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It's difficult to keep up with all of the tax changes that take place from year to year. 2011 was intended to be the year when many of the Bush tax cuts would expire and subsequently cause tax rates to increase. However, thanks to the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, many of the tax deductions and credits that were set to expire in 2011 were either extended or modified. Please keep in mind that although most of these changes are favorable, they are set to expire after 2011 or 2012.
Summary of Some of the 2011 Tax Changes:
2011 Tax Brackets: The rates carry over from last year, but the tax brackets have been increased slightly for inflation. These rates will remain in effect through the end of 2012.
2011 Tax Brackets
Married Filing Jointly
|10% Bracket||$0 – $8,500||$0 – $17,000|
|15% Bracket||$8,500 – $34,500||$17,000 – $69,000|
|25% Bracket||$34,500 – $83,600||$69,000 – $139,500|
|28% Bracket||$83,600 – $174,400||$139,500 – $212,300|
|33% Bracket||$174,400 – $379,150||$212,300 – $379,150|
Taxes on Investments
Both dividends and long-term capital gains have stayed at the low rates that were originally supposed to end in 2010. The rate is zero for taxpayers who fall within the 15 percent or lower tax bracket, while taxpayers in the 25 percent or higher tax bracket pay the 15 percent rate. These rates are in effect through the end of 2012. After 2012, the capital gains rate will go up to 20 percent and the dividend tax rate will become the same as ordinary income tax rates.
Estate Taxes & Gift Taxes
If you have assets that you would like to give to friends or family, the current estate and gift tax system is not as favorable as it was in 2010. For 2011, there is a top rate of 35 percent with a single exemption of $5 million per person ($10 million per couple), per estate. Giving tax-free gifts is still capped at $13,000 per recipient per year – so as the gift giver, you can make an unlimited amount of $13,000 in gifts to different individuals. For 2012, the top rate stays the same with the exemption amount indexed for inflation.
Roth IRA Changes
This year, you can convert your traditional IRA to a Roth IRA, regardless of your income. Last year, individuals who converted could defer conversion income into later years, but conversions taking place in 2011 do not have this option.
1 Year Temporary Payroll Tax Reduction
Last year, the Social Security payroll taxes were cut by 2 percent, up to $2,136 per worker (whether filing married or single). This remains in effect through the end of 2011. Most employees already receive this tax cut out of their automatic tax withholding. Self employed individuals will experience the payroll tax reduction in the form of a drop from 12.4 percent to 10.4 percent and will be included on the quarterly withholding worksheet. Lower income individuals may not see a payroll tax cut at all, but instead a tax increase by the sheer fact that the Making Work Pay Tax Credit, which offered more savings for single workers making $20,000 or less (or married couples making $40,000 or less,) expired in 2011.
Alternative Minimum Tax Patch
The AMT exemption rates are higher than 2010, but remain in effect through the end of 2011. Single filers qualify with income levels of $48,450 or lower, while married couples qualify with income levels at $74,450 or lower. Furthermore, nonrefundable credits can still be used against the AMT.
Some Extensions of Important Tax Credits
The modified child tax credit, the increased Adoption Tax Credit, the credit to employers for child care assistance, the 3rd Child Earned Income Tax Credit (EITC), and the Dependent Care Tax Credit have all been extended through 2012.
Homeowner Energy Tax Credits
The energy tax credit – which allows credit for energy efficient home improvements – has been extended but is useful to fewer taxpayers than it was in the past. The credit is now set at a maximum of $500 per tax payer for a lifetime, which means that anyone who received the $1,500 tax credit last year will not qualify. The homeowner energy tax credit will be available through the end of 2011.
Photo Credit: John-Morgan