New Tax Rules for 2011: Personal Income Taxes

Over the past few years there have been many changes to the tax code.  To keep you informed, we have provided a summary of these modifications.

Within the personal income tax realm, the following policies are in place for 2011.

1.  Payroll tax holiday – Employees will pay only 4.2% (instead of the usual 6.2%) Social Security tax on payroll income received during 2011 up to the 2011 wage base of  $106,800.  Self-employed persons will pay only 10.4% Social Security self-employment taxes on self-employment income up to $106,800.

2. Stricter rules on energy-saving home improvements – Rules surrounding energy-saving home improvements will be more strict for those done in 2011 than in 2010. Only a 10% credit can be claimed for qualified energy property placed in service in 2011, and a $500 lifetime limit is in place (only up to $200 can be from windows and skylights). Also, there are limits on the amount you can claim based on claims you place in previous years. Finally, limits have been placed on claims for particular equipment.

3.  Changes to how non-retirement plan annuities are taxed – For amounts received from annuity contracts in tax years beginning after Dec. 31, 2010, taxpayers may partially annuitize such an annuity (or endowment, or life insurance) contract. This change allows each annuity payment  to be treated as partially  a tax-free recovery of basis and partially a taxable distribution of earnings.

4.  Stricter definition of “medicine” for health plan reimbursements – New in 2011, payments for over-the-counter medicines cannot be reimbursed through a health flexible spending arrangement (FSA), health reimbursement account (HRA), health savings account (HSA), or Archer MSA (medical savings account), unless the medicine is prescribed by a doctor or is insulin. Also, for distributions starting in 2011, the tax on distributions from an HSA that are not used for qualified medical expenses increases from 10% to 20% of the disbursed amount, and the tax on distributions from an Archer MSA that are not used for qualified medical expenses increases from 15% to 20% of the disbursed amount.

If you’d like to discuss how these changes affect your personal tax situation, or about tax planning in general, please give us a call.

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