Viresh Janani covers new tax laws for 2011

President Obama and Congress have approved a two year extension to all the Bush-era tax cuts. This means that the 2011 federal IRS tax rates will be the same as 2010 rates, shown in the table below. However tax bracket ranges and standard deduction levels have increased slightly due to low inflation. A rise in tax rates would have cut the after-tax pay by $3,000 for the average tax payer, so the tax rates extension is worth a lot given current economic conditions. However, the extension is only for 2 years and unless the economy really tanks, don’t look for these to be extended again in 2013.

Notable changes between 2010 and 2011 Taxes:

- The value of each personal and dependent exemption, available to most taxpayers, is $3,700, up $50 from 2010.

- The new 2011 standard deduction is $11,600 for married couples filing a joint return, up $200, $5,800 for singles and married individuals filing separately, up $100, and $8,500 for heads of household, also up $100. The additional standard deduction for blind people and senior citizens is $1,150 for married individuals, up $50, and $1,450 for singles and heads of household, also up $50. Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.

- Tax-bracket thresholds increased slightly for each filing status as shown in the above table.

- Key Dates for 2010-2011 Tax season:

   The IRS begins accepting e-file – January 11, 2011
   W-2’s due to employees (unless IRS exemption provided) – January 31, 2011
   Tax Filing Deadline or request for extension– April 18, 2011

With tax season complete, it is now time to look forward and implement some smart tax management strategies to reduce your mitigate your tax liability for the years ahead. This is particularly the case with a number of new provisions and expiring tax breaks in 2010 and 2011. Based on these and extrapolating from 2010 IRS Tax Brackets I have provided my preliminary view of the 2011 income tax brackets.

Higher Tax Rates with Repeal of Bush Era Tax Cuts

Beginning in 2011, tax rates that were in effect prior to 2001 and 2003 will be restored if President Obama does not extend the Bush tax cuts. These tax cuts included reductions in some individual income-tax rates, levies on capital gains and dividends, changes to the estate tax and relief from the so- called marriage penalty, in which a married couple may pay more in taxes than if they filed as separate individuals. The top income tax rate would go back to 39.6 percent, and the special low 10 percent bracket is eliminated.

Whether this actually happens will be a major point of contention in Congress especially in the contradictory light of the recession and record federal deficits. In all likelihood and based on stated views, it is likely that the Obama administration and Democratic lawmakers will extend income-tax cuts that benefit American families earning less than $250,000 a year, while allowing tax rate reductions for high-income earners to lapse. This means boosts in the top marginal rates from 33% and 35% to 36% and 39.6% respectively. Based on this and inflation, here is what the 2011 tax tables* could look like, with a comparison to the 2010 tax brackets.

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