Tuesday, January 11, 2011

IRS Releases new 2011 Tax Brackets and other remaining inflation adjustments

The IRS has updated the tax brackets, personal exemption, standard deduction and several other tax items as part of its annual cost-of-living and inflation adjustments for 2011 (Rev. Proc. 2011-12).
Tax laws require the IRS to adjust the dollar amounts of dozens of tax provisions each year to account for inflation. The IRS updated most of the items - such as pension and retirement plan limits and the annual gift tax exclusion - in mid-October in IR-2010-108 and Rev. Proc 2010-40. But the IRS waited to release updates on several tax items in anticipation of legislation addressing the extension of the 2001 and 2003 tax cuts. Rev. Proc. 2011-12 covers these items.
The tax brackets increased modestly for 2011, reflecting relatively low inflation (See chart for 2011 and future new tax brackets). The new standard deduction increased $200 to $11,600 for married couples filing a joint return and increased $100 to $5,800 for single filers. The personal and dependent exemption increased $50 to $3,700.
Individual tax bracket scenarios under current law
 SingleJoint2011-122013
Ordinary income tax brackets
(based on 2011 brackets)*
$0 - $8,500$0 - $17,00010%15%
 $8,501 - $34,500$17,001 - $69,00015%15%
 $34,501 - $83,600$69,001 - $139,35025%28%
 $83,601 - $174,400$139,351 - $212,30028%31%
 $174,401 - $379,150$212,301 - $379,15033%36%
 Over $379,150Over $379,15035%39.6%
Capital gains top rate15%†23%‡**
Dividend top rate15%†43.4%§**
Interest income top rate 35%43.4%**
* Brackets are adjusted for inflation every year and refer to taxable income
† Capital gains and dividends in bottom two brackets have zero rate
‡ The top capital gains rate in 2013 would be 23.8% but 21.8% for property held at least five years**
§ Dividends would be taxed as ordinary income in 2013 up to the top rate of 39.6% (+3.8%)
** Includes new 3.8% Medicare tax on investment income