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2011 Changes in Tax Law

There were many political battles in Congress in 2010, but few were more heated than the debates revolving around the Bush tax cuts extension. The original Bush tax cuts, which were enacted in 2001 and 2003, were in serious jeopardy of sunsetting at the end of the year if Congress did not take action. This action would have caused virtually every American to experience a tax hike for 2011.
The Democrats wanted to extend the tax cuts but strongly preferred not to include income earners over $250,000 from receiving any extended tax cuts. On the other hand, Republicans fought hard for higher income earners, including small business owners who make over $250,000. This legislation was debated for so long that it was taken straight to the end of the deadline before it passed, right before the holidays. Check out the new tax changes that you may be able to take advantage of.
Small businesses can benefit greatly from a few tax changes in 2011 by investing in fixed assets and equipment before December 31st, 2011.  The Small Business Jobs Act signed this past September doubled the expense limitation from $250,000 to $500,000.  Eligible investments include office furniture and equipment, machinery, and computer software.  If you’re a small business owner and you’ve been holding out on buying newer office equipment, furniture, or IT equipment, this year is the time to invest in it. The major advantage here is that these expenses can be fully deducted from the business’ taxes if they are purchased in 2011.
Many people feared that the capital gains and dividend tax rate would be increased in the revised tax cut plan by President Obama, but the Republicans fought hard to keep it the same at 15 percent, and it will stay that way until at least the end of 2012.  For any non-tax deferred investing you plan on doing, make sure you take advantage of the low 15 percent capital gains tax rate now, because the chances of it staying this low past 2012 are slim.
In the past, there were income restrictions on who was allowed to convert a traditional IRA to a Roth IRA, but that has changed in 2011.  Converting to a Roth IRA can really help you save money on taxes mainly because a Roth IRA takes in taxable money, which is then not taxed when withdrawn at the retirement age.  If you believe that you’ll be in a higher tax bracket at retirement, then converting now definitely makes sense
For 2011 only, the Social Security payroll tax of 6.2 percent taken from everyone’s paycheck has been reduced by 2 percent to 4.2 percent.  The tax is actually 12.4 percent, but the other half is picked up by your employer, up to $106,000 in income.  That other half is not reduced for employers with this payroll tax holiday. A 2 percent increase to your paycheck is almost the standard amount of yearly raises that many employees receive. So why not set aside the 2 percent to a savings account?
Basil Ward is a contributing author to this blog and is currently serving as an intern for the Law Offices of Richard D. Seward.  Basil has been admitted to practice law as a Rule 9 Legal Intern in Washington State.