Tax Changes You Need to Know About
Although there aren't a lot of changes that affect 2011, there are a few important items to note: 2012 will bring many changes for state tax returns that will require more planning than many of us are used to.
There are changes being implemented by the IRS to help ensure the quality of paid tax preparers. The first step is the requirement for a PTIN – Preparer Tax Identification Number. This is now a requirement of all paid professionals and, according to the IRS, does involve a background check. The next step is passing an IRS exam that allows a tax professional to be a Registered Tax Return Preparer. This exam will be required for all paid preparers beginning with tax year 2012, which means the taxes prepared in 2013. A good tip-off that your preparer isn't following these rules is if he or she doesn't sign your return, or if you paid for preparation and at the bottom of your 1040 or 1040A, where you sign, the preparer information simply says "self prepared."
Many of the changes for 2011 actually stem from 2010. For example, if you converted your traditional IRA to a Roth IRA in 2010, you had the option to split the tax between your 2011 and 2012 tax returns. Because of the ability to plan for the extra tax liability, many who converted IRAs chose this option. For those of you that did, you should remind your tax advisor if he or she fails to ask about this.
The other change which began in September of 2010 was the ability to take 100 percent bonus depreciation on personal property acquired and placed in service after Sept. 9, 2010. While this may sound like a great deal, being able to write off the entire cost of something, it may not be in your best interest. Most northern Michigan businesses are running on a slim profit margin, if there is any profit at all. The last several years have been tough for us. It is only within the past six months that many business owners have seen the impact from the economic upswing the rest of the United States is seeing. If your business is already in the red, it makes little sense to write off the cost of equipment. It would be much more beneficial to delay recovering the cost until your business has the income to support the deduction.
The interesting part of this bonus depreciation is that the way the law is written, the 100 percent bonus depreciation is automatic. Taxpayers, including corporations, have to opt out of taking the 100 percent bonus depreciation. If your tax advisor doesn't sit down and show you all the possible options available, take your information and find someone who will.
Another tie-in with the bonus depreciation involves depreciation rules for vehicles. While this won't involve as many taxpayers as the bonus depreciation, there are still some items to note. If you decide to take the bonus depreciation on a vehicle, the amount is limited to $11,060 and no further depreciation is allowed on the vehicle until year seven. So, again, it will be a much better choice for many taxpayers to opt out of the bonus depreciation.
2012 brings many changes to Michigan taxes; the first and most significant involves the replacement of the Michigan Business Tax with the Corporate Income Tax (CIT). This will relieve anyone filing a sole proprietor, partnership or S-Corp return from any filing obligation, unless the business elects to file to retain certain credits. Only C-corporations or those electing to be taxed as C-corporations on the federal level will be subject to the CIT.
A second noteworthy change involves taxation of retirement benefits. For individuals born before 1946, there is no change. These taxpayers will be treated just as they are under current tax law. What has been confusing for many taxpayers is that many pension and IRA managers have distributed copies of the Michigan W-4 P form, which allows the taxpayer to sign up for withholding from pensions and IRAs. These were delivered on a mass level, even to those unaffected by the changes, so there has been some confusion.
The taxpayers that are affected are actually split into two groups: Those born between 1946 through 1952 are subject to one set of rules. Those born in 1953 and later are covered under a separate system. Social Security, railroad retirement and military pensions will not be taxable to anyone. The rules then break down the groups and, in very general terms, give a $20,000 deduction for single taxpayers and $40,000 for married taxpayers filing a joint return. Details are available at www.michigan. gov/taxes.
Remember to contact your tax advisor with any questions you have, or any time you have a drastic change in your life.
Jonna Stebleton is a Master Tax Advisor with H&R Block, Benzonia; 231-882-5220.