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At the end of 2010, Congress passed the 2010 Tax Relief Act that extended many of the tax provisions in the Code that were set to expire at the end of 2010. Most of these extensions now expire at the end of 2012:
• Reduced individual income tax rates.
• Reduced individual income tax rates on capital gains and dividend income.
• Increased standard deduction and elimination of the personal exemption phase-out for high income taxpayers.
• Elimination of the itemized deduction phase out for high income taxpayers.
For 2011, a temporary reduction in the employee portion of OASDI (social security) tax from 6.2% to 4.2% (a reduction from 12.4% to 10.4% for self-employed individuals) is also in effect. The maximum benefit to an individual is $2,136 (2% x $106,800).
Self-employed individuals might be in the best position to take advantage of this tax break by estimating their self-employment earnings at year-end and deferring expenses or accelerating income to maximize their self-employment earnings in 2011.
Any OASDI tax reduction is a permanent savings; however the savings should be balanced with the present value impact of accelerating their income taxes on the same earnings into 2011.
As always, start planning early, stay in touch with your accountant and stay informed. More in depth information about this and other tax topics can be found on our website.