2011 Tax Changes At-a-Glance

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2011 Tax Changes At-a-Glance

A host of tax provisions enacted in 2001 and 2003--commonly referred to collectively as the "Bush tax cuts"--expire at the end of the year. While it's possible that new legislation could extend some or all of these expiring tax provisions, election-year politics make it difficult to predict what action, if any, Congress will take. With that in mind, here's what you need to know about the major changes that are scheduled for 2011.

Federal income tax brackets

Right now, there are six income tax brackets: 10%, 15%, 25%, 28%, 33%, and 35%. For 2010, these brackets apply to married couples filing joint federal income tax returns in the following manner.

2010 Income Tax Brackets--Married Filing Jointly

Taxable Income	Marginal Tax Rate
Not over $16,750	10%
Over $16,750 to $68,000	15%
Over $68,000 to $137,300	25%
Over $137,300 to $209,250	28%
Over $209,250 to $373,650	33%
Over $373,650	35%

As it stands now, there will be no 10% bracket for 2011, and the remaining bracket rates will return to their original 2001 levels: 15%, 28%, 31%, 36%, and 39.6%.

Marginal Tax Rate

For 2010, if you sell shares of stock that you've held for more than a year, any gain is a long-term capital gain, generally taxed at a maximum rate of 15%. If you're in the 10% or 15% marginal income tax bracket, however, you'll pay no federal tax on the long-term gain (a 0% tax rate applies). That means if you're a married couple filing a joint federal income tax return, and your taxable income is $68,000 or less, you pay no federal tax on the gain.

However, these rates expire at the end of 2010. Beginning in 2011, a 20% rate will generally apply to long-term capital gains. Individuals in the 15% tax bracket (remember, there won't be a 10% bracket in 2011) will pay the tax at a rate of 10%. Special rules (and slightly lower rates) will apply for qualifying property held for five years or more. Finally, while qualifying dividends are taxed in 2010 using the same capital gains tax rates described above (i.e., 15% and 0%), in 2011 they'll be taxed as ordinary income subject to the increased 2011 tax brackets.

The Estate Tax

There is currently no estate tax for 2010, and special rules are in place that govern the way basis is calculated for property passing upon death. The estate tax reappears in 2011, however, with a $1 million exclusion amount (meaning that up to $1 million of assets will be exempt from estate tax) and a top tax rate of 55%. To put that in context, for 2009, the top estate tax rate was 45%, and estates received an exclusion of $3.5 million.

Year	2009	2010	2011
Estate tax exclusion	$3.5 million	N/A	$1 million
Top estate tax rate	45%	No tax	55%

Other Important Changes

Other changes for 2011 include:

• Phaseout of itemized deductions and exemption amounts--Itemized deductions and personal exemption amounts will once again be phased out for higher-income individuals
• The "marriage penalty" returns--Changes made to correct the federal income tax "marriage penalty" expire at the end of 2010, resulting in a reduced standard deduction amount and lower tax bracket thresholds (i.e., higher rates will apply at lower income levels) for married couples filing jointly in 2011
• Tax credits get cut--The child tax credit will be reduced and both the Hope education tax credit and the earned income tax credit become less generous (the Making Work Pay tax credit also disappears)
• Section 179 small business expensing--The increased IRC Section 179 expense limit ends (Section 179 allows small businesses to elect to expense the cost of qualifying property rather than recover the cost through depreciation deductions); the amount that a small business may expense will drop from $250,000 in 2010 to $25,000 in 2011

Recession officially ended in June 2009

Recession officially ended in June 2009
uncertain about the future.

The National Bureau of Economic Research, an independent group of economists, released a statement Monday saying economic data now clearly point to the economy turning higher last summer. That makes the 18-month recession that started in December 2007 the longest and deepest downturn for the U.S. economy since the Great Depression.　
　
NEW YORK (CNNMoney.com) -- The Great Recession ended in June 2009, according to the body charged with dating when economic downturns begin and end.
But the news is little comfort to the millions of Americans still out of work, underwater on their mortgages or
Still, weaker economic data over the past few months have led to rising fears of a double-dip recession. The forecast of top economists surveyed recently by CNNMoney was that there is a 25% risk of a

In its statement, the NBER acknowledged the risk, but said "the committee decided that any future downturn of the economy would be a new recession and not a continuation of the recession that began in December 2007."
The NBER said it "did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity." Rather, it decided that June was when the economy hit bottom, and that it has been slowly but steadily growing since then.
"Economic activity is typically below normal in the early stages of an expansion, and it sometimes remains so well into the expansion," said the NBER.


"Obviously, for the millions of people who are still out of work, people who have seen their home values decline, people who are struggling to pay the bills day to day, [the recession is] still very real for them," he said.
Most economists have been saying for months that the recession likely ended in the summer of 2009.
"No, we are not still in a recession as some people have asserted," said Barry Ritholtz, CEO of Fusion IQ, a research firm based in New York. "No, it's not a depression. The wheel has turned, the trough is more than a year behind us. This is not a robust recovery, but the economy is now expanding, not contracting."
Ritholtz places the risk of a double-dip recession in the 20%-30% range. Some other economists have put the risk as high as 40%. One of those is Sung Won Sohn, economics professor at Cal State University Channel Islands. He said the NBER determination does nothing to reduce his fears of another recession looming around the corner.
"The primary reason is we don't have any cylinder powering the economy," he said. "It's hard to imagine where the strength comes from."
The NBER typically takes a long time to declare the start and end of recessions, waiting for all the economic data to be revised and finalized and making sure that any change in direction of the economy is long-lasting. It didn't declare that the recession started in December of 2007 until a year later.
0:00 /1:55Economists: Politics holding up economy
In addition to looking at gross domestic product, the broadest measure of the nation's economic health, the NBER also weighs employment, industrial production, income and sales for determining when the economy changes direction.
Gross domestic product has recovered to about 70% of its pre-recession level, said Lakshman Achuthan, managing director of Economic Cycle Research Institute and an expert in the dating of recessions. Other measures followed by economists, such as industrial production and sales, have also rebounded nicely, he said.

But he acknowledged that the rebound hasn't felt like a recovery to the typical American. He pointed to private sector employment -- only 9% of jobs lost during the recession have come back -- as an area of continued weakness.
That, and several other weakening indicators, are key factors in rising fears of a double dip.
Double-dip recessions are still relatively rare. The last one occurred in the United States when the 1980 recession was followed by another in 1981-82. The NBER waited until July 1981 to declare the end of the 1980 recession, which turned out to be the same month that it eventually determined the next recession had begun.

　
　Speaking to a town hall meeting in Washington, President Obama said the announcement about the end of the recession is further proof that steps taken early in his administration, including the economic stimulus package, were the right ones. But he cautioned it does not mean that the economy has recovered.within the next year, up from a 15% chance just six months ago.The housing recession isn't over

Some tax benefits for college costs expire at end of 2010

Some parents have big dreams about what they'll do when their children start college. They'll take a cruise, go back to school, maybe walk around the house with no clothes on. But unless your child has received a generous scholarship, mooning your neighbors may be all that you can afford to do.

You can take some of the sting out of college bills by taking advantage of the credits, deductions and other tax-advantaged programs Congress has enacted to make college more affordable. At the end of this year, though, some of those benefits are scheduled to expire. Here's a look at what's changing:

Tax credit

The American Opportunity Credit, included in last year's economic stimulus package, provides a tax credit of up to $2,500 per student in 2010. You can claim the credit for up to 100% of the first $2,000 in qualified college costs and 25% of the next $2,000. To get the full credit, you'll need to spend at least $4,000 on qualified expenses.

Forty percent of the credit is refundable, so a low-income family that doesn't owe federal taxes could receive a check from the government for up to $1,000.

In addition, the income limits on this credit are broader than limits on the Hope and Lifetime Learning Credits, which have been around since the Clinton administration. Married couples with modified adjusted gross income of up to $160,000 can claim the full credit.

The credit is scheduled to expire on Dec. 31. There's a good chance Congress will extend it, "but the question is when," says Mel Schwarz, partner at Grant Thornton in Washington, D.C. One possibility is that Congress will wait until next year to extend the tax credit and make it retroactive for 2011.

YOUR MONEY: Student loan program changes affect rates, repayment

DEBT: Student loan debt exceeds credit card debt in USA

In any event, it makes sense to get the most out of the credit available for 2010. If you haven't already run up $4,000 in qualified expenses, here are some steps you can take before the end of the year:

•Prepay tuition. Many colleges send out tuition bills for the spring semester at the end of the year. If you pay the bill before Dec. 31, you can claim the credit for those expenses on your 2010 tax return, says Melissa Labant, tax technical manager for the American Institute of Certified Public Accountants.

•Buy next semester's textbooks. Textbooks and course materials are qualified expenses for the American Opportunity Credit. If your child knows what courses he or she is going to take in the spring, you can buy textbooks before Dec. 31 and claim the credit, says Gil Charney, tax researcher for H&R Block's Tax Institute.

You can't claim the credit for expenses paid with your 529 college savings plan, says John W. Roth, tax analyst for CCH, a publisher of tax reference books. Because 529 plans also receive special tax treatment — withdrawals are tax-free if they're used for educational purposes — that's considered double-dipping. Instead, use your 529 plan to pay for costs that aren't covered by the tax credit, such as room and board.

Coverdell accounts

Since 2002, Coverdell Education Savings Accounts have allowed families to save up to $2,000 a year in a portfolio of mutual funds or other investments. Contributions are after-tax, but withdrawals are tax-free as long as the money is used for qualified expenses. Along with college-related costs, the money can be used for tuition at a primary or secondary school.

Barring action by Congress, though, these accounts will become much less appealing after Dec. 31. Annual contributions will shrink to $500, and tuition for primary and secondary schools will no longer be a qualified expense, says Barbara Weltman, author of J.K. Lasser's 1001 Deductions and Tax Breaks. Even more significantly, a portion of withdrawals taken after Dec. 31 will be taxed, Weltman says. What to do before year's end if you have a Coverdell account:

•Roll it into a 529 college savings plan. As long as you roll the money directly into a 529 plan, you won't have to pay taxes on it. Withdrawals from 529 plans are tax-free as long as the money is used for qualified expenses.

•Spend the money. Under current law, you can use Coverdell funds to pay for a broad range of education expenses, including computers, school uniforms and tutoring. If you've got some money sitting around in a Coverdell account, "use it up," Weltman says. "That way, it's all going to be tax-free."

Five Rules for Collecting Late Payments

The warning signs of a customer's cash-flow woes are easy to detect. Reduced orders, slowing payments, a change in phone number or business name, and a reluctance to get on the phone are all signs that trouble is brewing. Requests for duplicate invoice documentation or claims that "the check is in the mail" are also obvious stalling techniques. How should you respond to delinquent customers to improve your odds of getting paid? As business bankruptcies near a 16-year high, an informed response and a thorough credit policy are fundamentally necessary. Consider adopting the following five rules:


1. Initiate direct contact after a payment deadline is missed. The biggest mistake small business owners make is waiting too long to follow-up. The probability of collecting on a delinquent account drops dramatically each month following the due date, from 81 percent after two months to 52 percent after six months, according to the Commercial Collection Agency Assn. If an invoice remains outstanding for 12 months, the chance of collection drops to less than 25 percent, the trade group says.

"Demand letters rarely make a difference. Instead, get on the phone. Find out why the customer is late and nail down a defined payment arrangement," Steven Harms, a Birmingham (Mich.)-based attorney and collections expert, advises. Inquire about the state of the customer's affairs: Is business slow? Why are payments late? Customers operating in good faith will use this conversation as an opportunity to discuss their inability to pay and try to negotiate a revised arrangement.

Offering a discount for quick payment may also work in your favor, bumping your invoice to the front of a potentially growing chorus of creditors. Keep in mind that if things are going south for the delinquent customer, a bankruptcy court can claw back anything paid out within 90 days of a filing.

Before concluding the call, make sure you pinpoint a specific payment arrangement—including the amount to be paid, the deadline receipt, and the method of payment delivery. Ask your customer to sign off on a document summarizing the revised arrangement to make sure you are both on the same page; this documentation will be crucial should you find yourself in court.

2. Take broken promises seriously. If the new due date arrives and a check is nowhere to be found, the broken promise indicates that the customer is untrustworthy. At this point, you can hold back future deliveries, warranties, and service requests. Unless the customer is relying on your continued cooperation, however, you may have little leverage without taking more serious action. A past due bill will not show up as a strike on a credit report unless you take steps to file a claim in court.

3. Contemplate hiring a collections agency or attorney. Collections professionals specialize by industry and geography and are paid on their ability to collect—typically 10 percent to 25 percent of the invoice value. The bread-and-butter claims for the collections world range from $1,000 to $50,000, with smaller, younger claims usually being the easiest to collect. The best way to find a reputable agency or attorney is by seeking a referral from someone within your industry. Major industry trade associations, the Association of Credit and Collection Professionals and the Commercial Collection Agency Assn., can also offer recommendations.

4. Review legal options. Invoices under $5,000 can be pursued inexpensively in small claims court. Larger claims must be filed in civil court, a process that is far more complicated and will require the assistance of an attorney. If the action goes undisputed, you may secure a court judgement within a matter of weeks. If the debtor decides to fight back, the resolution can take several months or longer.

As defaults rise, more and more claims are making their way to court, creating a backlog in many jurisdictions. Be prepared for the process to take longer than it has in the past.

Even with a signed invoice and proof of delivery, the debtor still has the ability to fight back. The most common defense is to claim that the goods delivered were late, defective, or not as promised. Debtors tend to fight harder on claims over $50,000. This is when the terms and conditions in your invoice, the steps you take to enforce those terms, and documentation of your correspondence—particularly anything in which the debtor admits in writing that it owes you for a past due invoice—will come in handy.

If the court awards a favorable judgement, the collections process is still far from complete. A judgement is worthless without assets that can be seized, and the creditor's attorney will now be forced to play detective. This is where a detailed credit profile can make or break the process. A social security number, name of a banking relationship, trade reference, or old credit report can lead the way to property, bank accounts, or other assets that can be garnished by the creditor.

If this all sounds painful, that's because it is. "Your best defense against bad debt is a sound credit policy," advises Jocelyn Nager, a New York-based credit collections attorney with Frank, Frank, Goldstein & Nager.

5. Create a credit policy. Don't operate by the seat of your pants. To start, take a look at the International Association of Credit Collectors' guidelines. Collect extensive data at the onset of a credit application, with even tougher requirements for new businesses. Get credit-card details as a backstop to late payments. Invoices should contain detailed terms and be signed by buyers. Require late, damaged, or incomplete shipments to be reported in writing within days of receipt. Update your credit file every few months, particularly if the customer moves or changes phone number or company name. Also maintain a dialogue with your competitors, sharing news on customers. It's in everyone's best interest to cooperate.