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Summary of 2011 Tax changes – cuts, credits, deductions, exemptions and energy credits

President Obama signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 on December 17th. I wrote about what the major tax cuts would mean to us, a common person. There is more than just tax cuts in this tax deal. I didn’t realize some of these credits/deductions are expiring. summary tax changes 2011For example, we do use the employer provided education assistance for our graduate school tuition. This was supposed to expire by the end of 2010. Yikes! We would have to pay taxes for that extra $5000 that the employer reimburses. Now that we know that these are expiring again in 2012, we can look out for extensions or plan accordingly. So here is a summary of all the changes for that are going to impact us in 2011 as an individual tax payer and as a small business owner.

Individual Income Tax Rates

  • Temporarily extend the 10% bracket : If this was not extended, the 10% bracket would have gone up to 15%
  • Temporarily extend the 25%, 28%, 33% and 35% brackets : If the current law was allowed to expire. The rates would have been 28%, 31%, 36%, and 39.6% respectively. With this tax cut, the current tax brackets as it stands now will be -
Marginal Tax Rates Single Married filing jointly Head of Household Married filing separately
10% $0-$8,500 $0-$17,000 $0-$12,150 $0-$8,500
15% $8,500-$34,500 $17,000-$69,000 $12,150-$46,250 $8,500-$34,500
25% $34,500-$83,600 $69,000-$139,350 $46,250-$119,400 $34,500-$69,675
28% $83,600-$174,400 $139,350-$212,300 $119,400-$193,350 $69,675-$106,150
33% $174,400-$379,150 $212,300-$379,150 $193,350-$379,150 $106,150-$189,575
35% $379,150+ $379,150+ $379,150 $189,575+


More details : 2011 Income tax rates

    • Standard Deduction for 2011 :
      • $5,800 for unmarried taxpayers or married taxpayers filing separately
      • $11,600 for married taxpayers filing jointly
      • $8,500 for taxpayers filing as head of household.
      • Age/Vision adjustment
      • Real Estate tax adjustment
    • Personal Exemption for 2011: The personal exemption amount will be $3,700 ($50 increase from the 2010 amount $3,650)

General Income Tax Incentives

  • Temporarily repeal the personal exemption phase out : The personal exemption phases out for people earning more than a certain amount. This is repealed temporarily until 2012.
  • Temporarily repeal the itemized deduction limitation: The amount of itemized deductions that a taxpayer may claim was reduced, to the extent the taxpayer’s AGI is above a certain amount. This limitation is also repealed until 2012.
  • Deduction of state and local sales tax : The ability to deduct state and local sales tax instead of the state and local income tax will be extended through 2011.
  • Deduction of private mortgage insurance premiums : Homeowners can continue to deduct mortgage insurance premiums through 2011.

For a entire list of easily overlooked tax deductions and tax credits, check out this post : Easily overlooked tax deductions & Credits checklist.

Capital Gains and Dividends

  • Temporarily extend the capital gains rates : The current rates 0% for everyone under the 25% tax bracket, 15% for those above the 25% rate, will be in place for the next 2 years.
  • Temporarily extend the dividend rates : Rates are same as the capital gains rate – 0% for everyone under the 25% tax bracket, 15% for those above the 25% rate.

Incentives for family and children

  • Extension of child tax credit
  • Marriage Penalty relief : I hate the marriage penalty. The marriage penalty relief is extended for the standard deduction, the 15 percent bracket,for an additional two years, through 2012.
  • Temporarily extend the expanded dependent care credit : The dependent care credit allows a taxpayer a credit for an applicable percentage of child care expenses for children under 13 and disabled dependents. This deal extends the amount of eligible expenses from $2,400 for one child and $4,800 for two or more children to $3,000 and $6,000, respectively.
  • Temporarily extend the increased adoption tax credit and the adoption assistance programs exclusion: Taxpayers that adopt children can receive a tax credit for qualified adoption expenses. This tax credit will stay at $10,000 until 2012. Any help from an employer assistance program will be excluded from the income up to $10,000.
  • Temporarily extend third-child EITC : Families with 3 or more children will continue to receive the increased earned income tax credit of 45% of the family’s first $12,570 of earned income. The increased beginning point of the phase-out range for all married couples filing a joint return (regardless of the number of children) will also stay put until 2012.

Education Incentives

  • Temporarily extend expanded Coverdell accounts: The annual contribution limit until 2012 is $2,000 and the money can be used to pay for elementary and secondary school expenses as well.
  • Temporarily extend the expanded exclusion for employer provided education assistance : Up to $5,250 provided by the employer as part of the education assistance program is exempt from income and employment taxes.
  • Temporarily extend the expanded student loan interest deduction
  • Temporarily extend the exclusion from income of amounts received under certain scholarship programs.
  • Temporarily extend the American Opportunity Tax Credit : The tax credit of up to $2,500 of the cost of qualified tuition and related expenses including course material is extended until 2012.
  • Above the line deductions for qualified education expenses : The ability to use above the line deductions for qualified tuition and related expenses is extended through 2011.

Energy Tax Credits

This is one area where the 2010 energy tax credits are superior to the 2011 ones.

  • Energy tax credit is 10% of the expenses up to $500 (it was $1500 in 2010)
  • Credit for Energy star windows capped at $200
  • Heating system will have a maximum $300 credit and now comes with  much stringent rules.

For detailed information on the new energy tax credits, check out my 2011 Energy Tax Credits post.

Estate Tax

  • Temporary Estate Tax Relief : $5 million per person and $10 million per couple is exempt from estate taxes.
  • Reduced Estate tax rate : The top tax rate will be 35% for the estate, gift, and generation skipping transfer taxes over 5 million for two years, through 2012
  • Portability of unused exemption : Unused exemption of a deceased spouse will transfer over to the surviving spouse.
  • Reunification : The estate and gift taxes are unified.

Other

  • Temporary Individual Alternate Minimum Tax(AMT) Relief : The AMT is patched every single year and this year is not an exception. The exemption amounts for 2010 are $47,450 (individuals) and $72,450 (married filing jointly) and for 2011, $48,450 (individuals) and $74,450 (married filing jointly).
  • Extension of unemployment insurance : The long term unemployment insurance is extended for another 13 months.
  • Payroll holiday : Currently employees pay 6.2% and employers pay 6.2% social security taxes on wages up to $106,800. Self-employed individuals pay the entire 12.4%. With this new law the employee portion of the social security tax with be cut 2%. So the employees with pay 4.2%, employers 6.2%. The self employed individuals pay 10.4% in social security taxes.
  • Above the line deductions for school teachers : Elementary and Secondary school teachers can take up to $250 above the line deductions for professional expenses incurred, like books, office supplies, computer, etc.
  • Tax free IRA distributions for charitable purposes : Individuals can make tax free distributions to charity up to $100,000 per taxpayer directly from their Individual Retirement Accounts (IRA).
  • Mass Transit benefit : The employer provided transit and vanpool benefit is excluded from income tax. This exclusion will now extend to include employer provided parking benefits as well.
  • Business Incentives : I am not listing everything here, there are a whole lot of business incentives included in this bill. For example, 100% write off of depreciable property, enhanced charitable deduction.

For a more detailed listing of all these and a lot more business incentives check The United States Finance Committee website. Other than the energy credits I think 2011 will be a good year for taxes. I just have to keep an eye on the incentives (like the employer education assistance) after 2011 to make sure we plan properly.

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