Saturday, September 11, 2010

First, a moment of silence please.  It is September 11 -- we must never forget that tragic day.
Let’s begin our look at 2011 scheduled income tax changes by considering this married couple:

• Each spouse works full-time at a job at about $12 per hour, earning a $24,000 per year. Their total household income before tax is $48,000 per year.

• They have two dependent children living at home with them. Child care costs them more than $6,000 per year, currently that $6,000 is the most they can get a federal child care credit for (at $3,000 for each child).

• They file short form tax returns each year because they do not have enough deductions to itemize.

In 2010, this couple’s joint federal tax return could be summarized as follows:

• Adjusted Gross Income:                        $48,000
• Standard Deduction                               $11,400
• Personal Exemptions (4 @ $3,650)       $14,600
• Taxable Income                                     $22,000
• Tax before credits                                 $  2,466 ($16,680 taxed @10% and $5,320 @15%)

• Child Care Credit                                  $ 1,200 (20% of the $6,000 allowed)
• Child Tax Credit                                    $ 2,000 ($1,000 for each child)
• Making Work Pay Credit                      $    800 (Passed in 2009 for 2009-10)
• Federal Tax Refund                               $ 1,534 (plus income tax withheld)

Here’s what will change for this couple in 2011, unless Congress makes a last-minute modification (very possible, be sure to check back to this blog to see):

• The “marriage penalty” is coming back for more people. Right now, the standard deduction for a single person is $5,700. If this couple were not married, they would each qualify for that, which would total $11,400 for both of them. Under current law, their standard deduction as a married couple will also be $11,400. In 2011, the married standard deduction will return to 1.67 times the single standard deduction, or $9,519.

• The 10% bracket is disappearing. All of this couple’s taxable income will be taxed at 15%.

• The amount of child care they can claim a credit on will drop from $3,000 to $2,400 per child.

• The child tax credit will drop from $1,000 to $500 for each child

• There is a current proposal in Congress to extend the Making Work Pay Credit to 2011, but as of now it has not yet been voted on.

With these changes, here is what this couple’s tax return summary will look like in 2011:

• Adjusted Gross Income:                          $48,000
• Standard Deduction:                                $  9,519
• Personal Exemptions (4 @ $3,650)         $14,600
• Taxable Income                                       $23,881
• Tax before credits                                    $ 3,582 ($23,881 taxable @ 15%)
• Child Care Credit                                    $    960 (20% of the $4,800 allowed)
• Child Tax Credit                                      $ 1,000 ($500 for each child)
• Making Work Pay Credit                         $  - 0 -
• Federal Tax Due                                      $ 1,622

This couple, who is used to getting a $1,534 refund when they file their tax return, will find out they owe $1,622 instead – a net $3,156 increase in their tax liability (over 6½ percent of their income).

Letting the 2001-2003 tax cuts expire is going to affect everyone.

Get Your Tax or Financial Questions Answered In A Future Blog Post

I choose topics for my blog posts based on the questions I receive most frequently from you.  I appreciate your input!  Feel free to comment here at this blog.

Important Note!   The information in this article is intended to inform you of some of the financial opportunities provided in the tax laws or elsewhere.  These laws are very complex and thus this article is not intended to give you specific advice for your personal situation.  If you need such advice, please contact a qualified professional.

© 2010, Doug Beecher, MBA, CPA, all rights reserved. This article, either as a whole or in part, may not be reproduced or transmitted in any form without the prior written permission of the copyright holder. When such permission is granted, the user must state that the material was used by permission of the copyright holder.

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