you file as an individual, a corporation, a small business
owner, or are self-employed, as the end of the year draws
near, you're probably thinking ahead to tax season and filing
Most tax provisions of course, remain the same (IRA
contribution limits for example), but a few such as personal
exemptions have been adjusted for inflation and others have
been extended due to legislation and are set to expire at the
end of 2012.
From tax credits, exemptions and deductions for individuals
and Section 179 expensing for small businesses, here's what
you need to know about tax changes for 2011.
From personal deductions to tax credits and educational
expenses, many of the tax changes relating to individuals
remain in effect through 2012 and are the result of tax
provisions that were either modified or extended by the Tax
Relief, Unemployment Insurance Reauthorization and Job
Creation Act of 2010 that became law on December 17, 2010.
The personal and dependent exemption for tax year 2011 is
$3,700, up $50 from 2010.
In 2011 the standard deduction for married couples filing a
joint return is $11,600, up $200 from 2010 and for singles and
married individuals filing separately it's $5,800, up $100.
For heads of household the deduction is $8,500, also up $100
The additional standard deduction for blind people and senior
citizens is $1,150 for married individuals, up $50, and $1,450
for singles and heads of household, also up $50.
Income Tax Rates
Due to inflation, tax-bracket thresholds will increase for
every filing status. For example, the taxable-income threshold
separating the 15-percent bracket from the 25-percent bracket
is $69,000 for a married couple filing a joint return, up from
$68,000 in 2010.
Estate and Gift Taxes
The recent overhaul of estate and gift taxes means that there
is an exemption of $5 million per individual for estate, gift
and generation-skipping taxes, with a top rate of 35%. For
married couples the exemption is $10 million.
Alternative Minimum Tax (AMT)
AMT exemption amounts for 2011 are slightly higher than those
in 2010 at $48,450 for single and head of household fliers,
$74,450 for married people filing jointly and for qualifying
widows or widowers, and $37,225 for married people filing
Marriage Penalty Relief
For 2011, the basic standard deduction for a married couple
filing jointly is $11,600, up $200 from 2010.
Pease and PEP (Personal Exemption Phaseout)
Pease (limitations on itemized deductions) and PEP (personal
exemption phase-out) limitations do not apply for 2011, but
these are set to expire at the end of 2012.
Flexible Spending Accounts (FSA)
The Affordable Care Act, enacted in March, established a new
uniform standard, effective January 1, 2011, that applies to
FSAs and health reimbursement arrangements (HRAs).
Under the new standard, the cost of an over-the-counter
medicine or drug cannot be reimbursed from the account unless
a prescription is obtained. The change does not affect
insulin, even if purchased without a prescription, or other
health care expenses such as medical devices, eye glasses,
contact lenses, co-pays and deductibles.
The new standard applies only to purchases made on or after
Jan. 1, 2011, so claims for medicines or drugs purchased
without a prescription in 2010 can still be reimbursed in
2011, if allowed by the employer's plan.
A similar rule went into effect on Jan. 1, 2011 for Health
Savings Accounts (HSAs), and Archer Medical Savings Accounts
Long Term Capital Gains
In 2011, long-term gains for assets held at least one year are
taxed at a flat rate of 15% for taxpayers above the 25% tax
bracket. For taxpayers in lower tax brackets, the long-term
capital gains rate is 0%.:
A refundable credit of up to $13,360 for 2011 is available for
qualified adoption expenses for each eligible child.
Child and Dependent Care Credit
If you pay someone to take care of your dependent (defined as
being under the age of 13 at the end of the tax year or
incapable of self-care) in order to work or look for work, you
may qualify for a credit of up to $1,050 or 35 percent of
$3,000 of eligible expenses.
For two or more qualifying dependents, you can claim up to 35
percent of $6,000 (or $2,100) of eligible expenses. For higher
income earners the credit percentage is reduced, but not below
20 percent, regardless of the amount of adjusted gross income.
Child Tax Credit
The $1,000 child tax credit has been extended through 2012. A
portion of the credit may be refundable, which means that you
can claim the amount you are owed, even if you have no tax
liability for the year. The credit is phased out for those
with higher incomes.
Energy Tax Credits for Homeowners
Energy tax credits for homeowners expire at the end of 2011
and are not as generous as in previous years. In addition, a
taxpayer who has claimed an amount of $500 in any previous
year is not eligible for this tax credit.
Homeowners can claim an Energy Star window tax credit of up to
$200 maximum as well as a water heater tax credit, which
includes electric, natural gas, propane, or oil, up to a
maximum of $300. The same maximum ($300) applies to air
conditioners, but insulation, doors, and roof credits are
capped at $500. The furnace tax credit (includes natural gas,
propane, oil, or hot water) and is capped at $150 maximum and
efficiency must be at 95%.
Earned Income Tax Credit (EITC)
The maximum EITC for low and moderate income workers and
working families is $5,751, up from $5,666 in 2010. The
maximum income limit for the EITC has increased to $49,078, up
from $48,362 in 2010. The credit varies by family size, filing
status and other factors, with the maximum credit going to
joint filers with three or more qualifying children.
Coverdell Education Savings Account
For two more years, you can contribute up to $2,000 a year to
Coverdell savings accounts. These accounts can be used to
offset the cost of elementary and secondary education, as well
as post-secondary education.
American Opportunity Tax Credit (Higher Education)
The expansion of the Hope Scholarship Credit by the American
Opportunity Tax Credit has been extended through 2012. For
2011, the maximum Hope Scholarship Credit that can be used to
offset certain higher education expenses is $2,500, although
it is phased out beginning at $160,000 adjusted gross income
for joint filers and $80,000 for other filers.
Employer Provided Educational Assistance
Through 2012, you, as an employee, can exclude up to $5,250 of
qualifying post-secondary and graduate education expenses that
are reimbursed by your employer.
Lifetime Learning Credit
A credit of up to $2,000 is available for an unlimited number
of years for certain costs of post-secondary or graduate
courses or courses to acquire or improve your job skills. For
2011, the credit is fully phased out at $122,000 adjusted
gross income for joint filers and $61,000 for others.
Student Loan Interest
For 2011 and 2012, the $2,500 maximum student loan interest
deduction for interest paid on student loans is not limited to
interest paid during the first 60 months of repayment. The
deduction begins to phase out for higher-income taxpayers.
Tuition and Related Expenses Deduction
For 2010 and 2011, there is an above-the-line deduction of up
to $4,000 for qualified tuition expenses. This means that
qualified tuition payments can directly reduce the amount of
taxable income, and you don't have to itemize to claim this
deduction. However, this option can't be used with other
education tax breaks, such as the American Opportunity Tax
Credit, and the amount available is phased out for
Roth IRA Conversions
There is no longer an income limit for taxpayers who want to
convert regular IRAs into Roth IRAs. The difference is that
taxpayers who convert to Roth IRAs in tax year 2011 must pay
taxes on the conversion income now instead of deferring it in
later years as was the case in 2010.
Standard Mileage Rates
The standard mileage rate increases to 51 cents per business
mile driven (19 cents per mile driven for medical or moving
purposes and 14 cents per mile driven in service of charitable
organizations) for the first half of 2011. From July 1, 2011
to December 31, 2011 however, the rate increases to 55.5 cents
per business mile. This increase is a special adjustment by
the IRS and reflects higher gasoline prices.
Health Care Tax Credit for Small Businesses
Small business employers who pay at least half the premiums
for single health insurance coverage for their employees may
be eligible for the Small Business Health Care Tax Credit as
long as they employ fewer than the equivalent of 25 full-time
workers and average annual wages do not exceed $50,000. The
credit can be claimed in tax years 2010 through 2013 and for
any two years after that. The maximum credit that can be
claimed is an amount equal to 35% of premiums paid by eligible
Section 179 Expensing
In 2011 (as well as 2010), the maximum Section 179 expense
deduction for equipment purchases is $500,000 ($535,000 for
qualified enterprise zone property) of the first $2 million of
certain business property placed in service during the year.
The bonus depreciation increases to 100% for qualified
property. If the cost of all section 179 property placed in
service by the taxpayer during the tax year exceeds $2
million, the $500,000 amount is reduced, but not below zero.
Please contact us if you need help understanding which
deductions and tax credits you are entitled to. We are always
available to assist you.
As always you can call our offices if you have any
questions about these or any other accounting, tax,
financial planning or insurance related issues, at 301-657-8080.
Regards, Paul Sullivan, CPA
President, Sullivan & Company