As we prepare to welcome in the New Year, we would like to highlight some changes to the tax code that may affect your filing situation.

2011 brought with it three new Acts: “Small Business Jobs Act of 2010”; “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010”; and the “Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011”.

Following is a brief summary of how most taxpayers will be affected for 2011 and the upcoming 2012 tax year.

Social Security Tax: Beginning in 2011, the employee side of the Social Security Tax was temporarily reduced from 6.2% to 4.2%. This also applies to the self-employment tax, lowering it from 12.4% to 10.4%. While Obama has expressed his interest in continuing this tax break for 2012, as of now it has not happened.

Income Tax Rates and Brackets: The current Individual Income Tax brackets of 10%, 15%, 25%, 28%, 33% and 35%, and capital gains tax rates of 0% and 15% are extended through 2012.

Foreign Financial Asset Reporting: As we noted in our blog last month, The Foreign Account Tax Compliance Act (FATCA) will impose reporting requirements for individuals and foreign institutions with account values greater than $50,000. Steep penalties are assessed for not properly disclosing foreign assets on applicable returns.

Itemized Deductions: High income taxpayers’ itemized deductions will not be limited as previously anticipated. This phase-out which was scheduled for 2011 has been delayed and will begin in 2013. The deductibility of Mortgage Insurance premiums has also been extended through 2012.

Tuition & Education Tax Issues: The American Opportunity Tax Credit, Coverdell Education Savings Accounts Provisions, Tuition Deduction, and Student Loan Interest Deduction have all been extended through 2012. The Educator Expense Deduction has been extended through 2011.

Estate and Gift Tax: Effective for 2011 and 2012, the Estate Tax and Gift Tax exemption have been set to a lifetime exclusion of $5 million and $5.12 million in assets respectively. We patiently await guidance from Congress to the future of the estate and gift tax.

Health Act (Affordable Care Act):  This recent legislation provided taxpayers with Children under the age of 26 the ability to remain on their parent’s employer insurance plans. Employees will not be required to report these benefits as additional income as long as the child has not reached the age of 27 by the end of the applicable tax year.

Some reminders and updates for business owners:

Section 179: Effective last year, Sec. 179 deduction was increased to a maximum $500,000 per year. As it stands now, the $500,000 is only effective for the 2010 and 2011 tax years and is anticipated to revert to the $250,000 Sec. 179 deduction limit in 2012.

Mileage Rates: The standard business mileage rate for 2011 is 51 cents per mile for the period January through June and 55.5 cents per mile for the months July through December. For 2012, the IRS has recently announced they will maintain the 55.5 cents per mile rate.

Cell Phone Usage: The Small Business Jobs Act of 2010 removed cells phones as listed property and eliminated the detailed record keeping previously required. Cell Phones are now deducted in a similar manner as other most business expenses are, and employees provided a cell phone by their employer are not required to report the value of the benefit in their income.

Tax preparation and planning is an important component of the wealth management process.

We are here to help. Please contact us to discuss these changes and how they may affect you for the 2011 and 2012 tax year.

Wishing you a wonderful, healthy and happy New Year.