Cindy Krischer Goodman | 11/1/2010

For Individuals

Your Paycheck
The most significant change in 2011 will be the increase in individual income tax rates. The top rate, which now is applied to $373,651 or more in earnings, would increase to 39.6% from 35%. Tax filers in the 10% tax bracket would move into the 15% bracket. That bracket would apply to everyone with incomes below $34,550. Other bracket moves: The 25% bracket rises to 28%; the 28% bracket to 31%; the 33% bracket to 36%. If you are expecting a bonus, tax advisers say it might be worthwhile to ask for it before 2010 closes out. If you are a consultant or independent business owner, you may want to bill and collect early for projects in order to take advantage of 2010's lower tax rates. That may require sending invoices in plenty of time to ensure payment by year end.

Tax Credits for Children/Education

In 2011, the tax credit parents can claim per child under age 17 will decrease by 50% to $500 from $1,000. And, if you are thinking of going back to school, you will want to know about the change in the education credit. Until now, Congress has supported tax breaks for education. Those breaks allow taxpayers to reduce their bills by claiming a credit of up to $2,500 for expenses. "This was far more favorable than other tax incentives because it was dollar-for-dollar savings," says Melissa Labant, a tax manager with the American Institute of Certified Public Accountants. "Unless something happens, that will go away."

Boat Purchases
The good news is that 2011 will finally be the year to buy that yacht you've been lusting after. Sales tax on a boat purchase in Florida now can't exceed $18,000. Before the law changed, many taxpayers either purchased the boats outside of Florida or used other tax planning techniques to reduce or eliminate the sales tax, says Joe Moffa, a tax attorney with Moffa & Gainor in Fort Lauderdale.

Estates

If you die in 2010, your heirs will not pay taxes on the money they inherit. That's about to change. Starting Jan. 1, 2011, the estate tax rate will return to its pre-Bush levels of up to 55% after a $1-million exemption. This means the difference between dying by Dec. 31, 2010, and dying on or after Jan. 1, 2011, can mean 55% of your estate over $1 million. "That's a huge change," says Randy Macpherson, managing director of financial advisory firm WTAS in West Palm Beach. "People who fear leaving their beneficiaries with a huge tax obligation, or who want to assure that no one gets left out, may need to rewrite their will or living trust."

Roth IRA Conversion
Until now, only taxpayers with adjusted gross income less than $100,000 were eligible to convert their traditional IRAs to Roth IRAs for tax years prior to 2010. Now for the first time, anyone, regardless of income, has the opportunity to benefit from the tax-free growth a Roth IRA offers. And for the 2010 tax year only, you have the chance to defer any tax you might owe on the conversion and pay it in equal installments with your 2011 and 2012 tax filings. Some caution: When you pull the money out of the IRA to convert, you should plan to use non-IRA money to pay the taxes. "There are tax-planning opportunities for those affected by the recession," Farra notes.

"If your income has gone down and you're in a lower tax bracket, it may be wise to convert your IRA into Roth IRA in 2010 and take advantage of your lower income tax rates." Anyone who has a retirement account at work should know that the Small Business Act allows employees to convert all or a portion of their traditional retirement plan, typically a 401(k), to a Roth IRA. The amount of the conversion would be taxable income.

Marriage Penalty
Beginning in 2011, a married couple filing a joint return and taking a standard deduction will pay more tax than if they each filed individual 1040s. The standard deduction for couples would stand at 167% of the standard deduction for singles, rather than at 200%. "This may cause some couples in Florida to start itemizing," Labant says.

Dividends

If you're in a high tax bracket, your taxes on qualified dividends will rise to as much as 39.6% from the current 15%. Dividends will go back to being taxed as ordinary income. "You might want to consider whether municipal bonds are more attractive," Macpherson says.

Capital Gains

If you have investment property or stocks you have owned for more than a year that have appreciated, you may want to sell and recognize gains now rather than risk paying higher taxes next year. The top capital gains tax rises to 20% in 2011 from 15% this year. Conversely, you may want to hold onto possible capital losses. "Those losses will be more valuable in future years when the capital gains and ordinary income tax rates are higher," says Miguel Farra, tax partner at Morrison, Brown, Argiz & Farra in Miami.