| In continuing with my efforts on informing you about the coming changes in our tax code, this 5th installment on the “Sunset Rules” speaks specifically to the average working class taxpayer~You and Me! I’ve been talking to you over the past several mailings about the expiring tax credits that are set to take effect if our Congress does not reinstate them before the end of this year. Simply put, they will expire and we will ALL Pay More Taxes!
In this issue I want to address married taxpayers who typically file “Married Filing Joint” on their tax return. As you will read, if you are married you will be penalized, unless congress acts soon to reinstate this expiring rule. I will also touch on “personal exemptions” and the “phase out rules” for higher income taxpayers.
Okay. Here we go:
- Standard Deduction – In 2010, the standard deduction of taxpayers filing married joint status is twice the amount of someone filing under the single status. Beginning in 2011, the so-called marriage penalty is back: joint filers’ standard deduction will be only 167% (instead of 200%) of the single amount. For a married couple in the 28% bracket, the result is additional tax of about $525.
- Phase-Out of Personal Exemptions – For years before 2006, the personal exemptions were phased out for high-income taxpayers. Then, in 2006 through 2010, that phase-out was gradually reduced to where there is no phase-out in 2010. However, the reduction will no longer apply after 2010, and, in 2011, the phase-out reverts to the rules in effect before 2006. This only impacts high-income taxpayers. Although the phase-out threshold income amounts for 2011 are not currently available, they will be approximately $250,000 for a married couple, $210,000 for head of household and $170,000 for single individuals. The loss of each exemption for a high-income taxpayer in the 36% tax bracket will result in an additional tax of approximately $1,300. Thus, a family of four would see an increase of $5,200.
- Phase-Out of Itemized Deductions – At the same time that the exemption phase-out was being reduced (see immediately preceding item), the phase-out of itemized deductions for high-income taxpayers was also being reduced. Thus, for 2011, the high-income taxpayer’s itemized deduction phase-out returns. The phase-out impacts all deductions other than medical, investment interest, casualty and gambling losses. The deductions are phased out by an amount equal to 3% of the taxpayer’s AGI in excess of the AGI phase-out threshold, but not more than 80% of the deductions can be phased out. The phase-out threshold for most individuals will be approximately $170,000, which is significantly less than the exemption phase-out amount for married joint or head of household filers. The tax impact on an affected taxpayer will be 28% to 39.6% of the lost deductions.
Many of you have Health Savings Accounts (HSA’s) and Educational Savings Account. In my next installment of the Expiring Sunset Rules, I’m going to talk about the changes coming your way in regards to these types of accounts. I’ll also touch on the Home Energy Improvement Credit. Please stay tuned!
E-File Florida is very happy to help you with questions regarding these “Sunset Rules”. Feel free to contact our office by calling 954-583-8534 or by email at info@efileflorida.com. You can also visit us on the Internet at http://www.efileflorida.com for more great tax tips and articles.
IRS CIRCULAR 230 Required Notice – IRS regulations require that we inform you as follows: Any Federal tax advice contained in this communication (including any attachments) is not intended to be used and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction as tax related matter(s).
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