2011 Tax Relief: What the New Tax Bill Changes, and What it Doesn’t

Obama’s tax bill extended many of Bush’s tax cuts for two years and provided tax reductions for everyone. The bill extends the tax brackets from last year and also included some tax incentives, including a two percent decrease in social security taxes with no effect on their social security income in later years. This decrease drops social security taxes from 6.2 to 4.2 percent being taken out of your first $106,800 of wages. It remains the same 6.2 percent for employers. Furthermore, an alternative minimum tax patch was created exempting lower income filers, which means that fewer middle class families will be hit with having to pay higher taxes. Originally, the AMT was created to insure a minimum amount of taxes paid by high income tax payers. However, each year as our average incomes increase, more middle class families have to pay this tax. As a result, the exemption, instead of cutting off at $33,750 for single taxpayers and $45,000 for married filing jointly taxpayers, will cut off at $47,450 for single taxpayers and $72,450 for those married filing jointly.

The tax credits taxpayers got for energy efficient appliances are also still available, an extension from the Bush era. Teachers can also still write off $250 of out of pocket expenses, and all taxpayers have the option of writing off sales tax instead of state income taxes.

Major differences include a requirement that any taxpayer who wishes to deduct property taxes must itemize deductions. Estates above $5 million will be taxed at 35 percent with the option of keeping the 0 percent rate with minimal base adjustments. It also includes a portability clause. If you are considering changing your estate plan to benefit from this year’s tax bill, it may be advisable to speak with a professional who can help you sort out the details. In 2013, the tax for estates above $1 million will be taxed at 55 percent.

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Slow and Steady, the Tax Cuts Win the Race

Congress took advantage of all ten years allowed by the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) and the coinciding Jobs and Growth Tax Relief Reconciliation Act of 2003 (“JGTRRA”) to come up with a plan for new tax cuts upon the expiration of these acts at the end of 2010.

First, the income tax brackets remain the same. Under the original Acts, the rates were lowered for each bracket, which means taxpayers are on average skipping out on a 3 percent increase in taxes. Also, the bill includes a one-year cut in employee social security taxes from 6.2 percent to 4.2 percent from the first $106,800 of wages. Furthermore, the income threshold for the Alternative Minimum Tax (AMT) has been raised for two years, meaning that many families will avoid this otherwise costly tax.

Capital gains rates for long-term gains was scheduled to be raised to 20 percent, but under the new bill, it will top at 15 percent with as low as 0 percent available to some taxpayers.

Regarding tax credits, this new bill means that the Making Work Pay Credit will no longer be available. This credit, in 2009 and 2010, allowed workers to claim a refundable credit of up to $400 singly and $800 for those married filing jointly. However, the Earned Income Tax Credit (EITC) will be available to more taxpayers because the eligibility income level will not increase as planned. Also, the Child Tax Credit will remain at $1,000 per child for the next two years instead of dropping to $500. The American Opportunity Tax Credit (AOTC), a partially refundable credit for students pursuing a degree, will remain at $2,500 instead of dropping to the slated $1,800.

In addition to tax cut extensions, the bill extends unemployment benefits for another 13 months.

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2011 Tax Relief: Interest Rates Decrease

On December 27, the IRS announced lower interest rates for the quarter beginning the calendar year of 2011. The rates for January 1, 2011 will be 3 percent for individual taxpayer overpayments, and 3 percent for underpayments. For corporate taxpayers, the rates will be 2 percent for overpayments, 3 percent for underpayments, 5 percent for large corporate underpayments, and 0.5 percent for the portion of a corporate overpayment exceeding $10,000. These percentages are in addition to the sum of the federal short term rate.

This interest rate penalty decrease may be helpful to corporate and non-corporate taxpayers because many often consider borrowing money to pay back their taxes and avoid these penalties. However, this decrease may make the penalty cheaper than the interest rate for borrowing money. In other words, the cost of getting money from another source is higher than the cost of using your own dollars to pay off your penalty. Talk to a tax professional to find out what option is best for you.

The interest rates above are computed from the federal short term rate during October 2010. These rates are down from 4 percent for non-corporate taxpayers and from 3 percent for corporate taxpayers since the quarterly interest rates computed on April 1, 2009 for each quarter until the present quarter ending December 31, 2010.

It is important to understand that this interest is compounded daily. If you have an underpayment penalty or overpayment interest, the IRS will provide an explanation code, which corresponds with a general explanation of the error.

Section 6621 of the Internal Revenue Code establishes the determination of the rate of interest for overpayments and underpayments on taxes. The announcement will appear in Internal Revenue Bulletin No. 2010-52 on December.

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