Tax Return Confusion

Last week, the Congress committee responsible for cutting the deficit failed to reach an agreement on how to address U.S. fiscal woes.  Some individuals on the so-called Supercommittee have championed the idea of reducing America’s massive debt by raising taxes on businesses and individuals.  However, because the group remains so divided, the implications of inaction present some serious question marks for American taxpayers.

At the end of 2011, several sections of tax law are set to expire:
Alternative Minimum Tax Patch
Alternative minimum tax (AMT) is imposed on wealthy taxpayers.  In late 2010, an AMT “patch” reduced the number of people subject to the AMT from 20 million to 4 million.  This provision will expire at the end of 2011.
 
Charitable contribution of IRA assets
In 2013 and beyond, deductions you can take for charitable donations is uncertain.  Several proposals to reduce the amount wealthy individuals can deduct for charitable contributions are brewing in Washington D.C.  The Pease limit which disallows 3% of total itemized deductions is set to return in 2013.  For the rest of 2011, donors over the age of 70.5 can contribute up to $100,000 of IRA assets to qualified charities.  This gift is excluded from income.  If Congress fails to act soon, this popular provision will expire for 2012 and beyond.

Despite the uncertainty surrounding expirations at the end of 2011, there are a few things American taxpayers can bank on.  In 2013, a new net investment income tax of 3.8% is set to become law.  Investment income encompasses interest, dividends, rents, some annuities, and capital gains.  This tax will affect taxpayers with adjusted gross incomes exceeding $250,000.

Currently, the maximum rate on long-term capital gains is 15%, but as an investor, you can time gains and losses to minimize your tax liability.  Up to $3,000 of long-term capital losses can be deducted against ordinary income per year.  If the loss is in excess of $3000, the remaining amount can carry forward to offset income in future years.  If a stock in your portfolio isn’t performing well, you can cash out and use the loss to offset current or future gains.  Then, if the losing stock has good long-term prospects, you can repurchase the stock after taking the loss.  However, you want to avoid a common technique called “wash sales” in which the same investment is acquired fewer than 30 days before or after a sale.  The IRS will not allow you to deduct losses if it deems activity as a wash sale.

Unreimbursed medical expenses are deductible, but only if they exceed 7.5% of a taxpayer’s adjusted gross income.  To exceed the 7.5% fence, some taxpayers group their deductions into one year.