What Changes Will Happen To My Taxes On January 1st, 2011?

We’ve talked quite a bit on this site about the recent tax cut package that was passed, and some of the provisions that were included in the bill. One thing we haven't done, however, is to look at all the changes that we can expect to see in 2011 for individual taxpayers. What tax changes will happen for 2011?

2011 Tax Changes

President Obama and the Congress passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 in the last half of December, and as a result tax rates didn't go up for some as would have happened otherwise.  But the tax rates remaining unchanged wasn't the only thing to happen due to the bill.

Here are some of the changes that you can expect to see due to this tax cut bill.

Tax Rates Remain The Same Through 2012

The 2001 and 2003 Bush tax cuts meant a reduction marginal tax rates for all taxpayers. Those rate reductions will be extended for two years under the tax package. That means the 2011 federal income tax rates will remain essentially unchanged for everyone, including the high income earners.  The tax rates for 2011 are shown below. The main changed from 2010 are some rate range adjustments due to inflation.

2011 Tax Brackets	Single	Married Filing Jointly
10% Bracket	$0 – $8,500	$0 – $17,000
15% Bracket	$8,500 – $34,500	$17,000 – $69,000
25% Bracket	$34,500 – $83,600	$69,000 – $139,500
28% Bracket	$83,600 – $174,400	$139,500 – $212,300
33% Bracket	$174,400 – $379,150	$212,300 – $379,150
35% Bracket	$379,150+	$379,150+

Payroll Taxes Reduced By 2%

A provision that has been controversial, but is liked by those who would like a tax cut is the 2% payroll tax holiday for 2011.  Basically you’ll be paying 4.2% in payroll taxes for social security and medicare in 2011, versus the normal 6.2% on the first $106,800 in income.

Estate Tax Reinstated At Lower Rate

The estate tax lapsed in 2010, but would have been returning next year at a rate of 55% with an exemption of $1 million this package hadn’t happened. The tax cut bill changed that to have it be a top rate of 35% and a $5 million exemption.

Date To Apply For Unemployment Benefits Extended

The original date to apply for up to 99 weeks of unemployment for the long term unemployed expired on 11/30. This will extend that date for another 13 months. Note that the 99 weeks of unemployment benefits aren’t available to everyone, but only in some high unemployment states.

$1000 Child Tax Credit Extended

The $1000 child tax credit will remain at $1000 per child instead of dropping to $500 as it was slated to do.

Energy Tax Credits Return At Lower Rate

In 2010 the tax credits for energy efficient home improvements were quite popular because you could receive up to 30%, or $1500  on many home improvements in the form of a tax credit.    The 2011 home improvement tax credit is significantly reduced to a lifetime maximum of $500, and  only applies to 10% of the cost of the home improvement.  So if you took part and got your $1500 credit in 2010, you can't get this one. Details here.

Standard Deduction For Married Filers Kept

The package will maintain the standard deduction for married filers so that it will be twice that of a single filer – negating the so called “marriage penalty”.

Patch for Alternative Minimum Tax (AMT)

The amount of income exempt from AMT will rise for 2010 and 2011. In 2010, the amount exempt from AMT will be $47,450 for single filers, $72,450 for married filing jointly. In 2011, it would be $48,450 and $74,450 respectively.

Flexible Spending Account Changes

Workers with Flexible Spending Accounts (FSAs) may no longer use pretax funds to pay for many over-the-counter medicines—aside from insulin—without a prescription.  This should reduce many people's participation is this great tax savings.  2011 FSA Changes.

Roth IRA Conversions

The income limit for conversions has been permanently removed, so this year all taxpayers may still convert ordinary IRAs into Roth IRAs. But 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 Roth IRA conversions. Those who converted in 2010 do have until next Oct. 17 to decide whether to use this deferral.

Investment Taxes

Rates for both long-term capital gains and dividends will continue to be low. For taxpayers in the 15% income tax bracket and below, the rate is zero. For those in the 25% bracket and above, the rate is 15%.

Tax Filing Delayed For Some, Deadlines Extended For All

As you prepare to file your taxes this year to either get a refund or pay an amount owed, remember that itemizers will have to wait to file until mid to late February.  The reason?  The tax cut package was passed so late in the year that now the IRS is playing catch up to implement all of the tax rates, deductions and credits.

Also of note, the 2011 tax filing deadline is April 18th this year, due to the 15th being on a government holiday – on a Friday.

So what do you think of the tax cut package?  Is it a good thing, bad thing 0r a little of both?  If you don’t like it, what would you have rather seen?