How to Take Advantage of 5 New Tax Law Changes

From estate planning to personal investing, these 2011 tax changes can keep more cash in your bank account.

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There were many political battles in Congress in 2010, but few were more heated than the debates revolving around the Bush tax cuts extension. The original Bush tax cuts, which were enacted in 2001 and 2003, were in serious jeopardy of sunsetting at the end of the year if Congress did not take action. This would have caused virtually every American to experience a tax hike for 2011.

[In pictures: 10 Ways to Improve Your Finances in 2011.]

The Democrats wanted to extend the tax cuts but strongly preferred not to include income earners over $250,000 from receiving any extended tax cuts. On the other hand, Republicans fought hard for higher income earners, including small business owners who make over $250,000. This legislation was debated for so long that it was taken straight to the end of the deadline before it passed, right before the holidays.

You may have been too busy sipping on egg nog and singing holiday carols to be following the legislation that was finally passed in December to extend the Bush tax cuts and modify some of the current tax code. Either way, check out these new tax law changes that you may be able to take advantage of in 2011.

1. Small Business: Small businesses can benefit greatly from a few tax changes in 2011 by investing in fixed assets and equipment before December 31st, 2011.  The Small Business Jobs Act signed this past September doubled the expense limitation from $250,000 to $500,000.  

Eligible investments include office furniture and equipment, machinery, and computer software.  If you're a small business owner and you've been holding out on buying newer office equipment, furniture, or IT equipment, this year is the time to invest in it. The major advantage here is that these expenses can be fully deducted from the business' taxes if they are purchased in 2011.

2. Estate Planning: The new tax cuts and changes for 2011 will also benefit families if the right estate planning is done.  Starting in 2011, couples can add the unused estate tax exemption of their spouse (up to $5 million) to their own estate tax exemption, meaning they can transfer up to $10 million tax-free to family and heirs.  That's a huge tax break, so if you or your family have significant assets, now is the time to hire a good estate planner to plan everything out.

3. Personal Investing: Many people feared that the capital gains and dividend tax rate would be increased in the revised tax cut plan by President Obama, but the Republicans fought hard to keep it the same at 15 percent, and it will stay that way until at least the end of 2012.  For any non-tax deferred investing you plan on doing, make sure you take advantage of the low 15 percent capital gains tax rate now, because the chances of it staying this low past 2012 are slim.

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4. Roth IRA Conversion: A new change in 2011 is now allowing anyone, regardless of income, to convert a traditional IRA to a Roth IRA.  In the past, there were income restrictions on who was allowed to convert a traditional to a Roth, but that has changed in 2011.  Converting to a Roth IRA can really help you save money on taxes mainly because a Roth IRA takes in taxable money, which is then not taxed when withdrawn at the retirement age.  If you believe that you'll be in a higher tax bracket at retirement, then converting now definitely makes sense.

5. The Payroll Tax Holiday: For 2011 only, the Social Security payroll tax of 6.2 percent taken from everyone's paycheck has been reduced by 2 percent to 4.2 percent.  The tax is actually 12.4 percent, but the other half is picked up by your employer, up to $106,000 in income.  That other half is not reduced for employers with this payroll tax holiday. A 2 percent increase to your paycheck is almost the standard amount of yearly raises that many employees receive. So why not set aside the 2 percent to a savings account?

You can open an ING Direct savings account and set up auto-draft to take the 2 percent from your checking account every month. This is a really easy way to set up an emergency fund that'll help you stay out of debt when an unexpected expense pops up in 2011.

Taxes are never a fun subject, but staying educated about new tax legislation and laws could help you save thousands of dollars each year. If you know a tax professional or tax attorney that you trust, give them a call this month to discuss the changes and ask about any moves you can make, including the ones listed above, to take advantage of some serious tax savings in 2011 and the years to come. Alternatively, if you're used to filing your taxes online, tax preparation software like TurboTax should be able to guide you step-by-step through the new tax law changes as well.

How have the tax law changes affected you and your finances in 2011?

Erik Folgate writes about personal finance topics like money management, banking, getting out of debt, generating side income, and saving money on MoneyCrashers.com, one of the top personal finance blogs.