Nine Year Mortgage on the 2011 Tax Changes

Nine Year Mortgage welcomes you into the year 2011! It is important as a taxpayer to know what changes were made this year and what to expect in the upcoming years. We know it can be difficult to keep up on all the changes that have been made and we are here to answer many of the questions you have, like how the new payroll tax cut works, the expiration of the Roth IRA conversion rules, and how long it will all last.

An important thing to remember is that most of the tax changes that were made this past year were only temporary; a majority of them are set to change in 2012 to what they were like previous to 2001. It is a major possibility that in two years we will yet again be in the middle of tax debates like this past year, but in the heart of the presidential campaign. You can expect that tax rates on both regular wages and investment income will surge once more, leaving the estate tax to return to a $1 million-per-individual exemption and a 55% top income tax rate.

Those who procrastinated planning for higher taxes are finding this year to be a nice reprieve, especially if they had investments with long-term gains and stock options. Tax strategists acknowledge that investment tax rates are going to increase in the near future and have already started meeting with their clients to prepare for 2013.

But for now, Nine Year Mortgage tells you the Important Changes for 2011:

Income taxes

The previous rates from last year apply to this year’s rates, but it is important to recognize that the tax brackets are a fraction higher than last year’s due to inflation adjustments. Please refer to the table below.

Expires at the end of 2012

Investment taxes

Investment taxes are continuing at all time lows for both long-term capital gains and dividends. For taxpayers in the 25% tax bracket and above, their rate is 15%. For others who are in the 15% income tax bracket and below, the rate is zero.

Expires at the end of 2012

‘Stealth’ income taxes

Prosperous taxpayers will not have ded uctions reduced by the Personal Exemption Phase-out (PEP) and Pease Limitations. The Pease limit cut 3% of itemized deductions, while PEP has eliminated personal exemptions, which is $3,700 for 2011.

Expires at the end of 2012

Payroll taxes

The temporary two-percentage-point cut in the employee’s share of Social Security taxes that was announced last year will stay in effect for another year, which saves a maximum of $2,136 per worker. Each partner in a married couple is eligible for this rebate.

For most of Nine Year Mortgage readers, this will come as an automatic adjustment to withholding taxes. If you are self-employed your tax rate falls from 12.4% to 10.4%. This tax cut will be built into a quarterly withholding worksheet that the IRS hopes to release soon.

Expires at the end of 2011

Estate and gift taxes

There is now a top rate of 35% and one exemption of $5 million per individual for estate, gift and generation-skipping taxes. It is suggested that if you are able to dispose of some of your assets, it would be possible for you to rearrange large amounts of wealth.

For those of you who are keen on donations, the annual exclusion for tax-free gifts still remains at $13,000 per donor. A donor is allowed to make a total number of $13,000 of gifts, with the limitation that they have to be to different individuals. However, gifts of payment for medical care and tuition are still exempt.

Expires at the end of 2012

Alternative Minimum Tax (AMT)

Congress has set the AMT exemption at $74,450 for married couples and at $47,450 for single filers, which is slightly higher than this past year.

Expires at the end of 2011

Roth IRA conversion

This year all taxpayers are still allowed to convert ordinary IRAs into Roth IRAs, but the income limit for conversions has been permanently removed. However, if you do take advantage of this, the option you had of deferring conversion income into later years is no longer available, as was true for 2010 conversions. If you did convert in 2010, you still have until October 17, 2011 to decide whether to use this deferral.

Foreign-account reporting

For those who have foreign financial assets above $50,000 there is a new IRS reporting requirement that is being imposed. Don’t be misled, this form is different from the foreign asset report, the FBAR. This will also apply to others, such as hedge-fund investors, who have been exempt from the FBAR filing. Further details are pending because the IRS has still not issued regulations.

Cost-basis reporting by brokers

As of 2011, brokers need to track clients’ purchases of stock, real-estate investment trusts and foreign securities. Once the asset is sold, brokers are asked to report the original cost to the IRS. They hope that by doing so, there will be an improvement in tax compliance by investors. After 2011, the rules for investments in bonds, mutual funds, options and many exchange-traded funds will be implemented. Please see the Tax Report from October 23, 2010 for more information.

Medical expenses

Workers with Flexible Spending Accounts (FSAs) are no longer able to use pretax funds to pay for most over-the-counter medicines without having a prescription (insulin is an exception). However, workers FSA funds may still be used for nonprescription medical items like crutches, chiropractor visits, or laser eye surgery. To see the list of what is now allowed by law, please visit the IRS Publication 502 website.

Energy tax credits for homeowners

The “25(C)” credit for energy-efficient improvements has been extended, but unfortunately it will be beneficial to few. The credit amount has plunged to a maximum of $500 per taxpayer per lifetime. This is $1,000 dollars less than last years credit provisions, meaning that those of you who took the $1,500 provision last year will not be qualified for the provision this year.

Other changes include…

The $250 deduction for teacher classroom expenses; the tax-free donation of IRA proceeds to charity; and a deduction for state sales taxes due to the state income tax deduction were all renewed as well.

Expires at the end of 2011

The American Opportunity Tax Credit of up to $2,500 for education expenses was also renewed.

Expires at the end of 2012

Nine Year Mortgage Sums it Up

The year 2011 has brought in new tax changes that will have an effect on your budget in the upcoming years. To be prepared for the slight increase in your income taxes,  Nine Year Mortgage would suggest that you start putting away a little extra money each month for your 2011 tax returns. If you are one of the hundreds of thousands of taxpayers who wait to file your taxes, be aware that Tax Day 2011 has been moved to April 18th due to the fact that Washington D.C. will be celebrating Emancipation Day on April 15th. Here at Nine Year Mortgage we are aware that one of the best ways to enter the new year is debt free. You can start working your way out of unnecessary debt today by following these tips from Nine Year Mortgage.

To learn more about the products and services that Nine Year Mortgage offers please complete the Nine Year Mortgage Do I Qualify Form today and one of our qualified representatives will contact you.