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2011 TAX CHANGES YOU NEED TO KNOW

The 2011 Tax Changes are here.

Some are major and those that can save you considerable money are easy to overlook. It is important to understand how the new tax rules will affect you.  Here are the highlights:

Marginal Rates:  There is no change in the rates for top earners; 33 and 35 percent marginal rates for 2010 will stay in effect for 2011. The top rate would kick in on taxable income of $379,150, not gross income.

Standard Deductions: 

The standard deductions stay largely the same for 2011:

• For single persons: $5,800
• For married taxpayers filing jointly: $11,600
• For taxpayers filing as head of householder: $8,500
• For senior citizens and taxpayers who are legally blind: $1,150 for married filing jointly and $1,450 for single taxpayers. 

Personal Exemptions:

The personal exemption amount for 2011 is $3,700, which is an increase from the 2010 amount of $3,650.  Tax rates for 2011 remain relatively the same as for 2010.  The minimum rate for all taxpayers is 10%. 

Capital Gains Tax Rate: 

The capital gains tax rate was supposed to revert to 20% but the extension of the “Bush Tax Cuts” keeps them at a maximum of 15%.  The holding period is the same—one year. Any gain less than that would be taxed at the taxpayer marginal rate for ordinary income.

Payroll Tax: 

Taxpayers get a one-year break on Social Security tax for 2011. For 2011, Social Security tax will be lowered by 2 percentage points.  This gives employees up to $2,100 of additional cash in their paychecks. Currently this reduction is set to expire at the end of 2011, but an extension is being considered as a part of the President’s “Jobs Act.”

Child Tax Credit:  

Previously, for 2011, the child tax credit was supposed to return to $500 from $1,000.  However, this did not pass therefore the credit of $1,000 in force.  In order to earn the credit and to receive this refund, taxpayers must earn more than $3,000.  In many cases, the credit is limited to the amount of tax liability.  

Alternative Minimum Tax (AMT):

The AMT exemption for 2011 is:

• $74,450 for taxpayers filing jointly,
• $48,450 for single taxpayers and head of households and
• $37,225 for married couples filing separately. 

Federal Estate (Death) Tax:

The current 2010 Tax Relief Act is set to expire in December, 2012.  For 2010, your heirs got a huge tax break with zero estate tax.  But this is not the case in 2011. The “death” tax has been overhauled to give a one- time per person $5 million exemption at a top rate of 35%. For married couples the exemption is $10 million, which is far less dramatic than the previous top tax rate of 55%.

Gift Tax:

The annual exclusion for tax-free gifts remains at $13,000 per donor. A giver may make an unlimited number of $13,000 gifts, as long as the gifts are made to different individuals.  Gifts of tuition and payments for medical care also are exempt. 

Roth IRA Conversion:

The income limit for conversion has been permanently removed, so this year all taxpayers may still convert ordinary IRAs into Roth IRAs.  Taxpayers who convert to Roth IRAs in 2011 no longer have the option of deferring conversion income into later years, as was true for 2010 conversions.

Cost-Basis Reporting by Brokers: 

As of 2011, brokers must track clients’ purchases of stock, real estate investment trusts and foreign securities, and then report the original cost to the IRS when the asset is sold. This is an effort to improve tax compliance by investors. The rules for investments in mutual funds, bonds, options and any exchange-traded funds do not kick in until after 2011. 

Other Changes:

Tax deductions such as the $250 deduction for teacher classroom expenses, the deduction for state sales taxes in lieu of the state income tax deduction, and the tax-free donation of IRA proceeds to charity all have been renewed.  The American Opportunity Tax Credit of up to $2,500 for education expenses was renewed for 2011 & 2012.  

For more information about this and other important tax issues that may affect you, please contact our office for a free consultation, span> 908-813-3180, or fill out and send the inquiry form on our website, Web Form.