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Social Security Changes For 2011

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We  had a  tax package passed in December that extended the current tax rates, in addition to making other changes to the estate tax, extending certain tax credits,  and other changes.  One area that saw several changes was the Social Security program.

Social Security benefits are received by nine out of ten individuals age 65 and older, so it's an important piece of the puzzle for many people.  (Whether it should be is up for debate)

The Social Security changes for 2011 will give workers a temporary 1 year tax break on the amount they pay into the entitlement program, in addition to several options for retirees being eliminated. Here's a look at how the Social Security program will change this year.

Lower Social Security Taxes:  2% Payroll Tax Holiday

As was mentioned a while back, the Making Work Pay tax credit expired at the end of 2010.   The expiring credit, which you can claim on your 2010 taxes, amounted to about $400 for singles and $800 for married couples.  Since that credit was expiring, the Obama administration wanted to pass something to replace it to a degree.  Because of that they passed the 2% payroll tax holiday.

So how does the 2% cut work?   The amount we pay into Social Security will drop this year from 6.2% of your income (up to $106,800 annually) to 4.2 % in 2011 only.  The employer portion of that will remain at at 6.2%.

For those who are self-employed, the Social Security tax rate will drop from 12.4 percent to 10.4 percent next year, due to provisions of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which was signed by President Obama on December 17th of 2010.

While this move has been criticized by many because the Social Security pr0gram already is having predictions of running out of money in the near future, others say the program's finances won't be harmed because the trust fund will be reimbursed for the tax cut funds from the general fund of the Treasury.    In any event, the program's much publicized problems will still be an issue – even if this tax cut doesn't directly affect the program.

Interest Free Loan Option Removed

In the past retirees were able to start claiming social security payments at the age of 62, and then pay back all the benefits received at age 70, so that they could reclaim social security at the higher delayed claiming rate.  In effect this gives those retirees an interest free loan.

New rules only allow beneficiaries to withdraw their application for retirement benefits within the first 12 months of receiving their first payment.  They may only withdraw once per lifetime.

According to The Center for Retirement Research at Boston College if enough people were to use this claiming strategy it could cost the system between $5.5 billion and $11 billion.   The benefit would go primarily to high-income households who had enough money to take the interest free loan without worries of having to pay it back later.

No Retroactive Benefit Suspensions

In the past retirees were able to temporarily suspend their benefits, and then restart them later – resulting in a bigger social security check based off of the time in which the payment wasn't received. This is still allowed under the new rules, however, social security recipients won't be able to retroactively suspend their benefits, and pay back money already received in exchange for higher payments going forward.

Much like the “no interest free loan” rule, beneficiaries can't pay back money already received. They can only suspend benefits for months when they didn't receive payments or for future payments, the month after the request is made.

No More Paper Checks For Retirees

Social Security recipients will no longer have the option of receiving a paper check if they apply for benefits after May 1st, 2011.    Going forward new retirees will only have their choice of having a direct deposit or having their funds loaded onto a debit Mastercard.

Sending out paper checks to retirees every year has quite a large cost associated with it.  It costs the federal government over $120 million dollars to send out checks.  Making this change going forward will save Social Security $1 billion over the next 10 years, according to the Treasury.

Retirees who are already receiving paper checks can continue receiving them for now.  In the end though they will need to switch to direct deposit or the prepaid debit card by March 1, 2013.

Changes To The Estate Tax Rates And Exemptions For 2011-2012

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Among the changes that took place due to the recent Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was the reinstatement of an estate tax.   Due to gridlock in Congress last year, the estate tax was allowed to lapse.  That means anyone who had a wealthy family member die in 2010 could possibly see millions in tax savings.  For example, the family of George Steinbrenner will pay no estate taxes since he died in 2010.

Estate Tax Reinstated 2011

The tax bill that Congress just passed and President Obama signed in December reinstated the estate tax for the 2011 and 2012 tax years.   So what will the estate tax look like for the next two years?  Will it return to 2009 levels, or return to levels seen before the 2001 Bush tax cuts?

  • Pre-2001 Bush Tax Cuts: $1 million exemption, and a 55% rate on estates worth $1 million to $10 million. Rate rises to 60% on estates worth more than $10 million.
  • 2001-2009: $3.5 million exemption and a 45% tax rate on amounts over $3.5 million.
  • 2010: No estate tax
  • New Estate Tax For 2011-2012:  $5 million exemption for an individual or $10 million for a couple, with a rate of 35% for estates above these levels

So basically what happened was that the estate tax was re-implemented with a higher exemption, and at a rate lower than it had been from 2001-2009, and much lower than it had been before that.  So the estate tax is back for 2 years at least, at which time we'll need to revisit it again, or it will return to pre-2001 and Bush tax cut levels (55-60% rate)

From Don't Mess With Taxes:

For 2011 and 2012, estates worth $5 million or less won't be taxed at all. For estate values greater than that, a 35 percent tax rate will apply.

That's better than the 2009 law, which imposed a $3.5 million exemption and a 45 percent tax rate on the excess. And it's much better than what would have happened had the Bush tax cuts expired. If that had happened, estates worth more than $1 million would have faced a 55 tax rate. The bad news, though, is that Congress has set up a repeat of 2010. Unless it acts again in two years, the $1 million/55 percent rate law will be back.

How Many People Will Be Affected By 2011-2012 Estate Tax?

So now that the estate tax has been reinstated with a higher exemption, and at a rate lower than it used to be, how many people will be affected and still have to pay the estate tax?

The head of the American Bar Association's section that focuses on estate law estimates that less than one-half of 1 percent of people who die in 2011 will be hit by the estate tax. That's minuscule compared to the 10.5 percent of estates that paid Uncle Sam in 1977.

So while wealthy folks who died last year may have gotten away with paying no estate taxes, the families of those less than 1/2 of 1 percent who pass on this year can take solace that at least the estate tax is returning at a lower level than it was at previously.  They won't be subject to the 55-60% rates that were around pre-2001.

One other thing to note, while folks who died last year may not have had an estate tax, they also didn't have the benefit of a stepped up basis for capital gains taxes.  For a discussion of that, see this post that discusses the estate tax stepped up basis.

Also, in case it is any consolation, at least the tax rates in the US are at least somewhat lower than other countries: Tax Rates by Country

What do you think of the estate tax?  Do you think it is necessary and fair, or do you think that it is essentially taxing income twice?  What are your thoughts on the returning estate tax?

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

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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 BracketsSingleMarried 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?

2011 Federal Income Tax Increase For Some Despite Tax Rate Extensions

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A couple of weeks back I published the new 2011 Federal Income Tax brackets. Basically, because of the tax act that was passed on December 17th, 2010, the current tax rates are being extended for all taxpayers, both high and low earners.

What some people might not realize, however, is that despite the tax rates remaining essentially the same (except for some rate range increases due to inflation) some people will see a 2011 federal income tax increase due to expiring tax credits, and a 2% payroll tax holiday for 2011 that might mean less savings for some.

2011 Federal Income Tax Increase

Not everyone will see their taxes remain the same despite the fact that the tax rates remain unchanged.  Some folks will see their taxes go down, and others will see an increase in withholding from their paycheck.

The Making Work Pay credit expired on December 31, 2010; therefore the 2011 income tax withholding tables do not reflect this credit.  As a result, employees in a lower income tax bracket may see an increase in their tax withholding amount, while employees in a higher tax bracket may see a decrease.

So it all really depends on how much you make, and how much of a cut you got in previous years from the Making Work Pay tax credit.

Expiring Making Work Pay Tax Credit

As mentioned the Making Work Pay tax credit has now expired, which means taxpayers will no longer receive the benefits from this cut.   How much was it, and who got it?

  • The 2009 stimulus bill will gave a $400 credit per worker and a $800 credit per working couple.
  • The full credit would be paid to people making $75,000 or less ($150,000 per dual-earner couple).
  • A partial credit would be paid to those making above those amounts but no more than $100,000 ($200,000 for couples).
  • The credit was also refundable, meaning even very low-income families who don’t make enough to owe income tax would be able to claim it.

For most working individuals, the credit was paid over time at roughly $15 per period, assuming 26 pay periods in a year.   So since it is expiring, you won't have that extra $400-800 in your paychecks in 2011.

2% Payroll Tax Holiday For 2011

The 2% payroll tax holiday for 2011 was meant in part to be a replacement for the expiring $400-800 “Making Work Pay” tax credit.  For some people it will more than replace the credit, while for others who have extremely low incomes or don't pay taxes, they won't see as much as with the previous credit (or nothing at all since only those who pay tax will get it).

What does the 2% payroll tax holiday mean for the average taxpayer? Around a $1000 tax savings.  Since the Social Security tax is capped at $106,800, the maximum savings that could be seen by a higher income individual is around $2136.    This as opposed to a $400 credit for singles and $800 credit for families under the “Making Work Pay” tax credit.

Some Will Pay Less Taxes This Year, Some Will Pay More

So because of the expiring tax credits, and because 2% social security tax holiday is calculated at a percentage of income as opposed to a flat rate, people will be seeing different withholdings this year.  Either they'll be coming out ahead from previous years, or if they make extremely low incomes or don't pay taxes, they'll be getting less than previously.  Or nothing.   It really just depends on their situation.

Is the tax withholding situation – along with expiring credits and new tax cuts confusing?  Do you think the government adequately explained that some lower income earners may see a decrease in their paychecks?

Where Can I Get Paper IRS Forms And Tax Publications?

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With the advent of the internet and widely available free or affordable electronic filing options, the IRS has moved away from sending out paper tax packages every year as they used to.  Do you remember how you used to get your tax forms in the mail every year, and the sense dread that it gave you? No longer.  The IRS no longer automatically sends out paper tax packages by mail.   I'm sure it means a good cost savings for the  IRS and for taxpayers, but what if you're one of those folks who just prefers to file their taxes the old fashioned way? What options do you have and where can you get paper IRS forms and publications?

Places To Get Paper IRS Forms And Publications

There are a variety of places that you can still get your paper tax forms, or electronic versions that you can then print out.  From the IRS:

  • On the Internet: You can access forms and publications on the IRS website 24 hours a day, seven days a week, at http://www.irs.gov.
  • Taxpayer Assistance Centers: There are 401 TACs across the country where IRS offers face-to-face assistance to taxpayers, and where taxpayers can pick up many IRS forms and publications. Visit http://www.irs.gov and go to Contact My Local Office on the Individuals page to find a list of TAC locations by state. On the Contact My Local Office page, you can also select TAC Site Search and enter your zip code to find the IRS walk-in office nearest you as well as a list of the services available at specific offices.
  • At Convenient Locations in Your Community: During the tax filing season, many libraries and post offices offer free tax forms to taxpayers. Some libraries also have copies of commonly requested publications. Many large grocery stores, copy centers and office supply stores have forms you can photocopy or print from a CD.
  • By Mail: You can call 1-800-TAX-FORM (800-829-3676) Monday through Friday 7:00 am to 10:00 pm local time – except Alaska and Hawaii which follow Pacific time – to order current year forms, instructions and publications as well as prior year forms and instructions by mail. You will receive your order by mail, usually within 10 days.

The IRS requests that taxpayers wait until after January 10, 2011, to put in a request for tax products for 2010.

Other IRS Resources

  • Publication 910, Guide to Free Tax Services (PDF 636K)
  • Publication 2053A, Quick and Easy Access to IRS Tax Help and Forms (PDF 40K)
  • State tax forms (link)

State tax forms

Tax Filing Deadline Extended To April 18th For Filing 2010 Taxes In 2011

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Earlier this week we wrote about how because Congress took so long to act on the tax bill in December (the act was passed on December 17th), the IRS had to push back the filing start date for those that itemize.  There would be a tax filing delay well into the month of February for all of us itemizers out there because the IRS needs more time to update their systems.  Of course all the companies who help us to file our taxes like TurboTax will be updated long before the government is, and you can start your return there at any time.  But of course  that's no big suprise- that private business moves at a faster pace than government.

Tax Filing Deadline Extended

This week the IRS announced that there would be a tax filing deadline extension for everyone – and that the deadline would be pushed back from April 15th as it normally is, to April 18th.

The Internal Revenue Service today opened the 2011 tax filing season by announcing that taxpayers have until April 18 to file their tax returns. The IRS reminded taxpayers impacted by recent tax law changes that using e-file is the best way to ensure accurate tax returns and get faster refunds.

Taxpayers will have until Monday, April 18 to file their 2010 tax returns and pay any tax due because Emancipation Day, a holiday observed in the District of Columbia, falls this year on Friday, April 15. By law, District of Columbia holidays impact tax deadlines in the same way that federal holidays do; therefore, all taxpayers will have three extra days to file this year. Taxpayers requesting an extension will have until Oct. 17 to file their 2010 tax returns.

So the reason for the deadline extension isn't because of the delays in people being able to file, or because of the impact of the new tax bill, it's because there's a government holiday observed on that day – meaning it has to be pushed back.   Ah, to be a government worker and get all those extra days off!

Tax Filing Delay – Who Must Wait To File?

As mentioned in the first paragraph above, there is going to be a delay in the start to tax filing season as well. As many as 50 million taxpayers itemize on their taxes, and would be affected by the delay.  Of those  50 million usually only around 9 million usually file in January or February and would be affected by the delay.

For most taxpayers, the 2011 tax filing season starts on schedule. However, tax law changes enacted by Congress and signed by President Obama in December mean some people need to wait until mid- to late February to file their tax returns in order to give the IRS time to reprogram its processing systems.

Some taxpayers – including those who itemize deductions on Form 1040 Schedule A – will need to wait to file. This includes taxpayers impacted by any of three tax provisions that expired at the end of 2009 and were renewed by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act Of 2010 enacted Dec. 17. Those who need to wait to file include:

  • Taxpayers Claiming Itemized Deductions on Schedule A. Itemized deductions include mortgage interest, charitable deductions, medical and dental expenses as well as state and local taxes. In addition, itemized deductions include the state and local general sales tax deduction that was also extended and which primarily benefits people living in areas without state and local income taxes. Because of late Congressional action to enact tax law changes, anyone who itemizes and files a Schedule A will need to wait to file until mid- to late February.
  • Taxpayers Claiming the Higher Education Tuition and Fees Deduction. This deduction for parents and students – covering up to $4,000 of tuition and fees paid to a post-secondary institution – is claimed on Form 8917. However, the IRS emphasized that there will be no delays for millions of parents and students who claim other education credits, including the American Opportunity Tax Credit extended last month and the Lifetime Learning Credit.
  • Taxpayers Claiming the Educator Expense Deduction. This deduction is for kindergarten through grade 12 educators with out-of-pocket classroom expenses of up to $250. The educator expense deduction is claimed on Form 1040, Line 23 and Form 1040A, Line 16.

So basically the start to filing season is delayed so that the IRS can implement the extensions of several tax cuts, tax credits and other things that were to be expiring, and that have now been renewed.

Do What I Plan On Doing – File Your Taxes Now With TurboTax

While the government is still updating all of their software, many or most of the tax filing software are already up to date for the new tax law.   While you won’t be able to file and get a refund until the IRS starts actually accepting returns, you can file your return with companies like TurboTax (who will allow you to file your return starting January 6th), and then just let them file the return for you when the government is ready to accept it.

don’t wait to start your return. TurboTax products are already up-to-date with all the latest forms and schedules. You can prepare your return with TurboTax and electronically file it beginning on Jan. 6.

TurboTax will securely hold your return until the IRS begins accepting returns impacted by the processing delays. TurboTax will send you an email confirmation that your return has been e-filed and accepted by the IRS.

TurboTax is the tax software I used last year to file my taxes, after having used several others in past years, including a good one from TaxSlayer.com.  While TaxSlayer and other packages aren't bad, I found the TurboTax interface to be much easier to use, and less complicated to complete.  I double checked my return with TaxSlayer and CompleteTax last year, and both of them gave me about the same number for my amount due as TurboTax.   So based on TurboTax's better interface, I would recommend it first.

Check out all of your filing options at the TurboTax site!

Do you usually not file your taxes til the last minute?  Will this extension be just what you needed in order to file on time?   Are you expecting to be delayed in filing your taxes because you itemize?  Tell us in the comments!