Tax policy can be complicated, even for the wonkiest of them out there. And with Congress’ last-minute political charade before the holidays, do you really know what you face in 2011? And, if you do, do you know how long it will last? Remember that provisions in the tax cut compromise are temporary, with a few extensions expiring as early as the end of this year.
But let’s deal in the present, shall we? The Wall Street Journal published an excellent piece today entitled “Tax Changes for 2011: A Checklist” that better enables taxpayers to adequately plan their finances for the next 365…er 358 days.
Here are some of the changes:
Income Taxes: They will carry over from 2010 and expire in 2012, but brackets are a tad higher due to adjustments in inflation. Expires: end of 2012
Investment Taxes: Zero for taxpayers in the 15% bracket and below. 15% rate for those in the 25% bracket and above. Expires: end of 2012
Death Taxes: Resurrected to 35 percent rate and $5 million exemption. Expires: end of 2012
Payroll Taxes: Temporary 2% cut in employees’ share of Social Security taxes, saving a maximum of $2,136 per worker. For most, this will come as an automatic adjustment to withholding. For those who are self-employed, the IRS has said they hope to release a quarterly withholding worksheet soon. Expires: end of 2011
Alternative Minimum Tax (AMT): The patch sets single filer exemption at $47,450 and $74,450 for married couples. Expires: end of 2011
Roth IRA Conversion: Income limit has been removed, but 2011 converters no longer have the option of deferring conversion income into later years.
Medical Expenses: Workers with Flexible Spending Accounts (FSAs) can no longer use pretax funds to purchase over-the-counter medicines without a prescription. You may continue to use funds for nonprescription items like crutches and contact-lens solution, but only if permitted by your health plan. IRS Publication 502 provides more specifics.
Energy Tax Credits for Homeowners: “25(c)” credit for energy-efficient improvements has been extended, but the WSJ admits that it will be useful to few people. The lifetime $500 credit will not qualify those who received the $1,500 credit last year. Expires: end of 2011
Thanks to writer Laura Sanders for a comprehensive look at what taxpayers can expect for 2011. Unfortunately, many of these provisions are set to ultimately return to 2001 levels, setting up another, near inevitable legislative battle in 2012. Enjoy the good stuff while you can.