Big tax questions finally answered for 2011

With Christmas knocking on the door, President Obama signed in a temporary two year extension of the Bush-era tax cuts.  While many tax provisions have stayed the same there have been changes, too.  Some of the biggest tax questions for 2011 that were answered included: estate tax, income brackets, capital gains, and IRA guidelines.

Taxpayers should note that those who usually itemize deductions will have to wait until mid or late February to file tax returns because the IRS is still making adjustments to the tax schedules to accomondate the new tax bill.  Also, tax returns will not be due (post-marked) until April 18 because of the federal Emancipation Day holiday on April 15.

Below is a summary of some of the main tax provisions for 2011 taken from the Summary of the Reid Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.2

Estate Tax

  • The estate tax exemption amount has been raised from $3.5 million per person to $5 million ($10 million per couple).  Estate assets over the estate exemption amount are taxed at a maximum rate of 35%, as well as gift and generation skipping transfer taxes.  "The proposal is effective January 1, 2010, but allows an election to choose no estate tax and modified carryover basis for estates arising on or after January 1, 2010 and before January 1, 2011."

  • Portability of unused exemption – This new tax provision allows the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse without complicated estate planning.  This allows the surviving spouse to receive and use $10 million in estate exemptions; effective for estates of decedents dying after December 31, 2010

  • Reunification – the provision reunifies the estate and gift taxes, "creating a single graduated rate schedule for both;" effective for gifts made after December 31, 2010.

  • Annual exclusion for tax-free gifts remains $13,000 per donor with an unlimited amount of individuals a donor could give to. (i.e., A married couple with 5 kids may gift each kid $26,000 ($13,000 per each parent) for a total of $130,000 in tax-free gifts.)

Alternative Minimum Tax (AMT)

  • The AMT exemption has been set at $47,450 for single taxpayers and $74,450 for taxpayers married filing jointly. 

Income Tax Rate

  • Personal exemption was raised from $3,650 to $3,700.

  • Package extends the repeal of the Personal Exemption Phase-out (“PEP”); no phase out provisions for taxpayers with AGI above a certain level.

  • Extension of the repeal of the “Pease limitation” – no itemized deduction limits for taxpayers with AGI above a certain level.

Capital Gains and Dividends

  • Capital gains and dividend rates for taxpayers below the 25% bracket remains at 0%.  Rates for those in the 25% bracket and above remains at 15%. 

IRA, Roth IRA, and 401(k) Contributions and phase out limits

  • "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."1

  • IRA, Roth IRA, and 401(k) contribution limits in 2011 will remain the same as in 2010, except for some minor increases of the MAGI limits of IRAs.

Click here for IRA guidelines regarding other filing statuses.

Child Tax Credit

  • Remains at $1,000 for qualifying children under 17 years.  Income limits apply: $110,000 if married & filing jointly; $75,000 if single, qualifying widower, or head of household.  The Child Tax Credit is reduced by $50 for every thousand dollars that exceed income guidelines.

  • Refundability – This credit may be refundable for taxpayers with gross income over $3,000.

Incentives for Families and Children

  • Expanded dependent care credit for eligible children under 13 and disabled dependents was extended.  Eligible limit amounts are $3,000 for one child and $6,000 for two or more with an applicable percentage rate of 35%.
  • Extension of the $10,000 adoption tax credit for qualified adoption expenses.  It also remains refundable.

Medical Expenses

  • "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. But FSA funds may still be used for other, nonprescription medical items such as crutches, contact-lens solution or a wig after chemotherapy, if the individual plan allows it..."1

Education Incentives

  • Extension of the expanded employer-provided educational assistance.  "Employee may exclude up to $5,250 per year of employer-provided education assistance from gross income."

  • Extension of the expanded student loan interest deduction.  Individuals with income up to $55,000 to $70,000 or joint filers with income up to $110,000 to $140,000 may claim an above-the-line deduction for student loan interest expenses up to $2,500.  

  • Extension of the provision that allows students to exclude from income qualified scholarships for tuition and expenses 

  • Extension of the American Opportunity Tax Credit.  This credit is available for up to $2,500 of the cost of tuition and related expenses paid during the taxable year.  Taxpayers receive a tax credit on 100% of the first $2,000 of college expenses and 25% of the next $2,000.  Forty percent of the credit is refundable.

Employee Payroll Tax Cut

  • The tax bill provides a payroll/self-employment tax break during 2011 of two percentage points.  This means employees will pay only 4.2% on wages and self-employment individuals will pay only 10.4% on self-employment for tax payers with income up to $106,800.

Energy

  • Section 1603. The bill extends for one year the start-of-construction deadline for the cash grant in lieu of tax credit program, established in Section 1603 of the American Recovery and Reinvestment Act.

  • Credits for energy-efficient clothes washers, dishwashers and refrigerators extended

  • Credits for energy-efficient improvements to existing homes extended. "The amount of the credit has shrunk to a maximum of $500 per taxpayer per lifetime, so those who took last year's $1,500 credit under this provision don't qualify."1

Individual Tax Relief

  • Extension of the $250 above-the-line tax deduction for teachers and other school professionals for qualifying expenses

  • Extension of deduction of state and local general sales taxes

  • Extension of above-the-line deduction for qualified tuition and related expenses

  • Extension of tax-free distributions from individual retirement plans for charitable purposes of up to $100,000 per taxpayer, per taxable year.

Business Tax Relief and Investment Incentives

  • Small businesses may depreciate 100% of new equipment placed in service after September 8, 2010 through December 31, 2011.  Equipment purchases placed in service after December 31, 2011 through December 31, 2012 may be applicable for an immediate 50% depreciation.

  • R&D credit has been extended

  • Premiums for mortgage insurance may be itemized through 2011