- Home
- Tax Worksheets
- FAQs
- Critical Info / Opinion Blog (Twitter feed)
- Tax blogs & Opinions!
- Friends & Associates
- Fun Stuff
- Calculators
- Tax Links
- Questions or Comments?
- Pay your bill online
- Small Business Accounting
Tax Changes for 2011
The Tax Relief Act of 2010
The final version of this act keeps intact for two more years America's existing tax rate structure, temporarily fixes the AMT, and extends a number of deductions and tax credits, provides a temporary one-year reduction in Social Security taxes, temporarily reforms estate and gift taxes, and provides a number of incentives for businesses to invest in equipment.
Temporary is the key phrase! Most of these provisions are temporary; two year fixes that impact 2011 and 2012 only. All of the tax cuts that were scheduled to expire at the end of 2010 will now expire at the end of 2012. Remember – it’s temporary and 2012 is a presidential election year.
Personal Tax Rates
Personal tax rates for the years 2011 and 2012 will keep our existing six-rate structure ranging from 10% to 35%. If the Tax Relief Act had not passed, the tax rates would have reverted to their pre-2001 levels ranging from 15% to 39.6%.
Capital gains tax rates will remain the same, with a zero percent and a 15% rate applied to long-term gains and a 15% rate applied to qualifying dividends. If the Tax Relief Act had not passed, the 0% rate would have risen to 10%; the 15% rate would have risen to 20%; and dividends would have been taxed at ordinary rates instead of the preferred 15% rate.
Social Security tax rates for the employee will be reduced from the current 6.2% to a temporary rate of 4.2% for 2011 only. The employer-portion remains the same at 6.2%; and the Social Security wage base remains the same at $106,800 for 2011. Medicare tax rates are not changed: remaining at 1.45% each for employees and employers. Self-employed persons will see a corresponding reduction in their self-employment tax. The total 15.3% self-employment tax rate is temporarily reduced for 2011 to 13.3%. Self-employed persons will still be able to deduct the full amount of the employer's portion as an adjustment to income.
Alternative minimum tax exemptions amounts have been temporarily increased for the years 2010 and 2011 (but not for 2012). The exemption amounts help prevent some middle income earners from being subject to the AMT, and help keep any AMT adjustments less than they otherwise might have been.
Personal Tax Credits
The American Opportunity Credit is extended through the end of 2012. This credit provides a refundable tax credit up to $2,500 based on expenses for the first four-years of undergraduate education. The American Opportunity credit was scheduled to expire at the end of 2010.
The Child Tax Credit is extended through the end of 2012, providing up to a $1,000 in partially refundable tax credits for children under the age of 17. The credit was scheduled to revert back to its previous maximum of $500.
The Earned Income Credit is extended through the end of 2012. The EIC was scheduled to revert back to prior law in which the EIC maxed out at two dependents. The higher EIC amounts for a third dependent will remain in effect for two more years.
The Adoption Tax Credit has been extended through the end of 2012. The credit was scheduled to revert back to a $5,000 limit in 2012; the Tax Relief Act extends the higher dollar limits by one additional year.
The Dependent and Child Care Tax Credit was scheduled to falls back to its previous maximums of $2,400 for one child and $4,800 for two or more children. The Tax Relief Act extends until 2012 the higher maximums of $3,000 for one child and $6,000 for two or more children.
Personal Tax Deductions
Temporary repeal of the dollar limitation on itemized deductions was previously enacted as a one-year only repeal in 2010. The Tax Relief Act suspends for two additional years (until the end of 2012) the limitation on itemized deductions for higher-income earners.
Temporary repeal of the Personal Exemption phase-out had a temporary one-year repeal of the phase-out for personal exemptions but is now extended for two additional years.
Deduction for Student Loan Interest is extended for two more years. After 2012, the deduction will revert to a previous tax law in which interest on a student loan is deductible only for the first 60-months of repayment.
Sales Tax Deduction is retroactively re-instated for 2010 and extended through 2011. This is an optional itemized deduction in lieu of the deduction for state income taxes. Note: this deduction now expires in 2011.
Tuition and Fees Deduction is retroactively re-instated for 2010 and extended through 2011. This particular deduction can sometimes be more useful than the American Opportunity or the Lifetime Learning tax credits. Note: this deduction now expires in 2011.
Classroom Expense Deduction for teachers extends for two years (2010 and 2011).
Charitable contributions of IRAs are allowed for individuals aged 70 ½ years old or older who donate up to $100,000 of their individual retirement account directly to a qualified charity in a trustee-to-trustee transfer. The charitable gift bypasses reporting on the tax return (no IRA income is reported and no charity deduction is reported), which can keep a charitable person's adjusted gross income lower and thereby avoids any adjustments in Medicare premiums. This was also extended for 2010 and 2011.
Specifics on the TEMPORARY Social Security tax reduction
Employees should see a decrease in their Social Security withholdings. The Tax Relief Act provides a temporary, one-year reduction in the employee-portion of Social Security taxes. For 2011 only, employees will pay 4.2% of their wages, up to the maximum wage base of $106,800. This is a reduction of two percentage points from the “normal” 6.2% rate.
Employers are to implement the lower Social Security withholding as soon as possible but not later than Jan. 31, 2011. If the employer does end up withholding at the higher 6.2% rate, the employers are to reimburse employees for the difference no later than March 31, 2011.
The interim withholding tables issued by the IRS reflects the newly extended tax rates for 2011 and reflects the expiration, as scheduled, of the Making Work Pay Credit.
The IRS will soon issue an updated version of Publication 15, the Employer's Tax Guide. The caution to employees is that you most likely will not need to adjust their withholding allowances using Form W-4 solely in response to the Tax Relief Act.
The final version of this act keeps intact for two more years America's existing tax rate structure, temporarily fixes the AMT, and extends a number of deductions and tax credits, provides a temporary one-year reduction in Social Security taxes, temporarily reforms estate and gift taxes, and provides a number of incentives for businesses to invest in equipment.
Temporary is the key phrase! Most of these provisions are temporary; two year fixes that impact 2011 and 2012 only. All of the tax cuts that were scheduled to expire at the end of 2010 will now expire at the end of 2012. Remember – it’s temporary and 2012 is a presidential election year.
Personal Tax Rates
Personal tax rates for the years 2011 and 2012 will keep our existing six-rate structure ranging from 10% to 35%. If the Tax Relief Act had not passed, the tax rates would have reverted to their pre-2001 levels ranging from 15% to 39.6%.
Capital gains tax rates will remain the same, with a zero percent and a 15% rate applied to long-term gains and a 15% rate applied to qualifying dividends. If the Tax Relief Act had not passed, the 0% rate would have risen to 10%; the 15% rate would have risen to 20%; and dividends would have been taxed at ordinary rates instead of the preferred 15% rate.
Social Security tax rates for the employee will be reduced from the current 6.2% to a temporary rate of 4.2% for 2011 only. The employer-portion remains the same at 6.2%; and the Social Security wage base remains the same at $106,800 for 2011. Medicare tax rates are not changed: remaining at 1.45% each for employees and employers. Self-employed persons will see a corresponding reduction in their self-employment tax. The total 15.3% self-employment tax rate is temporarily reduced for 2011 to 13.3%. Self-employed persons will still be able to deduct the full amount of the employer's portion as an adjustment to income.
Alternative minimum tax exemptions amounts have been temporarily increased for the years 2010 and 2011 (but not for 2012). The exemption amounts help prevent some middle income earners from being subject to the AMT, and help keep any AMT adjustments less than they otherwise might have been.
Personal Tax Credits
The American Opportunity Credit is extended through the end of 2012. This credit provides a refundable tax credit up to $2,500 based on expenses for the first four-years of undergraduate education. The American Opportunity credit was scheduled to expire at the end of 2010.
The Child Tax Credit is extended through the end of 2012, providing up to a $1,000 in partially refundable tax credits for children under the age of 17. The credit was scheduled to revert back to its previous maximum of $500.
The Earned Income Credit is extended through the end of 2012. The EIC was scheduled to revert back to prior law in which the EIC maxed out at two dependents. The higher EIC amounts for a third dependent will remain in effect for two more years.
The Adoption Tax Credit has been extended through the end of 2012. The credit was scheduled to revert back to a $5,000 limit in 2012; the Tax Relief Act extends the higher dollar limits by one additional year.
The Dependent and Child Care Tax Credit was scheduled to falls back to its previous maximums of $2,400 for one child and $4,800 for two or more children. The Tax Relief Act extends until 2012 the higher maximums of $3,000 for one child and $6,000 for two or more children.
Personal Tax Deductions
Temporary repeal of the dollar limitation on itemized deductions was previously enacted as a one-year only repeal in 2010. The Tax Relief Act suspends for two additional years (until the end of 2012) the limitation on itemized deductions for higher-income earners.
Temporary repeal of the Personal Exemption phase-out had a temporary one-year repeal of the phase-out for personal exemptions but is now extended for two additional years.
Deduction for Student Loan Interest is extended for two more years. After 2012, the deduction will revert to a previous tax law in which interest on a student loan is deductible only for the first 60-months of repayment.
Sales Tax Deduction is retroactively re-instated for 2010 and extended through 2011. This is an optional itemized deduction in lieu of the deduction for state income taxes. Note: this deduction now expires in 2011.
Tuition and Fees Deduction is retroactively re-instated for 2010 and extended through 2011. This particular deduction can sometimes be more useful than the American Opportunity or the Lifetime Learning tax credits. Note: this deduction now expires in 2011.
Classroom Expense Deduction for teachers extends for two years (2010 and 2011).
Charitable contributions of IRAs are allowed for individuals aged 70 ½ years old or older who donate up to $100,000 of their individual retirement account directly to a qualified charity in a trustee-to-trustee transfer. The charitable gift bypasses reporting on the tax return (no IRA income is reported and no charity deduction is reported), which can keep a charitable person's adjusted gross income lower and thereby avoids any adjustments in Medicare premiums. This was also extended for 2010 and 2011.
Specifics on the TEMPORARY Social Security tax reduction
Employees should see a decrease in their Social Security withholdings. The Tax Relief Act provides a temporary, one-year reduction in the employee-portion of Social Security taxes. For 2011 only, employees will pay 4.2% of their wages, up to the maximum wage base of $106,800. This is a reduction of two percentage points from the “normal” 6.2% rate.
Employers are to implement the lower Social Security withholding as soon as possible but not later than Jan. 31, 2011. If the employer does end up withholding at the higher 6.2% rate, the employers are to reimburse employees for the difference no later than March 31, 2011.
The interim withholding tables issued by the IRS reflects the newly extended tax rates for 2011 and reflects the expiration, as scheduled, of the Making Work Pay Credit.
The IRS will soon issue an updated version of Publication 15, the Employer's Tax Guide. The caution to employees is that you most likely will not need to adjust their withholding allowances using Form W-4 solely in response to the Tax Relief Act.
