As part of the Tax Relief Act of 2010, Social Security tax rates will be lowered by two percent. The employee-portion of Social Security taxes will be reduced from 6.2% to a temporary rate of 4.2% for 2011 only.This 2% tax break also applies to self-employed individuals. Medicare taxes are unchanged, the employer-portion of Social Security remains 6.2%, and the Social Security wage base remains $106,800 for 2011.

What it means: You could get a raise in your pay by as much as $2,136 in 2011. Unfortunately, for most clients this "raise" is offset somewhat by the expiration of the Making Work Pay Credit that expired in 2010. It also means you should be prepared for lower paychecks in 2012 as the Social Security tax rate goes back up.

What You Should Know

With massivelegislative changes over the past nine months, outlined here are five key things you should know:

Tax breaks extend into 2011.  A number of tax breaks now extend into 2011. Key among them are:

• $250 deduction for elementary and secondary school teachers' classroom expenses
• a continuation of the deduction for qualified tuition and related expenses
  up to $4,000
• a charitable donation deduction for direct contributions from qualified retirement accounts if 70 1/2 years or older
• $1,000 Child Tax Credit that does not fall back to $500 as scheduled
• a choice between taking sales tax OR state income tax as an itemized deduction

Roth IRA Conversions.   Anyone can now convert IRAs into Roth IRAs by paying the tax, regardless of your income levels. However, you must be prepared to pay taxes on the amount converted in 2011.In 2010, this tax obligation could be spread between 2011 and 2012 tax years.

W-2s now have health benefit reporting.   Your 2011 W-2 will contain the value of health insurance benefits.While not yet taxable, the government wants to keep track of these values as part of the Health Care Reform Act.

More 1099s.   In an effort to capture unreported income, the Treasury Department is requiring more information reporting.This includes brokerage companies reporting the cost basis of stock transactions, merchant credit card companies reporting merchant business card activity, and small businesses issuing 1099s to many more suppliers.

Phase-out reprieve.   For many clients, itemized deductions and personal exemptions were phased out in prior years. After a hiatus in 2010, phase-out of deductions was scheduled to occur once again in 2011, but has now been delayed
until 2013.

Still Up in the Air?

For the next two years (through 2012), the Tax Relief Act re-instates the estate tax after a one-year reprieve during 2010.The new maximum estate tax rate is 35% with an asset exclusion amount of $5 million.The law also re-establishes the "stepped up" basis rules that allow for transferring assets to heirs at their fair market value at time of death versus the historic value when they were originally purchased.This rule reduces potential capital gains when the beneficiary sells the inherited assets.

What it means: While decedents know what the next two years will bring, after 2012 estate tax law will be filled with uncertainty once again.This lack of certainty complicates estate planning and makes for another potential election year debate.