Tax laws change every year. Even though it may be hard for the average person to keep track of the annual editions, knowledge of the changes potentially could save a person thousands of dollars in extra expenses. This article is intended to inform the average taxpayer on what to expect for 2011.
The most notable feature for the upcoming year is the bill that was just signed into law by President Obama in December, The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. The main component of the bill is to temporarily extend the tax cuts under former President Bush from 2001 and 2003. The entire package is estimated to save Americans $900 billion over the next 2 years, about $2,000 per year for the typical family.
Income Rates, Standard Deductions and Personal Exemptions
The income tax rates will remain the same for at least 2 more years. If not for the recent bill, tax rates would have gone up for nearly every bracket. For example, the 10% bracket would have gone up to 15%. The 25%, 28%, 33%, and 35% brackets all would increase around an additional 3%.
Standard deductions have increased by small increments. Individual taxpayers are allowed a $5,800 standard deduction, up from $5,700 and married taxpayers filing jointly are allowed an $11,600 standard deduction, up from $11,400.
The personal exemption will also increase slightly, up $50 to a total of $3,700. The bill also temporarily repeals the Personal Exemption Phase-Out. The phase-out would reduce personal exemptions for filers above certain thresholds. For single filers, the threshold is $169,550 and for married couples filing jointly this is $254,350.
Alternative Minimum Tax
Alternative minimum tax (AMT) is a tax that some people have to pay in addition to their regular tax. The original intent of this tax was to avoid letting high income people use special tax benefits and/or loopholes to pay little or no tax. It has grown in scope to affect people in lower income brackets even without special benefits. Each year the government adjusts the requirements for the AMT. The adjusted exemption amounts for 2010 are $47,450 for individuals and $72,450 for married couples filing jointly. This will save an additional 21 million households from facing the AMT.
FICA Payroll Tax
The bill allows for a temporary, 1-year reduction of the social security tax (FICA). The FICA tax has been reduced from 6.2% to 4.2% for employees. If the taxpayer is self-employed, the rate changes from 12.4% to 10.4%. This means if earn $50,000/year you will save an extra $1,000. This reduction is expected to save Americans a total of $111 billion.
Earned Income and Child Tax Credits
The tax credit of $1,000 for each qualifying child has been extended for 2 years. The credit starts to phase-out once a tax-payer reaches a certain threshold: $75,000/year or over for individuals and $110,000/year or over for married couples filing jointly. Low income families could even be eligible to receive part of the credit back as a refund if they do not owe any federal taxes.
Tuition Tax Credit
The American Opportunity Tax Credit has also been extended for 2 years. This credit covers tuition and related costs for the first 4 years of post-secondary education. The full tax credit of $2,500 is available to individuals earning $80,000/year or less and married couples filing jointly earning $160,000/year or less. The credit is phased-out for taxpayers over those thresholds. Up to 40% of the credit is refundable if it exceeds tax liability. This is expected to benefit over 8 million students and along with the Earned Income and Child Tax credits, save Americans over $40 billion.
Unemployment Benefits Extension
A big part of the recently passed bill is the extension of unemployment benefits for an additional 13 month period. Unemployment benefits have started to run out for many people while the country is still experiencing high levels of unemployment. This feature is expected to benefit 7 million people and cost $56 billion.
Conclusion
Taxpayers should be aware of the many changes in the tax laws that will affect their tax liabilities and potential refunds. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 which has recently been passed will extend many of the tax cuts for an additional 2 years. The IRS has advised that those who wish to take advantage of these changes in the law wait until mid to late February 2011 to file their tax returns.
By Lance Collett
Rehan Alimohammad is an Attorney and CPA. Our office handles all tax law and immigration law issues. In the past year we have successfully trained over 200 people, including Attorneys, CPA’s, and Enrolled Agents, on how to successfully resolve cases with the IRS and State Tax Agencies. Please visit our website at www.attorneyrehan.com, or call our offices at (281) 340-2074 or (800) 814-3920.
Disclaimer: This article is not meant as specific advice regarding a person’s individual case. An attorney should be consulted. This article does not create an Attorney-Client relationship. Any tax information or written tax advice contained herein (including any attachments) is not intended to be and cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer. (The foregoing legend has been affixed pursuant to U.S. Treasury Regulations governing tax practice.)
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