On December 24, 2011, Congress extended a bill that created a "payroll tax holiday" for the first two months of calendar year 2012, specifically as it pertains to the United States' Social Security program. Had an agreement not been made, the bill would have expired on December 31, 2011, causing taxes to increase for many Americans.

Under the payroll tax holiday, the social security tax on self-employment decreased from 12.4% to 10.4%, while the social security tax on wages decreased from 6.2% to 4.2%.

These reductions translate to equal savings for both self-employed people and wage-earners. As self-employed people must pay both the employer and employee portions of the social security tax (total of 12.4%), they will now pay 6.2% as an employer and 4.2% as an employee.

While this 2% drop may not seem like a lot, if your salary, after deductions, comes in at around $50,000, this cut has saved you approximately $1,000 in taxes this year.

As of now, the "holiday" is in effect only for January and February, 2012 and will return to the 12.4% and 6.2% levels for self-employed and wage earners respectfully in March. Currently, President Obama is pushing for Congress to pass a bill that extends the payroll cuts through all of 2012.

State of Connecticut Taxes

In the summer of 2011, newly elected Governor Malloy made some drastic changes to the State of Connecticut tax structure with a retroactive change to January 1, 2011.

First, the number of income tax brackets was increased from three to six with the top marginal income tax rate increased to 6.7%. With this change, the new income tax rates are 3%; 5%; 5.5%; 6.0%; 6.5% and 6.7%.

The second change involves the property tax credit available to Connecticut homeowners. The income tax credit for property taxes paid to a Connecticut political subdivision was reduced from $500 to $300.

For most taxpayers, there are many popular credits and deductions that are available if eligible. These credits include: educational credits, adoption credits, dependent care credits, educator's deductions as well as student loan interest deductions.

Educational Credits:

Through tax year 2012, taxpayers who pay for qualified higher education expenses can reduce taxes by claiming an education credit paid on behalf of self, spouse or dependent. These benefits are limited by the taxpayer's filings status and taxable income.

The American Opportunity Tax Credit made temporary changes to the education credit known as the Hope Credit. It added that taxpayers would be eligible to include required course materials such as books, supplies and equipment needed for the course of study to the list of qualifying expenses. The change also allowed the credit to be claimed for four years of post-secondary education instead of two.

Eligible students are required to be enrolled in a degree program at least half-time for the tax year. The maximum credit of $2,500 per student in 2011 and 2012 covers monies spent for tuition, fees, and course materials (books) for the first four years of post-secondary education in a degree or certificate program.

Adoption Credit:

For taxpayers who adopted a child in 2011 or anticipate adopting a child in 2012, a credit is available for the adoptive parents. This credit may be claimed for qualified expenses or for the adoption of a child with special needs.

Qualified expenses include adoption fees, attorney fees, court costs, travel expenses and re-adoption in state court. While this credit is refundable for a taxpayer who adopted a child in 2011, the credit is no longer refundable for 2012.

Dependent Care Credit:

Taxpayers who have children under the age of 13 claimed as a dependent may be eligible to take up to $600 annually in a tax credit. If a taxpayer made payments to a third party for care of a minor child outside of the home, they are eligible for this credit. The monies used for before/after school, day camps and similar programs and transportation expenses can be included in the expenses.

Taxpayers should investigate and explore their employer's benefits program to determine their eligibility for establishing a dependent care account to be used for paying for such benefits.

Educator's Deduction:

For tax year 2011 only, eligible educators including kindergarten through grade 12 teachers, instructors, counselors, principals or aides who work in a school for at least 900 hours can deduct up to $250 for classroom supplies purchased out of pocket in 2011.

Qualified expenses include books, supplies, computer equipment, other equipment and supplementary materials that are used in the classroom. For expenses greater than $250, there is an opportunity to deduct these expenses elsewhere on the return.

Student Loan Interest:

Taxpayers who pay student loans during the year are able to deduct such interest paid on loans for tuition, required enrollment fees, books, supplies, equipment, room and board, transportation and other necessary expenses.

If a loan is in the name of the student, the student can deduct interest paid by his or her parents providing the student is not claimed as a dependent. If the loan is in the student's name, parents cannot claim the deduction as they are not legally obligated to pay back the loan.

Annually the student loan interest deduction is $2,500.00 and is phased out or reduced based upon a client's filing status and income level.

Unreimbursed Business Expenses:
When considering deducting unreimbursed business expenses on your income tax return, tax planning is more than following the rules and proving that the expense was incurred. Tax planning for unreimbursed business expenses includes compiling adequate records to substantiate a particular deduction by ensuring that the expenses are ordinary AND necessary to perform your job.

Ordinary expense is an expense that is common and accepted in the taxpayer's line of work. While necessary expense is an expense that is helpful and appropriate for work.

You should maintain records through monthly credit card statements, account books, log books and canceled checks which clearly indicate the date, place and amount of the expense incurred.

Taxpayers should ensure (through reviewing employer's reimbursement policy) that they are not entitled for reimbursement of certain items or particular type of expenses that are being deducted on the personal return.

Go Green Initiatives  

During 2011 and 2012, the government has implemented an eco-friendly approach to discussing residential energy credits as well as plug-in electric vehicle credits for qualified vehicles.

Residential Energy Credits:

The residential energy credit is divided into two main categories with two separate characteristics.

First, the non-business energy property credit applies to building components such as doors, windows, insulation, heat resistant roofs, air conditioning, stoves and water heaters. Individual homeowners can claim 10% of the material costs up to $500. This number has decreased from the collective 2009 and 2010 amount of $1,500.00. This credit is limited to a lifetime deduction of $500.00.

Qualifying property for non-business energy credits must meet higher efficiency standards and limits have been established for certain types of improvements. (I.e. $150 for furnaces and water boilers, $200 for windows, and $300 for water heaters, air conditioners, and bio-mass stoves).

The second type of residential energy credit is the residential energy efficient property credit which applies to solar and wind powered property as well as geothermal heat pumps. Homeowners can claim 30% of the cost of eligible property with no maximum amount. While residential energy credits offer a higher credit amount, they are very expensive to install initially.

The plug-in electric drive vehicle credit ranges from $2,500 to $7,500 for qualified plug-in electric drive vehicles purchased after December 31, 2009. Qualified vehicles must draw propulsion using a traction battery of at least 5 kilowatts, use an off-board source of energy for recharging, and meet certain environmental criteria. While there is no income phase out for this credit, it will begin to phase out when manufacturers sell 200,000 vehicles.