Congress passed a big tax law in late December 2010. We cover parts in this month’s Estate Watch and IRA Watch, and we reveal other key provisions here.
– The big news is the individual income tax rates from 2010 are extended for 2011 and 2012. The tax tables will be indexed for inflation in those years. Also extended was the 15% maximum tax rate for long-term capital gains and qualified corporate dividends. Now we have certainty for at least two years. That enables you to actually do some income and investment planning to maximize after-tax wealth.
– When you’re employed or self-employed, after-tax income is increased by a change in the Social Security payroll tax. The employee’s rate for 2011 is reduced from 6.2% to 4.2% at all income levels. This won’t affect your benefit levels. The Treasury Department is required to transfer funds to Social Security to replace this money.
– The phaseouts of some tax breaks as income rises are suspended through 2012. One of these is the limitation on itemized deductions (also known as the Pease limitation) on higher income taxpayers. Another is the phaseout of personal and dependent exemptions. The suspension of the limit on itemized deductions is important, because it means charitable contributions won’t be reduced for higher income taxpayers.
– Provisions to reduce the marriage tax penalty also are extended. One of these provisions gives married couples filing jointly a standard deduction of twice the basic standard deduction for an unmarried individual filing a single return. The other provision increases the range of the 15% tax bracket for married couples filing a joint return.
– The alternative minimum tax relief is extended, increasing the exemption amount so that fewer taxpayers are subject to the AMT.
– The option to deduct state and local sales taxes instead of state and local income taxes for taxpayers who itemize deductions is extended for one year. This is a big benefit to taxpayers in states without income taxes or with high sales taxes. The deduction for private mortgage insurance premiums is extended for one year, allowing deductions for amounts paid or accrued in 2011.
– The American Opportunity Tax Credit is extended, providing a tax break for those who help pay the college expenses of a child or grandchild. This credit for qualified tuition and related expenses is 100% of the first $2,000 in expenses, plus 25% of the next $2,000, for a maximum credit of $2,500 per student per year. This credit replaced the Hope credit for 2009 and 2010 and now is extended through 2012. It applies to all four years of college, not only the first two years like the Hope credit.
The credit is phased out when modified adjusted gross incomes exceeds $80,000 for single taxpayers and $160,000 for married couples filing joint tax returns. A taxpayer can’t claim more than one tax benefit for the same higher education expenses, so you need to decide whether the credit or the tuition and fees tax deduction is better for you.
– Traditional IRAs still can be converted into Roth IRAs by taxpayers of any income level, but taxes on the conversion must be paid for the year of the conversion. There is no deferral option.
RW February 2011