The New Tax Law And You

Tuesday Tips is a series of articles from local experts to help you save money, make better decisions and plan for a better future.

Although called a ‘tax cut,’ the new law just signed is really not a tax cut. It is basically just an extension of the current tax laws with the only major change being with the estate tax, which doesn’t affect most people.

In other words, it’s just a ‘hokey-pokey’ and this is what it’s all about.

Basically, the allowances and credits you were eligible for last year remain:

• Keep tax rates at the current, lower rate, regardless of your tax bracket through 2012 (good for married couples);
• Extends the low current capital gains and dividend rates through 2012;
• Extends the repeal of Itemized deduction limitations for higher income individuals through 2012;

• $1,000 Child Tax Credit will continue;
• Earned Income Tax Credit enhancements continue;
• Maximum expenses for the Child and Dependent Care Credit remain at $3,000/$6,000;
• Deduction of mortgage insurance premiums continue;

• American Opportunity Tax Credit for students;
• Exclusion for employer educational assistance;
• Student loan interest deduction;
• Increased contributions to Coverdell Education Savings Accounts; and
• Adoption Credit and exclusion for employer adoption assistance.

• State and local sales tax deduction;
• Higher education tuition deduction;
• $250 above-the-line teacher’s classroom expense deduction (worth about $50 in your pocket);
• Charitable contributions of IRA; and
• Charitable contributions of appreciated property for conservation purposes.

There are a few changes, however:

Non-Itemized Property tax deduction: Gone: An allowance for the property tax you paid was added to the ‘standard deduction’ if you could not itemize. (Sorry senior citizens.)

Social Security Payroll Tax Cut: This is a new tax benefit for 2011.  All employees will benefit from a 33% reduction in their social security payroll tax or a cut of 2% from 6.2% to 4.2%.  This means that someone earning $50,000, will have $1,000 (2%*$50,000) in additional annual disposable income.  That’s a nice perk.  Employers please note that your portion of the social security payroll tax of 6.2% remains the same.

It is important for employees to review their paychecks in 2011, to ensure that their employer has only taken out 4.2% of their gross income for that pay period and not 6.2%. Employers must adjust their payroll systems no later than January 31. For any Social Security tax over withheld in January, an offsetting adjustment in pay must be made by March 31.

(This benefit primarily benefits low-and middle-income households.)

The Estate Tax is Reinstated But Below Prior “No Estate Levels”: In case you forgot, for 2010 Congress fell asleep at the wheel and forgot to reinstate the estate tax.  Essentially, someone could pass away and their heirs wouldn’t have to pay any estate tax.  For 2011, the estate tax is back but much more taxpayer friendly than the 2009 $3.5 million estate tax exclusion and 45% tax rate above the excluded amount.  Specifically, and retroactive to January 1, 2010, the estate tax will allow the first $10 million of a couple’s estate (the money they already paid income taxes on) to pass to their heirs without taxation.  Any amount above the $10 million exclusion amount will be subject to a 35% tax rate. There is an election if you wish to keep the 0% rate with minimal basis adjustments for 2010.  There’s also a portability clause, which makes things complicated enough that you should talk to your attorney about revising your estate plan. For 2013, estates above $1 million are scheduled to be taxed at 55%. (This should be a moot point for most of you, as proper planning can avoid most thresholds.)

The AMT Exemption Amounts Rise: Each year taxpayers are required to compute their tax using the regular tax rules and rates as well as an alternative method known as the AMT (Alternative Minimum Tax), which eliminates most itemized deductions.  The original idea of this parallel system was to insure that high income taxpayers pay a minimum amount of tax.  The problem is that each year as our income increases and more middle class families are hit with this tax. Instead of just adjusting this tax for inflation automatically, Congress makes a patch, called an exemption amount. Without the patch single filers would be exempt if they make LESS than $33,750 and married filers would be exempt if they made LESS than $45,000. For 2010, the AMT exemption amounts will be $47,450 for singles and $72,450 for couples.  For 2011, the amounts will be $48,450 and $74,450, respectively.

Making Work Pay Credit Expires: This tax credit was part of the 2009 American Recovery Act and will not be renewed.  The tax credit was as much as $400 for individuals earning $75,000 or less and $800 for couples earning $150,000 or less.  The social security 2% tax cut covers this loss but only for those that are employed. (Compared with 2010, taxes will fall for nearly half of all taxpayers but about one-third of households will be worse off because of the expiration of the Making Work Pay credit.)

Unemployment Benefit Extension: This unemployment benefit program is extended for an additional 13 months. This means that if you have not collected benefits for the full 99 weeks, you may collect until you have reached the 99 week maximum. It does not extend the number of weeks you are eligible for unemployment.

Joseph Reisman, of Joseph S. Reisman & Associates, has been serving tax prep and business accounting expertise from his Coney Island Avenue office for more than 25 years. Check out the firm’s website.