Tax Year 2011 brought no “major” tax changes, but many tax changes could significantly impact the preparation of your federal 1040.Take a moment to review these changes:

First installment of taxes owed on 2010 Roth conversions.  Individuals who did a Roth conversion in 2010 and elected to spread the tax payment over 2011 and 2012 will have to pay one-half of the tax owed on their 2011 income tax return. However, if a taxpayer took a distribution in 2011 from their 2010 Roth conversion, they may be required to pay more to cover taxes on the distributed amount. In addition, tax on any additional conversions done in 2011 will have to be included on the 2011 tax return. If you elected to spread the payment or took a distribution in 2011, make sure you bring that documentation with you so we can discuss options and calculations.

Changes for investors in reporting basis. If you’re an investor, the IRS will receive a revised Form 1099-B from your broker that now records the basis of transactions during the year. You should also receive a copy of that form. The IRS will check to see that this information matches the basis reported on your return. Additionally, these transactions will now be reported on the new Form 8949, rather than directly on Schedule D. Be sure you bring all 1099-Bs to our tax appointment.

Carryover basis on inherited assets. If you inherited assets where the estate elected to use the 2010 estate tax repeal option, you will receive a Form 8939 in January or February from the estate executor providing the basis information for those assets. An heir of a 2010 estate using the 2010 estate tax repeal option (and who sold the asset before receiving Form 8939) may be surprised at the amount of capital gain owed on the sale. It can be a complicated calculation, so if you inherited assets and receive Form 8939, bring that with you to our tax appointment.

New requirements for reporting foreign assets. Foreign Account Tax Compliance Act (FATCA) reporting requires foreign assets to be reported if they have a total value of more than $50,000 ($100,000 if married filing jointly).  FATCA is broader than what is defined under the Report of Foreign Bank and Financial Accounts, or FBAR. In addition to the prior obligation to report FBAR accounts on Form TDF90-22.1, FATCA must now be reported on a new Form 8938, so if you have a foreign account with balances of $50,000/$100,000, bring that information with you to the tax appointment.

New W-2 reporting of employer-sponsored health care coverage. Although it is only optional for Form W-2s issued in 2012 (becoming mandatory in 2013 under the health care reform legislation), some employees may receive W-2s for 2011 that include a new code (DD) in Box 12 along with the amount for employer-sponsored health care coverage. This provides the IRS with information to determine if the employer and employee have complied with the health insurance mandates of health care reform. However, as those mandates are not yet in effect, this added information on the W-2 does not impact 2011 federal tax return filing requirements.

Employee retention credit. This credit related to 2010 hiring, however, it required retaining the employee for at least 52 weeks to qualify for the credit, thereby moving eligibility for the credit to 2011 tax returns. To qualify for the credit, the employer must have paid wages in the last 26 weeks equal at least to 80 percent of the wages for the first 26 weeks. The credit is claimed on Form 5884-B and is the lesser of $1,000 or 6.2 percent of the retained worker’s wages during the period.

Note: If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.

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