As economic reports show the economy improving, Congress voted in some tax laws that will benefit taxpayers. Now there is a simple fact that we can all appreciate. But tax laws change so often and so many laws change that figuring out how to play the tax game is anything but simple. Have you ever played a game of Monopoly, where you were winning and then at the very end of the game, the rules changed and you found yourself loosing? While games use consistent rules, tax law changes during the game. And Congress has until December 31, 2011, to finalize 2011 tax laws. But for now, here is a rundown of the changes. And it is sure to make you smile!
"Extender" Tax Measures
The state and local sales tax deduction, the higher education tuition and fees deduction, the $250 classroom expense deduction for educators, and charitable contribution of IRA proceeds were all extended again for 2010 and 2011.
And, lower tax rates continue through 2011 with the extension of the 2010 Tax Relief Act. The extension continues the benefit through 2012. Without this measure, tax rates would have returned to the higher level used prior to 2001.
Also extended is the Credit for Energy Saving Home Improvements. This credit provides up to 30% on the cost of qualified improvements. The credit reverts to 2007 law; which provides a maximum lifetime benefit of $500. This credit is set to expire December 31, 2011.
Also extended through 2011 is the deduction for Mortgage Insurance Premium.
Likewise, the lower capital gains and dividend tax rates are preserved through the end of 2012.
Earned Income Tax Credit
The new law continued the temporary increase in the Earned Income Tax Credit (EITC) for 2009 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 percentage increased 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.
Child Tax Credit
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. and continued 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.
The inheritance tax returns for tax year 2011. The first $5 million of an estate can pass tax-free to heirs, anything over will be taxed at 35%.
Conversions to Roth retirement plan. Beginning in 2010, the modified AGI and filing status requirements for converting a traditional IRA to a Roth IRA were eliminated. For any 2010 rollover from an IRA other than a Roth IRA to a Roth IRA, any amounts that would have been included as income will be included in income in equal amounts in 2011 and 2012. A taxpayer can choose to include the entire amount in income when filing a 2010 tax return.
Section 179 Expense Deduction
Both pieces, the $500,000 expense limit on equipment placed in service and the annual investment limit of $2,000,000 remain through 2011.
The Patient Protection and Affordable Care Act brought on some immediate health care changes for individuals for filing a 2010 tax return. Lifetime limits on benefits and restrictive annual limits are now prohibited. The adoption tax credit and assistance exclusion has increased by $1,000 to $13,170. The bill makes the credit refundable and extends it through 2011. There's a 10% tax on tanning services that started July 1, 2010.
The First Time Home Buyer Credit is among some expiring tax measures. But also as a reminder, if a taxpayer claimed the first-time homebuyer credit for a home purchased in 2008, they generally must begin repaying it in 2010. Some other tax measures that have just expired are the $2,400 exclusion from income of unemployment payments, the government retiree credit, and the extra $3,000 IRA deduction for employees of bankrupt companies.
Contact your local income tax preparation office with questions regarding how these tax changes may have an impact on your return.
Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.