A Laundry List of 2011 Tax Law Changes

This page was last updated August 23, 2010. Please check back regularly as the tax laws may change before the end of the year.

Our Brackets & Details page covers the highlights of the tax changes coming in 2011, but there are many more provisions that take effect, or disappear as part of the 2011 tax hikes. Depending on your situation, these provisions may affect your tax bill come January 1.

Higher Tax Rates
By now you know that the tax rates in each bracket are going up. Of special concern to low income taxpayers is the disappearance of the 10% bracket. High-income tax payers will feel the sting of the 39.6% bracket. This also marks the return of the marriage tax penalty, where married couples pay more than they would if each person filed a single return. Since most families require two incomes, this will penalize a large number of American families.

Personal Exemption Phaseouts
According to the tax law each person covered by a return entitles the tax payer to reduce their taxable income by $3,750. However, starting in 2011, the personal exemption phaseout returns. Under this rule, the amount you can claim starts decreasing around $166,000 and goes to zero by $291,000. This effectively serves as a stealth tax hike on middle and higher income taxpayers.

Itemized Deduction Limits
The so-called "Pease" limits on itemized deductions return in 2011. If you itemize your deductions, the amount you can deduct will be phased out above a certain income amount ($169,750 for all returns). The reduction in the value of the itemized deduction can be up to 80% depending on your income level. This tax hike tends to punish people who pay large amounts of state taxes, live in high cost-of-living areas, and even people who donate large sums to charity.

The Return of the Estate Tax
In 2010 the estate tax was repealed entirely, meaning any wealth you accumulated during your life could be passed tax-free to your heirs. But that goes away in 2011, when the 55% tax on assets returns, with a $1,000,000 exemption. This insidious tax, often called the "Death Tax" is the most unfair and unjust tax on the books. It taxes people on wealth that they accumulated through their lifetime and on money they paid taxes on already. The Heritage Foundation assembled and excellent article on the Estate Tax and its implications called The Economic Case Against the Death Tax.

Higher Investment Taxes
The capital gains tax rate will jump from 15% to 20% for most taxpayers. The special 0% capital gains tax on earners in the 15% income tax bracket climbs to 10%. Income from dividends is treated as ordinary income and subject to your marginal tax rate up to 39.6%. The Bush Tax Cuts limited the dividend tax to 15%.

Tax Credits
Child Tax Credit
The child tax credit drops from $1,000 per child to $500. Also, the credit is no longer refundable unless earners make less than $12,550. For joint filers, the tax credit begins to phase out at $110,000 (AGI), and phases out at $75,000 for single filers. This will seriously impact low-income families.

Payroll Tax Credit (Making Work Pay)
The partial credit of 6.2% for payroll taxes that low income earners pay is eliminated. This will increase the tax liability of low-income single payers by $400, and joint filers by $800.

Earned Income Tax Credit (EITC)
The economic stimulus act provided for a 45% increase of the EITC credit for families with three or more children, and higher income limits for qualifying for the credit. This provision is repealed in 2011; another tax increase for low-income families.

College Tuition Tax Credit
The economic stimulus act (“American Recovery and Reinvestment Act of 2009”) tax credit expires in 2011. The old Hope credit is limited to a student's first two years of college, and is worth a maximum of $2,000. Also, unlike the current tax credit, it is not refundable.

Energy Savings Credit
The 2010 credit of 30% (up to $1,500) for energy efficiency improvements to principal residences expires. Make any improvements to your home's windows, doors, HVAC equipment, water heaters, etc. this year to take advantage of the credit.

College Savings Plans
With the expiration of the Bush tax cuts, in 2011, 529 Plans can no longer be used to pay for a computer or broadband access.

Section 179 Expenses
One of the main tax breaks for small businesses is the Section 179 expense deduction. Currently $250,000, it drops to $25,000 in 2011. Above this much smaller amount, businesses will need to depreciate their expenses over many years, causing the tax bill to be much higher in the nearer term. Please visit Section179.org for more information.

1099 Reporting Requirements
Starting in 2011, any business that does more than $600 in business with any vendor will be required to submit a 1099 form. This massive increase in paperwork will increase the cost of every small and large business and will likely increase prices on the goods and services that these businesses provide. For example, if a business purchases a $1,000 computer from Amazon, that business will be required to file a 1099 with the IRS, something not previously required for vendors organized as corporations. For more information see Big Changes to IRS Form 1099 in 2011 at the Investing Blog.

Mortgage Insurance Premiums
As of January 1, 2011, taxpayers will no longer be allowed to deduct mortgage insurance premiums from their tax returns. In 2010, homeowners making less than $100,000 who were paying insurance premiums on mortgages established after December 31, 2006 were able to take this deduction.

Student Loan Interest Deduction
Starting in 2011, income limits for individuals or married couples drop and taxpayers can only deduct interest from the first 5 years of their student loans.

Medicine Cabinet Taxes
The recent Healthcare law imposes a new rule in 2011 that Health Savings Accounts (HSAs), Health Reimbursement Accounts (HRAs) and Flexible Spending Accounts (FSAs) cannot be used for non-prescription medicine. This is in effect a tax increase on anyone with such an account. Also, an annual tax on brand name pharmaceutical manufactures will increase the cost of brand name drugs (even though this tax isn't paid directly by individuals).

Tanning Tax (a.k.a "The Snooki Tax")
The Tanning Tax of 10% that just began in July continues next year.

Despite the length of this list of tax changes, there are many other less significant changes on the horizon. Always consult an accountant or tax professional regarding your specific circumstances.