Year End Tax Planning 2011

 1. Social Security Taxes

The one-year-only reduction in the Social Security tax expires at the end of 2011. In 2012, the Social Security tax will revert to its regular rate of 12.4%, with half (6.2%) paid by employers and the other half (6.2%) paid by employees. Self-employed persons pay the full 12.4% rate as part of the self-employment tax. For 2011, there was a temporary rate reduction to 4.2% for employees and to 10.4% for self-employed persons.

2. Educator Expense Deduction

The above-the-line deduction available for teacher's out-of-pocket classroom expenses expires at the end of 2011. This deduction will not be available for 2012 unless renewed by Congress.

3. Tuition and Fees Deduction

The above-the-line deduction for college tuition expires at the end of 2011. For 2012, both the Lifetime Learning Credit and the American Opportunity Credit will be available for college students.

4. Alternative Minimum Tax

Two separate provisions impacting the alternative minimum tax (AMT) will expire at the end of 2011. First, 2011 will be the last year when personal tax credits will be allowed to offset both the regular tax and the AMT. For 2012 and future years, tax credits will offset the regular income tax, but not any alternative minimum tax. Secondly, the temporarily patched exemptions for the alternative minimum tax will end in 2011. For 2012 and future years, the AMT exemption amounts will revert to a lower statutory amounts ranging from $22,500 to $45,000. This will result in more taxpayers being subject to the AMT, and will increase the adjustments for taxpayers already subject to the AMT.

5. Adoption Tax Credit

The refundable nature of the adoption tax credit expires at the end of 2011. For 2012, the maximum amount of the adoption credit decreases slightly from $13,360 (in 2011) to $12,650 (in 2012). For 2012, any unused non-refundable adoption credit can be carried forward up to five years to offset the regular income tax.

6. Mass Transit Fringe Benefit Reduced

For 2011, the tax-free exclusion for mass transit fringe benefits was set at $230 per month and was the same amount for tax-free parking benefits. For 2012, mass transit benefits no longer enjoy parity with the parking benefit. The 2012 amount for mass transit benefits eligible for tax-free treatment is $125 per month; while the parking benefit amount is set at $240 per month.

7. Deduction for Mortgage Insurance Premiums

The deduction for mortgage insurance premiums expires at the end of 2011. This deduction will not be available for 2012 unless renewed by Congress.

8. Sales Tax as an Itemized Deduction

The optional sales tax deduction expires at the end of 2011. This deduction is available in lieu of the deduction for state and local income taxes, and is particular valuable for taxpayers who live in states with no income taxes.

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