Increases in Standard Deductions and Personal Exemptions Lead to Savings

For most of us, changes in tax laws are usually very few, and their effects are fairly minor, but there are some. This year your tax savings should increase because the amounts used in preparing your 2011 tax return for personal exemptions and the standard deductions have been increased. Additionally, the tax rate schedules have been adjusted in your favor. Not by much, but you may be able to go out to dinner a time or two with the additional funds.

The personal exemption credit has increased all of $50, from $3,650 in 2010 to $3,700 in 2011. This doesn't sound like much, but it beats the previous year, when there was zero increase from the 2009 amount. The personal exemption is something that most taxpayers use on their return whether they choose to itemize their deductions or use the standard deduction, so that's a good thing.

The standard deduction for a single person under 65 has jumped a whopping $100 from $5,700 to $5,800. For a married couple filing jointly, the amount is not unsurprisingly twice that for a single person, or $11,600, a $200 increase from 2010.

Since most performers have significant deductions, however, the chances are reasonably good that these standard deduction increases mean little to you because you would probably be "itemizing" your expenses (adding all your expenses together, which would presumably exceed the standard deduction amounts). Unfortunately, every time the standard deduction increases, the comparative value of your itemized deductions decreases. A single person who spends nothing doing his or her job is entitled to $5,800 in deductions. Meanwhile, the actor who spends $8,000 in his or her career receives an additional benefit of only $2,200.

The tax rate schedule has been adjusted as well. The tax rates vary from 10 percent to 15 percent, then 25 percent, 28 percent, 33 percent, and finally 35 percent. As your taxable income increases, it moves through these amounts. For a single person that means the first $8,500 of taxable income (up from $8,375 last year) is taxed at 10 percent; from $8,501 to $34,500 (up from $34,000) that income is taxed at 15 percent.

The increase in the 10 percent bracket saves a single person $7.50 ($125 times 5 percent savings). If you have at least $34,500 in taxable income, you'll be paying only 15 percent tax on that $500 increase before you have to start paying 25 percent on the next dollar after $34,500. That's a $50 savings right there (10 percent less on the additional $500 in the 15 percent bracket).

As the 25 percent bracket initiates on income after $34,500 up through $80,000, I'll stop there. If you exceed that, you can afford an accountant.

The good news for those married couples filing jointly is, the value of these rate changes is doubled. The couple will be receiving twice as much benefit from the changed rate schedule as a single person.

What's the bottom line of all these changes? For a single person using the standard deduction, whose last taxable dollar maxes out in the 15 percent tax bracket at $34,500, here's how it adds up. You get the exemption credit change worth $7.50 (15 percent of $50) plus the change in the standard deduction worth $15 more (15 percent of $100). Add the $7.50 from the 10 percent bracket and $50 from the 15 percent bracket, and that's $80 you wouldn't have received in 2010.

Although that's not a lot to spend on food, at least you aren't a starving actor for a few days!