Tax Changes for 2011

Each year there are a number of changes introduced that may affect your particular tax situation. Here are a few you should watch for.

We will first start with the Income Tax Rates for 2011. The rates are the same from last year, but inflation has caused the brackets to increase.

Those who use a Flexible Spending Account (FSAs) to help pay for their medical expenses may no longer use the pre-taxed funds to purchase over-the-counter (OTC) medicines anymore, without a prescription from a doctor. Note though that insulin may still be purchased with FSA funds over-the-counter. No more using left over FSA funds to stock up on aspirin or cold medicine. Crutches, contact-lens, glasses, and pregnancy tests are just some of the items that are still included. Refer to IRS Publication 502 to see what is and isn't allowed to be covered by law.

2010 included a temporary two-percentage-point cut in the employee's share of Social Security taxes, saving a maximum of $2,136 per worker. There is no phase-out, and each partner of a married couple can get the rebate. This is set to expire at the end of 2011.

For most workers, this cut will come as an automatic adjustment to withholding. For the self-employed (whose tax rate falls to 10.4% from 12.4%), it will be built into a quarterly withholding worksheet.

Even though the energy tax credit was recently extended, it has been minimized and may not affect you if you have previously taken the credit. The amount of the credit is now $500 per taxpayer per lifetime. So, if you have previously taken the credit (a maximum of $1,500) than you will be ineligible to claim it again. This is set to expire at the end of 2011, though there may be a proposal backed by home builders and remodelers to expand the credit or drop it.

The estate and gift tax received a makeover, as the top rate is now 35% and there is a one-time exemption of $5 million per individual for estate, gift, and generation-skipping taxes. This may make it easier to move larger amounts of wealth. This provision is set to expire at the end of 2012.

The annual exclusion for tax-free gifts remains $13,000 per donor. A giver may make an unlimited number of $13,000 gifts, as long as they are to different individuals. Gifts of tuition and payments for medical care also are exempt.
The $400 ($800 if married filing jointly) Making Work Pay Credit will expire.

The American Opportunity Tax Credit of up to $2,500 for education expenses was renewed for 2011 and 2012. This will allow those eligible to qualify for the maximum annual credit of $2,500 per student. The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels.

The Teacher Classroom Expenses deduction was recently renewed for 2011. If you are an eligible educator, you can deduct up to $250 ($500 if married filing joint and both spouses are educators, but not more than $250 each) of any unreimbursed expenses [otherwise deductible as a trade or business expense] you paid or incurred for books, supplies, computer equipment (including related software and services), other equipment, and supplementary materials that you use in the classroom. This deduction is for expenses paid or incurred during the tax year.

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