On December 17, 2010, President Obama signed the tax bill into law after months of negotiations, and to our benefit, this law will be in effect for the next two years. Enactment of this tax law confirms that individuals at all income levels won’t face an automatic hike in taxes beginning in January 2011. There are several areas to talk about and some key points to consider now that the holiday season is over and tax season is upon us.
- Payroll Tax Relief―There is a two percent point reduction in an employee’s share of the social security portion of the FICA tax. So, in 2011, the amount taken out of your paycheck for social security will drop from 6.2% to 4.2%. A self-employed person will pay 10.4% on income up to the cap, down from 12.4% in 2010.
- Capital Gains Tax―The top rate on long-term capital gains and qualified dividends will remain at 15% for the next two years and those in the lower tax brackets (10% and 15%) will continue with the 0% capital gains rate.
- FSA Plans―Beginning in 2011, over the counter medicines and drugs will no longer be eligible for reimbursement under the Flexible Spending Accounts.
- No Cap on Exemptions and Deductions―Upper income taxpayers will benefit from no limit on their itemized deductions and exemptions because of higher adjusted gross income. This was eliminated for 2010 and extends through 2012.
- AMT Patch―The alternative minimum tax exemption level was extended for 2010 and 2011, thus the middle class gets a break. This tax was enacted for the wealthy, but over the decades the AMT tax has become a problem area for millions of middle class taxpayers.
- Education Costs―The American Opportunity tax credit has been extended through 2012. The full credit, up to $2,500 is available for higher education and does not phase out for married couples making up to $160,000 and single individuals $80,000.
- Sales Tax or State Tax―The taxpayer still has the choice of deducting either the state sales tax or state income tax, whichever is higher.
- Contributions from IRAs―Taxpayers who are 70½ or older can donate up to $100,000 of their IRAs directly to a charity and exclude the amount of their donation from their taxable income. This tax break has been extended through 2011.
- Tax Brackets―The income tax rates for taxpayers did not increase and will remain the same through 2012.
The above is just an overview of some of the major tax breaks that you can expect over the next two years. Although we can look forward to a few extra dollars in our pockets, these tax breaks won’t last forever.
ACTION ITEM: Understand how the new tax law will affect you and your tax planning.
Thomas F. Scanlon, CPA, CFP®