Exemptions, deductions rise due to inflation

In 2011, personal exemptions and standard deductions will rise and tax brackets will widen due to inflation, an official with the Internal Revenue Service said.

These inflation adjustments relate to eight tax provisions that were either modified or extended by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 that became law on Dec. 17.

New dollar amounts affecting 2011 returns, filed by most taxpayers in early 2012, include the following:

? The value of each personal and dependent exemption, available to most taxpayers, is $3,700, up $50 from 2010.

? The new standard deduction is $11,600 for married couples filing a joint return, up $200; $5,800 for singles and married individuals filing separately, up $100; and $8,500 for heads of household, also up $100.

The additional standard deduction for blind people and senior citizens is $1,150 for married individuals, up $50; and $1,450 for singles and heads of household, also up $50.

Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.

? Tax-bracket thresholds increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $69,000, up from $68,000 in 2010.

? The maximum earned income tax credit (EITC) for low- and moderate- income workers and working families rises to $5,751, up from $5,666 in 2010. The maximum income limit for the EITC rises to $49,078, up from $48,362 in 2010.

The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.

? The modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $102,000 for joint filers, up from $100,000; and $51,000 for singles and heads of household, up from $50,000.

Several tax benefits are unchanged in 2011. For example, the monthly limit on the value of qualified transportation benefits (parking, transit passes, etc.) provided by an employer to its employees, remains at $230. Details on these inflation adjustments can be found in Revenue Procedure 2011-12.

By law, the dollar amounts for a variety of tax provisions, affecting virtually every taxpayer, must be revised each year to keep pace with inflation. Most of the new dollar amounts, including retirement-plan-related adjustments, were announced in October. To avoid confusion, the eight provisions released in December were not included in the October announcements, due to the anticipated impact of extender legislation.

Cut in payroll taxes

The Internal Revenue Service released instructions to help employers implement the 2011 cut in payroll taxes, along with new income-tax withholding tables that employers will use during 2011.

Millions of workers, an IRS official said, will see their take-home pay rise during 2011 because the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 provides a two percentage point payroll tax cut for employees, reducing their Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid.

This reduced Social Security withholding will have no effect on the employee?s future Social Security benefits.

The new law also maintains the income-tax rates that have been in effect in recent years.

Employers should start using the new withholding tables and reducing the amount of Social Security tax withheld as soon as possible in 2011 but not later than Jan. 31.

Notice 1036 contains the percentage method income tax withholding tables, the lower Social Security withholding rate, and related information that most employers need to implement these changes.

Publication 15, (Circular E), Employer?s Tax Guide, containing the extensive wage bracket tables that some employers use, will be available on IRS.gov in a few days.

The IRS recognizes that the late enactment of these changes makes it difficult for many employers to quickly update their withholding systems. For that reason, the agency asks employers to adjust their payroll systems as soon as possible, but not later than Jan. 31.

For any Social Security tax over withheld during January, employers should make an offsetting adjustment in workers? pay as soon as possible but not later than March 31.

Employers and payroll companies will handle the withholding changes, so workers typically won?t need to take any additional action, such as filling out a new W-4 withholding form.

As always, however, the IRS urges workers to review their withholding every year and, if necessary, fill out a new W-4 and give it to their employer.

For example, individuals and couples with multiple jobs, people who are having children, getting married, getting divorced or buying a home, and those who typically wind up with a balance due or large refund at the end of the year may want to consider submitting revised W-4 forms.

Publication 919, How Do I Adjust My Tax Withholding?, provides more information to workers on making changes to their tax withholding.