In December 2010, President Obama and Congress agreed upon the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The Act makes numerous adjustments to the tax code for 2011. Here is a summary of some of the most relevant tax law changes.
Income Taxes
Income tax rates remain unchanged from 2010, but the income brackets have shifted up by a few thousand dollars. This change is considered to be an inflation adjustment and is set to expire in 2012. Nevertheless, the shift will only help a small number of taxpayers who were previously in the bottom of a higher bracket.
Payroll Taxes
During 2011, employee contributions to Social Security and Medicare will automatically be cut by 2 percent on the first $106,800 earned. That equates to a maximum savings of $2,136 per employee.
Investment Taxes
Long-term capital gains and dividends are not taxed for individuals making less than $34,500 and married couples filing jointly making less than $69,000. The rate jumps to 15 percent for taxpayers making more than those amounts. Nonetheless, these continue to be historically low rates.
Roth IRA Conversion
Converting a traditional IRA to a Roth IRA in 2010 provided the option of spreading conversion income throughout several future years. Unfortunately, that option is no longer available, which might dissuade people from converting to Roth IRAs this year to avoid being taxed on large lump sums.
Energy Tax Credits for Homeowners
The credit for energy efficient improvements has been extended through the end of 2011. However, the lifetime cap is now $500 per taxpayer, which means anyone who took 2010's $1,500 credit no longer qualifies.
Flexible Spending Accounts (FSAs)
In 2011, FSAs will no longer cover many over-the-counter medicines or items without a doctor's prescription. This will certainly deter use of FSAs, which may hurt those who need the tax break the most.
Estate and Gift Taxes
The estate tax rate will continue at no more than 35 percent with a $5 million exemption for people dying after 2010. This will help families build wealth over multiple generations. As for gifting, people may continue to make tax-free gifts up to $13,000 to unlimited recipients.
Although the broad goal of many of these tax changes is to help middle class America during the downturn, the effect they will have in practice is unknown. Because provisions of the Act expire at different times over the coming years, careful tax planning is crucial. Consult a tax attorney to maximize the benefit of these changes.
