With another tax season behind us it is time to start looking ahead to 2011 and 2012 and think about implementing some smart tax management strategies. 2011 tax rates stayed the same as 2010 levels thanks to the extension of the Bush-era tax cuts. This extension also covers the 2012 tax year, but after that tax rates are bound to increase as the US government cannot afford to further extend the lower tax brackets implemented in 2001.  Based on current and projected low inflation rates, the primary change in 2012 federal income taxes will only be a slight increase in the tax bracket income thresholds. This is reflected in the table below, which is based own my own projections:

Other tax breaks have been extended into 2012 and should be factored into your tax planning include:

Capital gains and dividend taxes -Long-term capital gains (on assets held at least a year) and qualified dividends will continue to be taxed at a maximum of 15%. This benefit will mean that investors can keep more of their gains. Short term capital gains will continue to be taxed at ordinary income tax rates.

Estate limit increase and lower taxes – Existing thresholds will be raised to $5 million for an individual or $10 million for a couple for both estate and gift-tax levies, with a top tax rate of 35%.  These new provisions will expire at the end of 2012, meaning a lot of revised estate planning for families. Taxpayers who have already used some of their lifetime exclusion under the old rules ($1 million) will be eligible for the higher exemption limit. The annual gift limits will  remain at $13,000, or $26,000 for a couple, a year for each beneficiary; this is in addition to the lifetime limits.

The American Opportunity Credit, which allows eligible college students and their parents to save up to $2500 on their taxes has also been extended into 2012. The AOTC replaced the Hope credit and will continue to do so for 2011 and 2012. The teachers Tax Credit (up to $250) for teachers who purchase classroom supplies using their own money is also likely to be extended into 2012 (to be requested in 2012 budget)

Other tax credits extended into 2012 include the Child Tax Credit, which provides $1000 per child under 17 years-old, and the  Earned Income Credit, which reduces the marriage penalty and creates a “third tier” of the EITC for families with three or more children.