America Gets a Raise

As part of the Tax Relief Act of 2010, Social Security tax rates will be lowered by two percent. The employee-portion of Social Security taxes will be reduced from 6.2% to a temporary rate of 4.2% for 2011 only.This 2% tax break also applies to self-employed individuals. Medicare taxes are unchanged, the employer-portion of Social Security remains 6.2%, and the Social Security wage base remains $106,800 for 2011.

What it means: You could get a raise in your pay by as much as $2,136 in 2011. Unfortunately, for most taxpayers this "raise" is offset somewhat by the expiration of the Making Work Pay Credit that expired in 2010. It also means you should be prepared for lower paychecks in 2012 as the Social Security tax rate goes back up.

2011 Tax Rates

Individual Tax Rates Remain the Same: The passage of the 2010 Tax Relief Actretains the current tax rates through 2012.Without action, the 10% tax bracket would have been eliminated and the upper tax brackets would have increased 3 - 3.6%. In 2013, these higher tax rates (15%, 28%, 31%, 36% and 39.6%) will go into effect unless Congress acts.

Dividend and Capital Gains Tax Rates Remain the Same: Qualified capital gains and ordinary dividends will continue to be taxed at a maximum rate of 15%, with a 0% rate on capital gains for those in the 10 and 15% incom e tax brackets. Without the Tax Relief Act of 2010, the capital gains 0% rate would have risen to 10% and the 15% maximum rate would have risen to 20%. Dividends would have been taxed at ordinary income tax rates rather than the preferred 15% rate.

What it means: You now have a level of certainty for the next couple of years as to what the tax rates will be.

Extensions and Changes

Tax breaks extend into 2011.  A number of tax breaks now extend into 2011. Key among them are:

  • $250 deduction for elementary and secondary school teachers' classroom expenses
  • a continuation of the deduction for qualified tuition and related expenses up to $4,000
  • a charitable donation deduction for direct contributions from qualified retirement accounts if 70 1/2 years or older
  • $1,000 Child Tax Credit that does not fall back to $500 as scheduled
  • a choice between taking sales tax OR state income tax as an itemized deduction
Roth IRA Conversions.   Anyone can now convert IRAs into Roth IRAs by paying the tax, regardless of your income levels. However, you must be prepared to pay taxes on the amount converted in 2011.In 2010, this tax obligation could be spread between 2011 and 2012 tax years.

W-2s now have health benefit reporting.   Your 2011 W-2 will contain the value of health insurance benefits.While not yet taxable, the government wants to keep track of these values as part of the Health Care Reform Act.

More 1099s.   In an effort to capture unreported income, the Treasury Department is requiring more information reporting.This includes brokerage companies reporting the cost basis of stock transactions, merchant credit card companies reporting merchant business card activity, and small businesses issuing 1099s to many more suppliers.

Phase-out reprieve.   For many clients, itemized deductions and personal exemptions were phased out in prior years. After a hiatus in 2010, phase-out of deductions was scheduled to occur once again in 2011, but has now been delayed
until 2013.

2011 Mileage Rates
  • Business Travel $ .51 cents per mile
  • Medical or Moving $ .19 cents per mile
  • Charitable Work $ .14 cents per mile