Tax legislation passed at the end of 2010—the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of2010—maintains the person in effect since 2003. In 2011 and 2012, those rates range from 10% to 35%. In 2012, we might see yet another debate on future tax rates.
Capital gains and dividends
The 2011 and 2012 tax rates ranging from 10% to 35% are on ordinary income: earnings, interest on savings accounts, pensions, and so on. For long-term capital gains and qualified dividend income (which includes most dividends received by investors), the top tax rate remains at 15% for this year and the next. Therefore, investors are likely to continue to seek dividend-paying stocks and all types of investments that may eventually produce long-term gains, such as stocks and real estate.
What’s more, the tax rate on long-term gains and qualified dividends remains at 0% for taxpayers in the 10% and 15% tax brackets. In 2011, those brackets apply to single individuals with taxable income up to $34,500 and to married couples filing joint tax returns with taxable income up to $69,000.
Consequently, some tax strategies remain effective. Suppose a retired couple projects they will have $50,000 of taxa e Income In t IS couple holds appreciated securities, they could take as much as $19,000 of their long term capital gains and owe 0% in tax on those gains.
In addition, individual investors now can exclude from tax 100% of any gains from investments in certain small business stock. This tax exclusion had been 50% until a law passed in 2009 increased it to 75%, and a law passed in 2010 created a 100% tax exclusion. Under the new tax law, investors may qualify for a 100% tax exclusion on gains from certain small business stock acquired after September 27, 2010, and before January I, 2012.
Other income tax benefits
Beyond tax rates, the new law extends many income tax benefits that were scheduled to end after 2010. For example, all taxpayers will be able to fully use their itemized deductions and personal exemptions in 2011 and 2012. If the new law had not been passed, certain high~ income taxpayers would have lost some of those tax breaks. Similarly, some tax credits that had been scheduled to end or lose value are still available in 2011 and 2012 at 2010 levels. These include the earned income credit, the child tax credit, the dependent care credit, the adoption credit, and the American Opportunity Tax Credit for higher education. The research tax credit, which expired at the end of 2009, was reinstated retroactively for 2010 and remains in effect for 2011.
Coverdell Education Savings Accounts still have a $2,000 annual contribution limit, not the $500 cap that would have returned. Some individual tax provisions were reinstated retroactively, so they apply to 2010, as well as 2011. This list includes optional deductions for state and local sales taxes, higher education tuition deductions, teachers’ deductions for classroom expenses, IRA charitable rollovers for taxpayers age 70 1/2 and older, and enhanced tax advantages for some donations of conservation easements.
Addressing the alternative minimum tax
The new law also includes another “patch” for the alternative minimum tax (AMT). Every year or two, a patch has increased the AMT exemption amount and allows nonrefundable personal credits to offset both regular tax and AMT liability. Here are the new AMT exemption amounts:
Singles and heads of households:
2010 – $47,450 | 2011 – $48,450
Married persons filing jointly:
2010 – $72,450 | 2011 – $74,450
Married persons filing separately:
2010 – $36,225 | 2011 – $37,225
If Congress had not addressed the AMT issue, the AMT exemption amounts would have been $45,000 for joint filers; $33,750 for singles and heads of households; and $22,500 for married persons filing separately. As a result of the new law, fewer taxpayers will be subject to the AMT.
Payroll tax holiday
Although the new tax law generally does not change income taxes from 2010, it does provide a significant break in payroll taxes. During 2011, employees will contribute 4.2% of compensation for Social Security instead of the normal 6.2%. In 2011, employees pay Social Security tax on the first $106,800 of earned income. Thus, taxpayers who earn at least $106,800 in 2011 will save $2,136 in payroll tax: 2% of $106,800. Self-employed individuals will enjoy similar tax savings.
Employers will continue to pay 6.2% of an employee’s earnings, up to $106,800. Under current law, the employees’ share of Social Security tax will go back to 6.2% in 2012.