The dust has finally settled after a noisy election season and all that December wrangling in Washington, D.C.
Lawmakers adopted some significant changes that will impact your finances in 2011 and affect your 2010 tax filing in April.
Here are five key areas to watch as you manage your money and stockpile retirement savings.
1. Saving in the Workplace
The amount you are permitted to save in a 401(k) account stays the same for 2011: $16,500, with an additional $5,500 "catch up" contribution for those over age 50.
You'll also want to keep an eye out for new offerings from employers this year. More companies are adding the option of a Roth 401(k), which allows you to save in an account with tax-free withdrawals when you retire. However, if you choose a Roth, your paycheck contributions will no longer lower your taxable income for the year in which you make the contributions.
If you contribute to both types of 401(k) accounts, you can't exceed the maximum contribution level of $16,500 (plus the "catch up" contribution if you're over age 50) between the two accounts.
The new year is a good time to give your existing 401(k) plan a checkup. Here are some pointers.
2. Saving Outside of Work
Individual Retirement Accounts, or IRAs, keep the same contribution levels as last year. You can save $5,000 in 2011, plus an additional $1,000 "catch up" contribution if you're over age 50.
Like 401(k)s, you can split your contributions between a traditional IRA and a Roth IRA, but you can't exceed the total combined limit set by the IRS.
Roth IRA conversions continue to be an option, but if you convert in 2011, you'll have to pay the entire tax due with your 2011 return. (For 2010 conversions, taxpayers had the option to spread the taxes owed over two years.)
3. Estate Planning
The end of 2010 brought a rush of negotiations in Congress to settle the future of the estate tax.
The new rules allow a $5 million estate tax exclusion. Estates with assets exceeding $5 million will be taxed at 35 percent. These rules will stick for 2011 and 2012, but after that, the estate tax will be up for debate again.
If Congress hadn't adopted the new rules, only the first $1 million of an estate would have been excluded from the federal tax, which would then kick in at a whopping 55 percent. The changes are a big difference from 2010 law, which granted a one-year reprieve from any federal estate taxes.
The December legislation also reinstated the so-called "stepped-up basis" for inherited assets, which is a big tax advantage for beneficiaries. If you inherit property from someone who died in 2010, or who dies in 2011 or 2012, the property will receive a stepped-up basis. That means that upon sale, beneficiaries would owe capital gains tax on the value of the asset at the date of death, rather than at the date the property was originally purchased. Read more about how it works here.
Congress likely will revise the estate tax in years to come, so you'll want to work with an estate planning attorney to prepare a long-term strategy. Don't forget to ask about how state estate taxes may impact your family's assets. (Try the American College of Trusts and Estates or your state and county bar associations to find an estate planning attorney near you.)
For some ideas on smart family giving that can lower your taxable estate without triggering gift taxes, click here.
4. Saving for College and Families
Families can take advantage of an expanded college credit for 2011 and 2012. The American Opportunity tax credit -- an extension of the Hope tax credit -- may be claimed during each of a student's four years of college.
Depending on your income level, the credit is up to $2,500, cumulatively, over a student's four years.
If you're saving for college and retirement at the same time, here are some ideas to help you strike a sensible balance.
5. Other Tax Changes
Social Security tax break: Employees will find a few more dollars in their weekly paychecks. For the 2011 tax year, workers will pay two percentage points less in payroll taxes. Employees used to pay 6.2 percent of the first $106,800 earned, but in 2011 it will be 4.2 percent. That's a savings of about $20 per $1,000 earned.
Investors' outlook: Taxes on dividends and capital gains will stay at 15 percent for most taxpayers, while low-income earners will have a zero percent rate. Before Congress took action in December, rates were poised to change, and dividends and capital gains would have been taxed as ordinary income.
Alternative Minimum Tax: AMT is an alternative tax code that was enacted in 1969 to stop the rich from taking advantage of too many tax deductions. But the thresholds were never upped with inflation, so middle income earners started to become subject to the AMT in recent years. For 2010, Congress raised the threshold, so it's less likely that your family will be impacted and pay a higher tax bill. To learn more about AMT, click here.
Marriage Penalty Relief: Married tax filers will continue to get a standard deduction that's twice what a single taxpayer gets. Before 2001, many married taxpayers owed more as a couple than they did as singles. Since then, the laws had changed, but those laws would have expired at the end of 2010. If Congress had not addressed this issue in December, many married couples would have faced a higher tax bill just for being married.
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