Tax Law Changes 

The Temporary Payroll Tax Cut Continuation Act of 2011 

By passing the Temporary Payroll Tax Cut Continuation Act of 2011 late in the year, Congress elected to extend tax relief to nearly 160 million workers by extending the reduction of the Social Security tax withholding rate from 6.2 percent to 4.2 percent.  This act extends the two percentage point payroll tax cut for employees through February 29, 2012. The IRS is requiring employers to put this measure into place by January 31, 2012.  It’s up to Congress to decide the future of this cut and its possible extension for the rest of 2012. 

This cut in Social Security taxes withheld from workers’ paychecks increased take home pay for millions of Americans: 

• A taxpayer earning $50,000 a year would have an extra $1,000 in their pocket over the year.   
• For every $10,000 of wages, the yearly increase in the paycheck will be $200.  
• For every $5,000 of wages, the yearly increase in the paycheck will be $100. 
• For every $1,000 of wages, the yearly increase in the paycheck will be $20.  

The Provisions of the 2010 Tax Relief Act Continue to Affect Consumers and Businesses   

The 2010 Tax Relief Act ushered in a package of over 800 billion dollars of extended tax cuts that benefit all Americans. All tax rates approved under President George Bush and many of the “Bush Era Tax Cuts” were extended for 2 more years. Here are the major highlights affecting filing a 2011 tax return and planning for 2012:  

TAX RATES EXTENDED: Extended the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) tax rates for 2011 and 2012. Without passage of the Tax Relief Act the EGTRRA tax rates of 10%, 15%, 25%, 28%, 33% and 35% would have gone back to 15%, 28%, 31%, 36% and 39.6% starting January 1, 2011.  

AMT “PATCH” ALTERNATIVE MINIMUM TAX: The 2010 Tax Relief Act provided another “patch” for the Alternative Minimum Tax (AMT), extending relief through 2011. Form 6251, Alternative Minimum Tax, lists the exemption amounts for tax year 2011 as:  

• $48,450 (from $47,450) for Single and Head of Household  
• $74,450 (from $72,450) for Married Filing Jointly and Qualified Widow(er)   
• $37,225 (from $36,225) for Married Filing Separately  

Taxpayers can also deduct nonrefundable personal credits again in 2011 such as the child tax credit to reduce their AMT liability. Without the patch the AMT exemption amount would have decreased to $33,750 for individuals and $45,000 for joint filers.  

UNEMPLOYMENT INSURANCE BENEFITS EXTENDED: Unemployment insurance benefits were extended through 2011 for those out of work longer than 26 weeks, but not longer than 99 weeks.  

BENEFITS FOR FAMILIES AND EDUCATION: Extended enhancements that were made to the Earned Income Tax Credit, Child Tax Credit, and the Hope (now called American Opportunity Tax Credit) credit adopted in the 2009 American Recovery and Reinvestment Act (ARRA) would have expired December 31, 2010. 

The American Opportunity Tax Credit expanded the Hope credit to be available for the first four years of postsecondary education. It has increased up to $2,500 (first $2,000 of tuition and 25% of the second $2,000) and is now up to 40% refundable. This credit continues through December 2012.  

The Tax Relief Act extended the repeal of itemized deduction and personal exemption phase-outs. The itemized deductions were projected to have begun to phase-out at $169,550 ($84,775 if MFS) and the personal exemptions were projected to start phase-out for AGIs above $169,550 ($254,350 for MFJ).  As a result, taxpayers who itemize their deductions can deduct the full amount of their itemized deductions regardless of their adjusted gross income through 2012.  

The temporary increase in the Earned Income Tax Credit (EITC) for 2009 will continue through 2012. Prior to 2009, the credit percentage for the EITC for a taxpayer with two or more qualifying children was 40 percent of the first $12,570 of earned income. The new law increases the percentage to 45 percent of the first $12,570 of earned income for taxpayers with three or more qualifying children. The EITC phase-out range has also been adjusted upward by $1,880 for joint filers to eliminate any marriage penalty.  

Without action, the Child Tax Credit (CTC) would have decreased from $1,000 per qualifying child to $500 per qualifying child in 2011. The Tax Relief Act also continued to allow the CTC to be used against AMT. Additionally, the Tax Relief Act continues the refundable portion of CTC (additional CTC) threshold to be 15% of the earned income above $3,000. Without action the threshold would have returned to $10,000.  

There’s a change in the inheritance tax for 2011. The first $5 million of an estate can pass tax-free to heirs. Anything over that will be taxed at 35%.  

 The individual “tax extenders" were extended again through 2011. These are the state and local sales tax deduction, higher education tuition and fees deduction, teacher’s classroom expense deduction and charitable contribution of IRA proceeds.   

Current capital gains tax rates of 0% (for those in the 10 and 15% tax brackets) and 15% will remain in place for two more years. Without action, the rates would have been 10% (for those in the 15% tax bracket) and 20% for 2011 and beyond.  Additionally qualified dividends would no longer be eligible for capital gains treatment and would be taxed at the taxpayer’s ordinary tax rate (15%, 28%, 31%, 36% and 39.6%).  

BUSINESS BENEFITS: Businesses were able to write off 100% of their capital investments for tax purposes for items placed in service after September 8, 2010 and through December 31, 2011, up from the 50% bonus depreciation. The 2010 Tax Relief Act also makes the 50% bonus depreciation available for qualified property placed in service after December 31, 2011 and before January 1, 2013. If a taxpayer purchased a qualified property after September 8, 2010, they will be able to claim 100% of the cost on their business return.  

The “Bush Era Tax Cuts” were ushered in by two pieces of legislation. One was the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), signed into law on June 7, 2001.  The biggest changes included reductions in income tax rates, estate and gift tax exclusions, and changes for retirement plan rules.  In short, it lowered tax rates and simplified retirement plan rules. The second phase of “Bush Era Tax Cuts” took effect with the passage of The Jobs and Growth Tax Relief Reconciliation Act of 2003 ("JGTRRA”). This act provided  lower taxes from dividends, capital gains, and estate taxes, and an increase of the exemption amount for the Alternative Minimum Tax.