The Bush-era tax cuts have been extended, the alternative minimum tax is patched and capital gains rates are set.
Tax breaks are in place for students and teachers, and for the most sizable estates.
Congress established some of the parameters for the 2011 tax year even before the year began.
The big question confronting lawmakers was whether to extend the Bush tax cuts and for whom. Democrats had argued that the nation's richest taxpayers should be excluded from any extension. But as a part of a compromise deal worked out with President Obama, Congress approved an extension for all taxpayers through 2012. The net result: Workers won't see their take-home pay reduced because of taxes.
In fact, they'll actually see an increase.
Congress declared a 2 percent payroll holiday in 2011, temporarily reducing Social Security withholding. People who are self-employed will see the savings when they file their estimated taxes.
"People are going to spend it or they're going to save it" depending on their goals and financial situation, said Greg Rosica, tax partner with Ernst & Young. "It's a great opportunity to look at it as an opportunity to increase their 401(k) or make an IRA contribution."
"That could multiply tax savings," said Barbara Weltman, author of tax guides for J.K. Lasser. "If they give to charity, it's tax deductible. If they put it into an IRA, that's deductible."
Other options could be to put it in a 529 plan to save for a child's education, or open a Roth IRA and create tax-free income for retirement. A note of caution: Roth IRA contributions are not tax deductible.
The reduced withholding for Social Security took the place of the Making Work Pay tax credit, which had been in place for 2009 and 2010. That credit was worth up to $400 for individuals and $800 for married couples filing jointly, but was phased out for those at higher incomes.
For those people and others, the payroll holiday will work out better. Earnings up to $106,800 are subject to the Social Security payroll taxes. That means a maximum savings from the payroll tax holiday of $2,136. Also, unlike the Making Work Pay credit, the payroll holiday does not phase out at higher incomes.
Some lower-income workers will be worse off, however, said Weltman. A married couple earning less than $40,000 a year or an individual earning less than $20,000 gets a smaller benefit under this year's tax break.
For tax year 2011, the standard deduction increases slightly to $11,600 for married couples filing joint returns, $8,500 for heads of households, and $5,800 for singles and married couples filing individually. The personal exemption increases to $3,700, up $50 from 2010.
Congress in December patched the alternative minimum tax to adjust for inflation for tax years 2010 and 2011. The AMT exemption for 2011 is $74,450 for joint returns, $48,450 for singles and heads of households, and $37,225 for married couples filing separately. Without the patch, millions more Americans would be subject to the AMT.
Other 2010 tax provisions in effect for 2011 include:
- A top capital gains rate of 15 percent.
- Personal exemptions and itemized deductions won't be phased out for higher-income taxpayers.
- The American Opportunity credit, an expansion of the Hope credit. Qualified taxpayers can get a credit of up to $2,500 toward tuition and other fees at colleges and universities.
- The maximum $4,000 deduction for qualified tuition and fees.
- The option of deducting state and local sales tax, geared mainly toward taxpayers in places that don't have state income taxes.
- The maximum $250 deduction for out-of-pocket expenses incurred by teachers in grades kindergarten through 12.
- The deduction for mortgage insurance.
Some of those credits and deductions phase out at higher incomes.
By the same token, some credits and deductions in place for 2010 were allowed to expire and are unavailable to taxpayers for 2011.
Among them is the first-time homebuyers credit. A smaller homebuyers credit for people who had owned homes before also expired. An exception was made, however, for active duty military and members of the Foreign Service or intelligence community stationed overseas. They may still qualify for the maximum $8,000 credit if they enter into a contract to buy a home by April 30, 2011. There are income limits and limits on the price of the home.
For those already in their homes, a limited credit is available for new windows, doors, furnaces or other energy-efficient improvements installed in 2011. A more-generous credit for energy-efficient improvements expired at the end of 2010.
A year from now, when it's time to do your 2010 taxes, remember that professional tax preparers will have been required not only to register with the IRS, but also to have passed a competency exam. Certified public accountants and others who meet other qualifying standards are exempt from the exam.
Since many things already are in place for 2011, Rosica says people should do some planning now. For example, if you're thinking about selling your home in the next year or two and the value has increased, should you sell it in 2011 since the lower capital gains rate are in effect only until the end of the year? The same with selling a business. "All items ought to be on the list to be examined," he said.
There's one big caveat: The economy, political environment and many other factors can change. And Congress still has a full year to amend the tax laws.