Important Changes to Tax Cuts, Credits and Deductions in 2011

As we head into the new year, there is a wide range of expiring tax cuts that the former Congress and President approved back in 2001 and 2003. The tax cuts intended to help spur and strengthen the economy. To put it another way, there are a wide range of taxes that will be increased that will impact both the middle and upper classes unless Congress acts this year. During his campaign for presidency, President Obama was clear about his intention to let the Bush tax cuts expire at the end of 2010 to keep our growing federal deficit under control. Many argue that these tax increases will affect everyone in some way–you be the judge. Here is a list of the expiring tax cuts, and changes to credits and deductions in 2011 you may want to know about in order to mitigate any increased tax liabilities you may be facing. Many of these projections are based of off the proposed budget and are subject to change.

Income Tax Rates

Currently, the proposed budget intends to make some changes to the income tax rates or income tax brackets. President Obama’s 2011 budget will keep the previous tax breaks for single taxpayers making less than $200,000 and married couples making less than $250,000. In fact, the 28% tax bracket is expected to be expanded. However, the 33% tax bracket is expected to rise to 36% and the top 35% tax bracket should end up being 39.6%.

Capital Gains and Dividends

There will no longer be a 15% long term capital gains rate for those in the upper brackets. Their rates will go back to 20%. For individuals in the lower 15% income tax bracket, they might see their long term capital gains rate go to 10%. Under Bush, the lower 15% tax bracket had a 0% capital gains rate. In 2011, dividends (excluding mutual fund capital gain distributions) that were once taxed at a 15% tax rate are set to be taxed as ordinary income for the highest tax bracket. Obama’s proposed budget though only wants to increase the dividends tax rate for the top bracket from 15% to 20%. It remains to be seen what will happen but in any event the top bracket will be paying more taxes on dividends.

Estate Taxes

The estate tax (also known as the death tax) exemption will return to a $1 million exemption and is set to increase to 55% for estates over $1,000,000 dollars. This year (2010) happens to be the best year to die (that sounds horrible but true) because the estate tax was completely phased out this year (unless Congress acts to retroactively change this).

Mortgage Premiums

After December 31, 2010, Americans will no longer be able to deduct mortgage insurance premiums from their taxes if Congress fails to act. This was a special deduction for taxpayers/homeowners who were paying these insurance premiums for mortgage insurance contracts issued after December 31st, 2006. Although this deduction had an eligibility income cap at $100,000 for families (fully phased out at $110,000).

Child Tax Credit

Currently the child tax credit is $1,000 per child, but in the new year it will drop down to $500 and may not be refundable to all taxpayers. The tax credit for married couples (filing jointly) started to phase out at $110,000 (AGI) and for all other taxpayers (except married independent filers) it started to become phased out at $75,000. In the beginning of this year, Obama has proposed increasing this credit for middle-class families but nothing has been approved as of yet.

529 and Coverdell ESA Plan Changes

529 Plans allowed parents to invest after-tax dollars in an account which could grow with withdrawals being tax free if used for qualified education plans. In 2011, 529 plan (college savings plans or higher education plans) withdrawals will not be allowed tax free to pay for internet access or computers. Also, Coverdell ESA Plans will have changes. Coverdell ESA are similar in some ways to 529 Plans, except they are geared for elementary/secondary education expenses and have maximum contribution limits. After 2010, the max contribution limit will fall from $2000 a year to $500 unless Congress acts.

Business Taxes

There will be a few business taxes that will change including the section 179 expense deduction. The maximum expense deduction for 2011, with regards to the 179 expense deduction that applies to small firms and companies, will drop from $250,000 to $125,000 in 2011. There are limitations with this tax deduction as well.

Other Tax Credits

There will be limitations on the tuition credits and the earned income tax credit.

It is a tricky situation for the current Commander-in-Chief. If the cuts are allowed to expire, policymakers will be given gruff for raising taxes. If the cuts are extended for a longer term, the future of the deficit begins getting worse real fast. The situation leaves not much room for compromise between the government and the taxpayers, especially during a time of recession.

This guest post was provided by TaxDebtHelp.com, a company that provides IRS tax debt help through a collection of self-help articles that serve as a guide for taxpayers facing IRS tax problems. Moreover, articles are complimented and backed by a diverse team of tax professionals offering tax relief services for those taxpayers facing serious issues.