Changes to the 2011 Form 1040

January 18, 2012|Jamie Downey, Globe Staff

As you know, the volume of annual changes to the tax code is increasing. This trend looks like it will continue for the foreseeable future. As you start to receive your 1099’s, W-2’s K-1’s etc, and think about preparing your 2011 Form 1040, here are a few changes that you may want to keep in mind:

Reduced self-employment tax — For 2011 self employment tax relating to Social Security dropped from 12.4 percent to 10.4 percent. The ceiling on Social Security self-employment tax is $106,800 of self-employment income for 2011. The Medicare component remains at 2.9 percent with no ceiling. There is a corresponding effect to this change. Typically, self employed folks deduct half of their self-employment tax on page 1 of the 1040. The 2011 calculation will multiply your SE tax by 57.51 percent (up to a certain threshold). The effect of the calculation is such that your self-employment deduction should be the same deduction that you would received without the tax cut.

Health insurance — Self-employed folks are no longer able to deduct costs of health insurance on Schedule SE. While the self-employed will be paying self-employment tax on these expenses, they probably won’t be paying federal income tax on them. Health insurance is usually still deductible on the line 29 of the 1040.

Residential energy efficiency improvements — There has been a drastic reduction in tax credits available for qualified energy efficient home improvements. The federal tax credit now stands at a maximum lifetime credit of $500. In 2010 the maximum was $1,500. Any credits taken in earlier years are subtracted from the $500 limit.

Roth IRA conversion — If you converted an IRA to a Roth IRA in 2010, you had the option of deferring the income and reporting half of it in 2011 and half of it in 2012. For those of you who exercised this option, half of that income must now be reported on either line 15b or 16b your 1040.

Capital transactions — Capital gains and losses must now be reported on Form 8949 and the totals are reported on Schedule D. This schedule provides additional information to the IRS regarding the transaction.

Foreign financial assets — If you own foreign financial assets, you may need to disclose these assets to the IRS on Form 8938.