overpayment.

Confusing changes

Other changes may be confusing. In the middle of last year, the IRS mileage allowance changed. For the first six months of 2011, the deductible business mileage rate was 51 cents a mile; for the last six months, the rate was 55.5 cents. For medical and moving expenses, the deduction was 19 cents a mile for the first six months, and 23.5 cents for the last six months.

The credit for energy-efficient improvements to the home has been reduced to 10 percent, with an overall limit of $500 that is reduced by prior credits.

If you converted from a traditional IRA to a Roth IRA in 2010, and you selected the special two-year deferral rule, you must report half of the 2010 conversion income as a taxable IRA distribution for 2011.

Depending on your income, you may qualify for a tax credit on contributions to a qualified retirement plan. The credit may be equal to 10, 20 or 50 percent of the retirement contribution, depending on your adjusted gross income.

The income brackets have gone up this year, and those whose adjusted gross incomes are $28,250 ($42,375 if head of household; $56,500 if married filing jointly) or less qualify. (Note that this credit, and any other credit you are entitled to, reduces your tax liability on a dollar-for-dollar basis, making it more valuable than a deduction.)

Don’t forget these deductions

When you prepare your return, it is also important to make sure you take all the deductions you are entitled to. I recommend that you review www.kiplinger.com for a comprehensive list of commonly overlooked deductions. What follow are three important ones, to which I’ve added some elaboration.

  • Reinvested dividends. If you own mutual funds, and have interest and dividends reinvested into the funds, the mutual fund informs you and the IRS annually of the amount of earnings that are taxable for the prior year. If you eventually sell some or all of your shares, make sure that you do not report gains on which you have already paid taxes.

For example, say you invested $5,000 in a common stock fund. For five years (prior to 2011) you received a total of $1,250 in dividends, and you paid taxes on that amount. You sold all your shares at the end of 2011 and received $6,000. You also received $250 in dividends in 2011 that was reinvested into the fund. Your “basis” in this fund is $6,250 (your initial purchase of $5,000 plus the $1,250 you paid in taxes for the dividends).

On your 2011 tax return, you should be reporting a long-term “loss” of $250 ($6,000 minus $6,250). You would also be reporting dividend income for 2011 of $250. Your mutual fund should be able to provide you with the back-up information you need.

  • Real estate points. If you refinanced your mortgage in 2011, you may prorate any points you paid over the length of the new mortgage. For example, assume you paid your financial institution $3,000 in points for a 15-year refinanced mortgage at the beginning of 2011. You are allowed to deduct $200 a year for 15 years.
  • Health insurance for business owners. If you own your own business, or have self-employment income, and file Schedule C, and you are eligible for Medicare, you can deduct premiums on your return for you and your spouse. You do not have to itemize in order to take this deduction.

You are allowed this deduction only if you do not have a subsidized health plan from your employer or your spouse’s employer. If you previously filed a return without deducting Medicare premiums, you can file an amended return to refigure the deduction.

File electronically for free

Another tip: Taxpayers with adjusted gross incomes under $57,000 can file their returns electronically for free through the IRS website www.freefile.irs.gov. The agency has agreements with tax preparation companies to provide the service, and you can choose which one you would like to use. 

If your income is higher than that threshold, you can always use the Fillable Forms that the IRS provides at www.irs.gov. The forms do basic math calculations and allow you to file electronically at no charge.

No support is provided with the Fillable Forms, nor are state returns included. The IRS calls it “the simple electronic equivalent of paper forms.”

© 2012 Elliot Raphaelson. All rights reserved. Distributed by Tribune Media Services, Inc.