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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 This is repealed temporarily until 2012.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.

{ 12 comments… read them below or add one }

retirebyforty

Awesome summary. All the info in one post! The extended tax cuts are really great for us since we will continue to concentrate on making more money in 2011. I love the 2% payroll tax cut as well. That money will go right back into the economy.

Reply

MoneyCone

Great post Suba! You should probably mention that 15% is for those in the 25% tax bracket and above. (25% *inclusive* wasn’t clear though I’m sure that’s what you meant!)

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krantcents

Although this is welcome, the benefits to me are marginal at best. My children are grown, my estate does not exceed the limit, and most of my investments are tax deferred accounts. Increasing taxes may have had a detrimental effect on the economy though!

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Everyday Tips

My gosh it is all so complicated. Suba, could you please initiate a flat tax for next year’s post? Thank you. :)

Thanks for all of the great info.

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The Biz of Life

Looks like there are a couple of goodies in there for me that I didn’t know about. Thanks for this comprehensive post.

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Steph

Im not sure if all of this is positive or negative..not too familiar with tax lingo. I wish i could understand this. However, this cant be positive…i am a newly wed as of Feb 2010. So this year “filing jointly”…we are out of $6,000+. I dont understand this. With 3 kids…why my taxes were cut by so much. I generally get $7000 refund and he generally gets $4000…and to be told..filing jointly we only get roughly $3300 back is devastating with 3 kids! Booo — tax cuts. THink imma write the president….im not happy at all!

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Chris

Really? So you don’t understand how refunds work? You get back an amount equal to the excess that you had deducted from your paychecks. So if you got “less” that is actually good in some cases because that means that you were able to utilize that money during the year instead of giving uncle sam a no interest loan. Please read and educate yourself better on how taxes work.
Additionally, if you file jointly because you were married in 2010 but were able to file as head of household in 2009 that is also a big difference. The tax code provides a larger deduction for single parent homes.

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Dave

Steph- You’re not following how it works. Everything is income based. You will not be penalized for filing jointly and having 3 kids. You cannot look at each individual tax item listed above and simply apply an amount to your situation. If you are used to a $7000 & $4000 return, respectively, you will likely qualify for a similar return, if not more when filing jointly. This is based on a simple assumption that your income wont exceed certain tax limits. If that is the case then you’re income offsets your return…which means you likely shouldn’t be receiving huge returns from the government because you are making more than what our governing body deems necessary to qualify for such returns. Tax Cuts are always and will continue to be in any working individuals/couples favor!

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Sandy

Nice work/info on this site….but I didn’t see what I wanted to see. Because we needed and took $57,000.00 out of an IRA this year (2011) I find that we will owe $13,000.00 + in tax next April. So I was trying to plan ahead to reduce that.
Most of the tax credits do not apply to us as we are 65 and retired. I was hoping I could get new energy star applicences to earn a credit and update my applicences. My husband was interested in getting a Street Legal Golf Cart and apply for that tax credit but we see no information on either.
Are there such credits for 2011?

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Suba

Sandy, I wrote a separate post on 2011 energy tax credits, should have linked to it, but here it is – http://www.wealthinformatics.com/2011/01/08/2011-energy-tax-credits/ Yes there is a credit for street legal golf cart. The plugin electric vehicle credit can be applied for your golf cart. Let me know if you need more information, I will gladly add that to the post. Thanks for dropping by!

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Tracie

I find myself this year working as a single person, not a homeowner, and my children are grown. I am looking for things that will reduce my tax, but don’t think there are any. Is there any help for someone in my situation?

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Kat

I am confused im single no kids i just wanted to know if there was gonna be a rebate check again this year. is there?

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