In December 2010, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (Tax Act) was approved in Congress and signed into law. The tax law changes contained within the Act basically allowed existing tax rates to prevail until 2012. One other thing to keep in mind is that many of the tax breaks in the 2010 Act were designed to be phased in over a number of years, or indexed to inflation. These breaks applied to 2010 and later years.
With 2010 now behind us, let’s take a look at what changes the Act has in store for us with regard to our 2011 tax returns. I’ll focus specifically on what is new or different for 2011.
New Payroll Tax Cut for Wage Earners
Wage earners and self employed individuals will see a significant cut in their share of payroll taxes. Instead of paying 6.2% on wages up to $106,800, they will now pay 4.2%. That could mean a savings of over $2000 for those making over $100,000 per year. This applies just for 2011. What’s really great about this tax cut is that you’ll see the savings reflected in each paycheck throughout the year. In other words, it’s not going to be reflected in the tax return you file by next April 15, 2012, but in each current paycheck. For example, if you earn $60,000 annually and are paid bi-weekly, you’ll see an extra $46 in each paycheck.
Self-employed individuals also benefit from the payroll tax cut. Self-employed individuals will pay 10.4%, instead of 12.4%, on self-employment income up to the $106,800 threshold.
Perhaps not too surprisingly, the good news is offset by some bad news. The payroll tax cut replaces the Making Work Pay Credit (MWPC), which expired at the end of 2010 and was not renewed for 2011. The MWPC provided a tax credit of up to $400 for individuals and up to $800 for married taxpayers filing joint returns. Nevertheless, you can see that if you’re earning more than $20,000 annually, the payroll tax cut is a big winner.
Mortgage Insurance Premiums
The deduction for mortgage insurance premiums paid on mortgages taken out after 2006 expired on Dec. 31, 2010 so this deduction no longer applies for 2011. Keep in mind that this is for your mortgage insurance premiums, not your mortgage interest.
Flexible Spending Accounts
Employees with flexible spending accounts can no longer use pretax funds to pay for many over-the counter medicines, except for insulin, without a doctor’s prescription. So this limits the benefit of paying for drugs like aspirin and other common cold remedies from your flexible spending account. This rule also applies to health reimbursments accounts, health savings accounts, and medical savings account plans. In addition to stingier rules for using your flex spending account funds, the penalty has doubled in some cases when you use these spending account funds for non-qualified expenditures. The penalty can be as much as 20% of the amount taken out of the account.
Residential Energy Improvement Credits
For individuals making energy-efficient improvements to their homes in 2011 important changes have taken place for a popular tax credit. The Tax Relief Act extended the energy efficient property credit for homeowners for one year, through December 31, 2011. However, more restrictive rules apply for 2011 than applied in 2010. An individual is now entitled to a 10% credit qualified energy efficiency improvements (building envelope components) installed during the tax year.
The maximum credit allowable is $500 over the lifetime of the taxpayer. The $500 amount must be reduced by the total amount of credits previously taken by the taxpayer in 2006, 2007, 2009 and 2010. There are also certain restrictions on the amounts claimed for certain items as well. For example, the amount claimed for windows and skylights in a year cannot exceed $200 less any credits you claimed for these items in all earlier tax years ending after December 31, 2005. The credit also cannot exceed $50 for an advanced main circulating fan, $150 for any qualified natural gas, propane, or hot water boiler, and $300 for any item of energy efficient property.
New Broker Basis Reporting Rules
Beginning in 2011, generally all brokers will be required to report your “adjusted cost basis” in stock you sell that year as well as whether it is short or long term. This reporting will be done on Form 1099-B. This simplifies the task of tracking your stock costs and ensures that your investment transactions are properly reported.
These are just some of the many important tax changes that you’ll see in 2011 and for the federal return you prepare by the deadline on April 15, 2012.