The More Things Change, for much of last year, the possibility of higher tax rates going into effect in 2011 loomed large in taxpayers\’ planning. The 20I0 Tax Relief Act\’s extension of the Bush-era tax cuts and certain other taxpayer friendly rules provides a temporary reprieve.
Individual Tax Rates
Except for inflation adjustments to the tax brackets, the income-tax rate schedules for individuals for both the 2011 and 2012 tax years will look largely the same as 2010\’s. The same six tax rates – 10%, 15%,25%,28%,33%, and 35% – will remain, in effect, for the two-year period. The rates that previously had been scheduled to take effect this year – 15%, 28%, 31%, 36%, and 39.6% – will apply beginning in 2013 (unless the law changes again).
Higher income taxpayers also benefit from an additional two-year moratorium on provisions that effectively increase their marginal tax rates: one that phases out personal exemptions and another that reduces itemized deductions once income exceeds certain levels. These two provisions won\’t come back into play until 2013.
Marriage Penalty Relief
When a married couple\’s tax on a jointly filed return is more than the combined taxes they would pay as single taxpayers filing separate returns, there\’s said to be a \”marriage penalty.\” This might happen, for example, if both spouses have similar earnings because, when their earnings are combined on a joint return, the income is taxed in a higher bracket.
In 201 I and 2012, the size of the 15% rate bracket for married couples filing jointly will continue to be t\\vice the size of the 15% rate bracket for singles. This prevents the marriage penalty that would have existed if the size of the joint bracket had been cut to 167% of the single bracket size as called for under prior law. In addition, the standard deduction available to married couples filing jointly will continue to be 200% (instead of 167%) of the standard deduction available to single taxpayers.
Capital Gains and Dividends
Investors enjoy a two-fold break when it comes to tax rates. Instead of rising to 20%, the maximum tax rate on long-term capital gains will generally stay at 15% for 2011 and 2012. A 0% rate will continue to apply to long-term capital gains otherwise taxable in the two lowest regular brackets, making those gains tax free for federal income-tax purposes.
For 2011 and 2012 tax, the same 15% and 0% rates will apply to the qualified dividend income of individual taxpayers. Under prior law, dividends were to have been treated as ordinary income, meaning dividends would have been taxed at the regular individual income-tax rates instead of favorable rates.
Tax Breaks for Education
Good news for many college students and their parents: The 20 I 0 Tax Relief Act keeps the American Opportunity Tax Credit in place for two additional years, 20 11 and 2012. This credit may be claimed for a limited amount of a student\’s qualified tuition and related expenses during the first four years of post secondary education. The American Opportunity Tax Credit is somewhat more generous than the (Hope) credit that was to have been re-instituted in 2011.
The new law also retroactively extends through 2011 an above-the-line deduction for qualified college tuition expenses (not available if an education credit is claimed for the student\’s· expenses). The education tax breaks are subject to income-based restrictions.
15 Corporations: Calendar-year corporations file 2010 tax return (Form – 1120 or 1120-A) and pay any tax due. S corporations file Form 1120S. For an automatic six-month filing extension, file Form 7004 and deposit the estimated tax due.
18 Individuals: File 2010 income-tax return (Form 1040, 1040A, or 1040EZ) with the IRS. For an automatic six-month extension, file Form 4868 and deposit the estimated tax due.
18 Individuals: Pay the first installment of 2011 estimated tax with Form IG40-ES
18 Partnerships: File 2010 calendar year partnership return (Form 1065) For an automatic five-month extension, File Form 7004
18 Corporations: Deposit first Installment of 2011 estimated tax
2 Employers: File Form 941, Employer\’s Quarterly Federal Tax Return; quarterly deposit due.
10 Employers: Deferred due date for Form 941, if timely deposits were made.
16 Exempt Organizations: File 2010 Form 990, 990-EZ, or 99G-N, if the organization reports on a calendar year basis.
16 Partnerships and S Corporations: If an election to use a tax year other than a required tax year was made, file Form 8752 to report the required payment.
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