What will the 2011 tax rates be? Lots of things could happen with the 2011 tax brackets, but whatever the changes are, they will impact your tax planning this year.

2011 Tax Rate Changes

There are many things that could happen with the 2011 tax rates. Congress could let all of the 2001 Bush tax cuts expire, which would essentially raise taxes for all the tax brackets.

Or they could keep the tax cuts in place for those earning less than $250,000, but bring back the two higher tax rates in 2011 for those making over $250,000 as they have alluded to in the 2010 budget proposal. The proposal also includes expanding the tax bracket for those in the 28% bracket.

Or they could do something totally different and surprise us all.

2011 Tax Rates & Brackets Proposed

Since we have to assume something for tax planning, we’ll use the projections from the proposed budget. Here’s what it could look like under the budget proposal.

These tax rate projections were developed by the Tax Policy Center.

If you want to compare to the current tax rates, check out the 2010 Tax Brackets.

Of course it’s anyone’s guess as to where we’ll end up! Stay tuned for more on 2011 tax planning!

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Since the number of Roth IRA conversions per year is unlimited, and we have the ability to unconvert the Roth IRA conversions, there’s a fantastic strategy to Roth IRA conversions to minimize your taxes!

We previously explored roth conversion strategies like increasing your basis to avoid taxes, but if you’re ready to convert the taxable portion of your traditional IRA, this one might be for you!

Roth IRA Conversion Strategy

Here’s the plan to execute the Roth IRA conversion strategy:

Create multiple traditional IRAs. For example, if you have a $100,000 traditional IRA to convert, separate it into 4 $25,000 traditional IRAs.

Convert each IRA. For each account, make a traditional IRA conversion to a Roth IRA. You’ll want to keep each new Roth IRA separate.

Invest differently. In your new Roth IRAs, you’ll want to take a separate investment approach. Separating by each asset class would probably make the most sense and gives the most flexibility.

Monitor Returns. Since each Roth IRA holds a different asset class, the returns will vary. If the value goes up, leave it alone.

Recharacterize. Select the accounts where the value went down, which could be all, some, or none, of the new Roth IRAs. Reverse the conversions with a recharacterization by October 15, 2011 (with an extension), for 2010 Roth IRA conversions.

Tax Savings. With this strategy you’ll avoid paying taxes on money you lost, without having to recharacterize the entire conversion, allowing you to keep the conversions on the winners!

Tips and Tricks

Reconvert. You can later reconvert the money that you recharacterized, but there is a waiting period of at least 30 days and at least until the next year. You’ll be able to reconvert at a lower value, which means lower taxes.

Rebalance and Consolidate. After you’re done converting, you can put the Roth IRAs back together for a more simplified record keeping.

Keep Good Records. The paperwork on this one could get very complicated if you take it to the extreme. Be sure to keep good records so you don’t make tax time next year a real headache!

Communicate Clearly. If you have multiple accounts, you’ll need to work closely with your broker to make sure the correct conversions and recharacterizations take place. I’ve done Roth IRA conversions and recharacterizations at both Scottrade and Vanguard before without any issues.

More Helpful Roth IRA information:

• 2010 Roth conversion
• Aggressive Roth IRA conversion strategy case study
• Tax treatment of Roth conversion
• How to Make Early Roth IRA Withdrawals

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Are you scrambling to finish filing in time for the tax deadline? Did you remember to file taxes for your kids?

Since we opened multiple accounts at ING to get $25 Sign Up Bonuses for our kids, they’re earning interest on their accounts, which reminded me to check into the kids tax filing rules. (Signing up for College Advantage $25 Sign Up Bonuses do not count as income for your child.)

If your kids earn interest and dividends, or have a job, check out the requirements for filing taxes.

2009 Kids Tax Filing Requirements

If you claim your child as a dependent on your return, the kids need to file taxes if ANY of the following are true:

• Earned income, from a job for example, is more than $5,700.
• Unearned income, including dividends or interest, is more than $950.
• Self employment net earnings are more than $400.
• Earned and unearned total income is more than the larger of $950 or earned income plus $300.

Also, if interest, dividends and other investment income are more than $1,900, you’re going to get hit with the kiddie tax (which means you’ll pay your tax rate on part of your child’s income).

Filing a Child’s Tax Return

You can file your child’s taxes for free at TurboTax.

If you want, you can also attach it to your return if the income is less than $9,500 and only from interest or dividends. This option is available to children under age 19 (or a full time student under 24) using Form 8814.

A word of caution though, qualified dividends or capital gains may be taxed at a higher rate if you attach it to your return instead of filing the child’s return separately.

More Filing Requirements

There are other circumstances when children must file a tax return. For more information see When Do Kids Need to File Taxes? or Publication 929, Tax Rules for Children and Dependents.

For more information when others must file, see minimum income to file taxes.

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Suffice it to say, over the past two years the IRS has made it more of a priority to recoup the money it is owed by individuals and businesses who are not truthfully reporting their earnings. And who can blame them? With the United States debt growing to over $12.5 trillion dollars, it seems only rational for them to continue this trend of coming after money that is owed.

So how is the IRS going about its debt collections?

Overseas Accounts

Based on US pop culture it is easy to think that every rich, James-Bond like American has an account in the Cayman Islands worth millions of dollars. Apparently the IRS has been watching these movies as well, as they are going after these accounts, which number in the tens of thousands. After some strong-arming from the U.S. government in 2009, several traditional countries where secret, tax-evading bank accounts are known to be kept (Switzerland, Liechtenstein and Luxembourg for example) are now going to cooperate more with the United States on identifying the accounts and making sure that the taxes owed on these accounts have been paid. Over 14,700 individuals voluntarily came forward with their overseas account information, and the IRS is currently investigating over 7,000 overseas accounts.  Also, in a settlement with the giant UBS Swiss bank, the US will be given 4,450 bank account names.

On top of that, the IRS is now expecting more information from individuals with overseas accounts. Individuals are now required to file a revised and stricter Foreign Bank Account Report by June 30 each year if the combined value of all foreign accounts in the previous calendar year exceeded $10,000. If you disclose that you have an overseas account, instead of reporting a vague range of money that is in that account, you now must include an exact dollar amount. Another new rule is that the full address of the bank where the account is held now must be disclosed. For more information on changes to this form, see the Anti-Deferral and Anti-Tax Avoidance information.

Hiring More Employees

The IRS is increasing their manpower in order to catch tax cheaters. In December of 2009, 100 new employees were hired in order to get a new “high wealth unit” within the IRS up and running. The high wealth unit will be focusing on trusts, real estate investments, privately held companies and other business entities controlled by rich individuals in the hopes that by looking holistically at a wealthy individual’s entire asset portfolio, they will find taxes that have not been paid.

Incentives to Snitch on Your Tax-Evading Friends, Family, and Bosses

The IRS paying people who tattle on tax cheaters with evidence is not a new concept, we discussed it previously when readers answered whether or not they report all their income; according to a Forbes article dated December 14^th, 2009, from 2004-2005, 428 informants received a total of $12 million for their information that recouped the IRS $168 million. But in the new passing of the Tax Relief and Health Care Act in 2006 (effective 2008), the IRS upped the ante by paying between 15%-30% to people who tip-off tax cheaters for cases of $2 million plus. While no funds have yet been paid, many cases are in the works.

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We all know that we must pay both income and social security taxes on employment income as well as any contract labor. But the IRS levies income taxes on some other sources of income too – some more surprising than others. If you received a windfall or other unexpected funds in 2010, chances are the IRS will view it as income. Read below for some of the most overlooked items.

Taxable Items

Generally speaking, the IRS taxes anything that leaves you in a better economic position than you were before you received it. Sometimes, like when you sell a house, the IRS has credits or deductions to eliminate all or part of the tax. Other times, you simply have to pay up. Prepare to open your wallet for:

• Scholarships/financial aid: Scholarships and financial aid used for tuition or other required fees, books, or supplies are not taxable. However any funds that are used for living expenses, travel, or expenses that are not required are considered income by the IRS and fully taxable. Students not enrolled in a degree program may have to pay taxes on all financial aid, even when spent on otherwise qualified expenses.
• Debt settlement: If you find yourself unable to pay credit card or other debts, the lender may negotiate with you to pay a reduced amount. Any forgiven debt is subject to taxation, and will be reported to the IRS if it is more than $600. If you have a negative net worth at the time of the settlement, the IRS may waive the tax liability. Until 2012, this does not apply to debt cancellation involving a principal residence mortgage. Taxpayers also do not owe taxes on any debts discharged through bankruptcy.
• Gambling Winnings: If you hit the jackpot in Vegas or win the lottery, you will owe the IRS a nice chunk of change. This is one of the main reasons people might choose to take annual payments, when they’re an option, rather than a lump-sum payout.
• Prizes: Along with lottery and other gambling winnings, you will have to pay taxes on any prizes you received, regardless of whether they were given in the form of cash. If your church or child’s school sold raffle tickets, and you win a car, you’ll have to pay taxes on the cash value of that car. Ditto for any game show or contest winnings.

Exceptions to the Rule

• Gifts: If you received a gift from a friend, relative or perfect stranger, you do not have to pay taxes on it – but they might. However, be aware that any money exchanged between an employer and employee is considered compensation and therefore taxable income.
• Fringe Benefits: To encourage employers to provide more benefits across the board, the IRS allows them to take a tax deduction for the value of many of those benefits, and also allows you to receive the benefits tax free. Tax-free benefits include things like your health insurance, childcare assistance, and access to gym facilities on the employers’ premises. But other benefits may be taxable, especially if they’re only offered to certain employees – your employer should notify you if you are affected.

If you’re looking for something specific that you don’t see on the list, feel free to ask about it in the comments. But as a general rule of thumb, the answer to your question is simple: if you had measurable economic gain, it’s probably taxable. Exceptions do exist, so check with your accountant or tax preparer if you’re really not sure!

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