2011 Tax Changes

The passage of the Tax Relief Act of 2010 last December removed a lot of uncertainties for taxpayers. The law, which extended Bush area tax cuts by two years and temporarily reduced payroll taxes by 2% for one year, also introduced some other changes in taxes for 2011. One of those changes is investment income taxes. In 2011, investors will continue to enjoy the low tax rate on investment incomes, such as long-term capital gains and dividends, that they have enjoyed for the past 10 years. Particularly, taxpayers will pay zero taxes on investment gains if they are in the 15% federal income tax bracket and below (see 2011 tax rates table for details on federal tax brackets),  or pay 15% taxes on the gains when they are in the 25% bracket and above.

The Wall Street Journal had an article last week highlighting tax changes for 2011. Among them are these most concern us:

  • Income taxes: This year’s tax rates remain the same as last year, but the brackets are adjusted higher due to inflation;
  • Payroll taxes: Every taxpayer gets a 2% reduction on Social Security taxes this year. The cut will be adjusted automatically on withholding;
  • Alternative Minimum Tax (AMT): In 2011, the AMT exemption for single filers is $47,450 and $74,450 for married couples;
  • Roth IRA conversion: Everyone can convert a Traditional IRA into a Roth, regardless their income level, those who convert in 2011 won’t have the option of deferring conversion income into later years;
  • Medical expenses: You may no longer use pre-tax contribution in your Flexible Spending Accounts (FSAs) to pay for OTC medicines without a prescription;
  • Energy tax credits: You can only get $500 credit this year for energy efficient upgrade of your home this year;

Check out the article for other changes such as estate & gift taxes and education tax deduction, etc.

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