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Tax Changes You Need to Know for 2011

Get ready for these tax changes in 2011With tax season 2010 already in full swing, it's easy to overlook some important tax changes for 2011. Here's some of what you can look forward to with respect to personal income taxes during the year:

  • Payroll Tax Holiday. As we reported earlier, there's a one-year payroll tax holiday in effect for 2011. This means that taxpayers subject to FICA (Social Security and Medicare) taxes will see a tax break of 2% in their paychecks during the year. The break is tied to Social Security payroll taxes, which means the benefit ends when you hit the Social Security cap during the year, which is $106,800 for 2011. Taxpayers who don't pay into the Social Security system during the year will not receive a benefit.
  • Standard Deductions. The standard deduction rates -- or the amount that you can claim if you don't itemize your deductions -- stay largely the same for 2011. They are $5,800 for single taxpayers or those married taxpayers filing separately, $11,600 for married taxpayers filing jointly and $8,500 for taxpayers filing as head of household. The additional standard deduction allowed for senior citizens and taxpayers who are legally blind is $1,150 for married taxpayers filing jointly and $1,450 for single taxpayers.
  • Personal Exemptions. The personal exemption amount for 2011 is $3,700, an increase from $3,650 in 2010.
  • Income tax rates. Tax rates for 2011 remain relatively close to those for 2010. The tax deal -- which extended existing breaks -- means that tax rate cuts remain in place with a few adjustments to account for inflation. The tax brackets for 2011 are:
Single
$0-$8,500 10%
$8,500-$34,500 15%
$34,500-$83,600 25%
$83,600-$174,400 28%
$174,400-$379,150 33%
$379,150+ 35%
Married Filing Jointly
$0-$17,000 10%
$17,000-$69,000 15%
$69,000-$139,350 25%
$139,350-$212,300 28%
$212,300-$379,150 33%
$379,150+ 35%
Head of Household
$0-$12,150 10%
$12,150-$46,250 15%
$46,250-$119,400 25%
$119,400-$193,350 28%
$193,350-$379,150 33%
$379,150+ 35%
Married Filing Separately
$0-$8,500 10%
$8,500-$34,500 15%
$34,500-$69,675 25%
$69,675-$106,150 28%
$106,150-$189,575 33%
$189,575+ 35%
  • Alternative Minimum Tax (AMT). The AMT exemption for 2011 is $74,450 for taxpayers filing jointly, $48,450 for single taxpayers and those filing as head of households, and $37,225 for married couples filing separately.
  • Pease and PEP limitations. High-income taxpayers benefit from a temporary repeal of the PEP (personal exemption phase-out) and "Pease" limitations. Under PEP, personal exemptions (which start at $3,700) for high-income taxpayers were reduced as adjusted gross income (AGI) increased, while the Pease provision reduced itemized deductions by 3% at the top of the brackets. With the temporary repeal, high-income taxpayers hold onto their exemptions and the full value of their itemized deductions for two more years.
  • Capital Gains and Dividends. Lower rates for capital gains and dividends are extended through 2011.
  • Flexible Spending Accounts (FSAs). In 2011, over the counter (OTC) medications are generally no longer eligible as FSA expenses unless a doctor writes a prescription for the medications (insulin is a significant exception to this rule). The new rule also affects HRA (health reimbursement accounts), HSA (health savings accounts) and Archer MSA (medical savings account) plans.
  • Health Care Benefits Reporting. As part of the new health care law, beginning in 2011, employers must report health care benefits for employees. This amount will appear on your form W-2 in 2012 as a report, but it will not affect your taxable income.
  • Foreign Account Reporting. On March 18, 2010, President Obama signed the Hiring Incentives to Restore Employment (HIRE) Act into law. The new law imposes additional reporting and disclosure requirements on your income tax return for U.S. taxpayers with any interest in certain foreign assets worth more than $50,000. This doesn't replace the existing FBAR (Report of Foreign Bank and Financial Accounts) requirements; those still apply.
These are the basics for 2011. It's important to remember that tax laws -- and changes to them -- can be very fact and circumstance specific. If you have questions about how the laws for 2011 affect you, check with your tax professional.

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