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We’ll start with the auto mileage rate for people not keeping track of actual auto expenses but who do keep track of business mileage. The rate for 2011 is 51 cents per business mile. It’s up one cent from 2010. This will be unwelcome news to most of us who have seen gas zoom up the last couple of months. Gulf oil spill? Not a problem for the IRS!

The individual’s paycheck will be larger in 2011 because the Social Security tax (FICA) has been dropped from 6.2% to 4.2%. The business tax percentage has remained the same, however. Thus firms will be paying the IRS 13.3% instead of 15.3%, but that difference is paid to the employee. Self-employed individuals will also pay 13.3%. It is my understanding that the page 1 deduction for the self-employed will not be reduced; that is, they will deduct 6.2% (up to $106,800) and the Medicare tax of 1.45%.

Medical Deduction

There may be a new deduction available for the self-employed. Beginning with tax returns for 2010, their medical insurance, which has been a page one deduction, will also be a deduction from the self-employment tax. If net self-employment income exceeds $106,800 by more than the insurance, the deduction is ineffective.

For a long time, there has been a “phase out” of itemized deductions and exemptions for people in the higher tax brackets. This ended in 2010. These items were NOT renewed in the 2010 tax law. They are gone! This is a huge break for upper bracket taxpayers.

Also gone, however, is the additional allowance for real estate taxes for those using the standard deduction instead of itemizing.

In a completely unexplainable move, the new tax law allows 100% depreciation for all purchases of qualified investments from September 8, 2010 through 2011 (not 2012). Qualified investments will NOT include “luxury” autos and all purchased used assets. The rate for 2012 will revert to 50% of the purchase price and a Section 179 first year depreciation limit of $125,000.

The estate tax law has a couple of twists beyond the basics that each individual has a $5,000,000 exclusion from estate tax with a rate of taxation at 35%. First, it’s valid only until December 31, 2012. Second, the new law provides the estate of the first to die the opportunity to allow a surviving spouse to acquire any unused portion of his/her $5,000,000 exemption. Thus if wife dies with a $2,000,000 estate, her estate can roll the remaining $3,000,000 exemption to the husband providing him with an $8,000,000 exemption upon his death. This is an election which has to be made, in this case, on the wife’s estate tax return.

Gift Tax Exclusion

The gift tax exclusion has been re-united with the estate tax, so there is a $5,000,000 exclusion on lifetime gifts (which, of course, to the extent used lowers the exemption upon death). The gift tax annual exclusion remains at $13,000 per individual gifted.

Which leaves us with 2010. The law gives people dying in 2010 a choice. This is admittedly peculiar since they are already dead. Nonetheless the choice is to file under the 2010 (no-estate-tax) or the 2011 laws. This is not necessarily simple. The 2010 law provided no step-up in the basis of their assets except for an allowable total of $1,300,000. So if someone died with assets that cost him $150,000 and were, at the time of death, worth $2,000,000, his heirs would inherit those assets with a basis of $1,450,000 that were already worth $2,000,000. They would have a built-in capital gain of $550,000 upon sale, a potential income tax liability of $82,500. They could elect to be taxed under the new tax law. They would still have no estate tax because it’s under $5,000,000, but they would get a stepped-up basis on those assets to the $2,000,000. The new law was written to apply deaths in 2010 to the new (taxable) law unless the election is made to apply the old law.

One can only conclude that the estate tax law of 1999 has been decimated.

These are not the only changes, but are the most important ones in my opinion.