Key Tax Changes for 2011

Provided by Tax Navigator

It is important to remember that last year’s 11th hour tax changes, though favorable for most are temporary. After 2012, many provisions are set to snap back to what they were before 2001, and a few even expire this year.

Here are the important changes:

  • Income taxes. This year’s rates carry over from last year, but the brackets are a bit higher than last year’s due to inflation adjustments. Expires: end of 2012.
  • Investment taxes. Rates continue at historic lows for both long-term capital gains and dividends. 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%. Expires: end of 2012.
  • Estate and gift taxes. The system has been overhauled, with a top rate of 35% and one exemption of $5 million per individual for estate, gift and generation-skipping taxes alike. The annual exclusion for tax-free gifts remains $13,000 per donor. A giver may make an unlimited number of $13,000 gifts, as long as they are to different individuals. Gifts of tuition and payments for medical care also are exempt. Expires: end of 2012.
  • Payroll taxes. Last year’s big surprise was a temporary two-percentage-point cut in the employee’s share of Social Security taxes, saving a maximum of $2,136. per worker. There is no phase-out, and each partner of a married couple can get this rebate. For most workers, this cut will come as an automatic adjustment to withholding. For the self-employed (whose tax rate falls to 10.4% from 12.4%), it will be built into a quarterly withholding. Expires: end of 2011.
  • Alternative Minimum Tax (AMT). The patch enacted by Congress sets the AMT exemption at $47,450. for single filers and $74,450 for married couples, slightly higher than the 2010. Expires: end of 2011.
  • 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 conversions. Those who converted in 2010 do have until next Oct. 17 to decide whether to use this deferral.
  • Foreignaccount reporting. A little noticed provision enacted last year imposes a new IRS reporting requirement on those with foreign financial assets above $50,000 in 2011. This form is different from the foreign asset report known as FBAR. It will also apply to some, such as hedge-fund investors, who have been exempt from the FBAR filing. Details remain unclear, as the IRS hasn’t yet issued regulations.

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