Income Tax Changes 2011

It's time, once again, for an annual review of the income tax changes for 2011.  The Great Recession appears to be subsiding, but carryover plans from prior years continue in 2011.  As was the approach last year, we'll outline any changes to Social Security, standard deductions, exemptions, mileage deduction rates, earned income credits, Hope, American Opportunity and Lifetime Learning tax credits, as well as changes to retirement savings accounts such as 401k plans, IRAs, and Roth plans. 

Federal Income Tax Filing Deadline

The federal income tax filing deadline for the tax year 2010 is April 18, 2011, which is a Monday.  The deadline was pushed back from Friday, April 15th because the District of Columbia is celebrating Emancipation Day.  State filings are still due on April 15, 2011.

In the remainder of this publication, we're going to be discussing the changes that became effective in the tax year 2011, which will become part of your income tax filing in 2012.

Social Security and Medicare

For 2011, the Medicare tax will remain at 1.45%.  On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act, which lowered the employee contribution to Social Security from 6.20% to 4.20% in 2011.  For the third consecutive year, the wage limit, or Social Security maximum, will be $106,800.  The Cost of Living Adjustment (COLA) was 0.0% again in 2011, a direct reflection of the U.S. economy's slow growth rate.

Standard Deductions in 2011

According to the IRS, around two out of every three taxpayers claim the standard deduction on their income tax returns.  In 2011, there was a change to the standard deduction amounts for all individual taxpayers.  The standard deductions that apply in 2011 include:

• Single - $5,800, an increase of $100
• Married Filing Separately - $5,800, an increase of $100
• Head of Household - $8,500, an increase of $100
• Married Taxpayers Filing Jointly / Qualifying Widow(er)s  - $11,600, an increase of $200

Exemption Values

The amount you can deduct for each exemption you claim on your federal income taxes in 2011 increased slightly from 2010.  The 2011 value of $3,700 represents a $50 increase over the 2010 amount.

Mileage Deduction Rates

Studies funded by the IRS demonstrate that it's more expensive to drive a car in 2011.  That means the standard mileage deduction rates are increasing.  The following table outlines the mileage deduction rates for the tax year 2011:

Mileage Deduction Rates 2011

 2011 Increase to Earned Income Credit

The earned income credit applies to working taxpayers that have earned income that falls below certain thresholds.  The qualification threshold depends on the number of persons in each family.  The thresholds in 2011 to qualify for this credit include:

• No Children - earnings must be less than $13,660 or $18,740 if married filing jointly.
• One Child - earnings must be less than $36,052 or $41,132 if married filing jointly.
• Two Children - earnings must be less than $40,964 or $46,044 if married filing jointly.
• Three or More Children - earnings must be less than $43,998 or $49,078 if married filing jointly.

The credits themselves have also increased in 2011, with the maximum credits that can be received as indicated below:

• No Children - $464
• One Child - $3,094
• Two Children - $5,112
• Three or More Children - $5,751

American Opportunity, Lifetime Learning, and Hope Credits

In 2011, there was no change to the Hope Credit.  The maximum Hope Credit, available for the first two years of post-secondary education, remains at $2,500.  This includes 100% of qualifying tuition and related expenses not in excess of $2,000, plus 25% of those expenses that do not exceed $4,000.

In 2011, the taxpayer's modified adjusted gross income will be used to determine the reduction in the amount of the Hope Scholarship and Lifetime Learning Credits.  Credit reductions start for taxpayers with an AGI in excess of $80,000, or $160,000 for those filing joint returns for the Hope Credit.  The American Opportunity Tax Credit is not available in 2011, as this tax credit only applied to the years 2009 and 2010.  The threshold for the Lifetime Learning Credit increases to $51,000 or $102,000 for those filing joint returns in 2011.

Contributions to Retirement Accounts

The bad news continues in 2011 for those individuals looking to increase the rate of savings into their retirement accounts.  Contribution limits for 401k as well as 403b plans remained the same in 2011 at $16,500.  Catch up contributions also remained at $5,500 in 2011.  Contribution limits to SIMPLE retirement plans also remained at $11,500, as did the catch up contribution limit of $2,500.  Although the contribution limits can be adjusted for inflation, they have not increased over the last two years.

The income limits for individuals willing to contribute to traditional IRAs as well as Roth IRA plans increased modestly again in 2011.  The income phase-out threshold for Roth IRAs now starts at $169,000 for those filing joint returns, which is an increase of $2,000.  The phase-out threshold for taxpayers filing their tax returns as head of household or single is now $107,000.  That's a $2,000 increase over last year's value.

Finally, if you're covered by a retirement plan at work, and you are considering contributing to a tax-deductible traditional IRA, then the 2011 income phase-out limits start at $90,000 for joint filers (an increase of $1,000 from 2010), and remain at $56,000 for those with a filing status of single or head of household.

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