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Tip of the Month for March 2012

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Tip: More Key Changes to Tax Form 1040

There are some important things to understand about tax Form 1040 before preparing your 2011 return. As always, there are many changes and variables that will affect your return. We have discussed some key changes previously, but neither that commentary nor this article is intended to replace the advice of a professional tax consultant. Here are some of those changes:

Social Security Tax Component of the Self-Employment Tax

The Bush tax cut extensions included a reduction in the Social Security tax component of the self-employment tax from the usual 12.4 percent of net self-employment income to 10.4 percent. This reduction applies to 2011 only. Medicare tax remains at the usual 2.9 percent. For 2011 Social Security tax purposes, the ceiling for net SE income is $106,800.

Self-Employment Tax Deduction (Page 1)

Because of the above-mentioned Social Security tax component tax break, there is a new formula in place for your self-employment tax deduction. Instead of deducting half of your self-employment tax bill on page 1 of your Form 1040, you tax deduction will be 57.51 percent of the self-employment tax amount as long as that tax amount does not exceed $14,204. If your self-employment tax bill does exceed this number, you will multiply the self-employment tax amount by 50 percent and then add $1,067. These revisions are designed to allow you to end up with the same self-employment tax deduction that you would have without the new Social Security tax cut.

Roth Conversions

Many people converted their IRA accounts into Roth accounts in 2010. If you did so, for tax purposes the conversion was treated as a taxable liquidation of a traditional IRA followed by a contribution to a Roth account. For 2010 conversions only, savers were given the option of reporting half the taxable income on their 2011 Form 1040 and the remaining half on their 2012 Form 1040. The same provisions were available to allow people with other qualified retirement plans (e.g. profit-sharing plans) to distribute their savings into a Roth IRA.

Energy-Efficient Home Improvement Credits

A federal income tax credit of up to $500 is available for 2011 for expenditures on qualified energy-efficient home improvements including, but not limited to, new windows, roofs and central air-conditioning systems. If you have already claimed credits in previous years, these claims will be subtracted from the 2011 limit. Note: in past years, the maximum tax credit for energy-efficient home improvements was much more generous.

The IRS Goes Digital

With the aid of lawmakers, the IRS is putting increasing pressure on tax professionals to file returns electronically. It might not be your preference, but this could be the year your Form 1040 is electronically filed.

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