The recent tax act has brought about a number of changes that affect US citizens and resident aliens living in abroad. The significant changes that are effective for 2011 and 2012 are as follows:

Income Tax Rates

Income tax rates will be slightly lower in 2011 versus 2010. For example, the 2010 tax rate for singles was 10% on the first $8,375 of taxable income. In 2011 the tax rate for singles will be 10% on the first $8,500 of taxable income. The 2010 tax rate for married filing joint was 35% on taxable income over $373,650. In 2011 the tax rate for married filing joint will be 35% on taxable income over $379,150.

Foreign Earned Income Exclusion

In 2010 the foreign earned income exclusion was $91,500 and in 2011 the foreign earned income exclusion will be $92,900.

Foreign Housing - Limitation On Expenses

For both 2010 and 2011 the maximum amount of housing expenses incurred in Bermuda that can be taken into account in computing the foreign housing exclusion will remain at $90,000.

Foreign Base Housing Amount

To obtain a foreign housing exclusion your actual housing expenses must exceed a base amount which was $14,640 in 2010 and will be $14,864 in 2011.

Foreign Housing Exclusion

The foreign housing exclusion is computed by taking your actual housing costs for the year, but not in excess of $90,000 and then subtracting the base housing amount. So in 2010 if you had actual housing costs of $67,800 your foreign housing exclusion will be $67,800 less $14,640 or $53,160.

Standard Deduction

The standard deduction for a single person will increase from $5,700 in 2010 to $5,800 in 2011. The standard deduction for married filing joint will increase from $11,400 in 2010 to $11,600 in 2011.

Personal Exemption

The personal exemption will increase from $3,650 in 2010 to $3,700 in 2011.

Itemized Deductions and Personal Exemption Phase-out

As in 2010 individuals with adjusted gross income over $170,000 will not have to lose a portion of their itemized deductions and personal exemptions.

Capital Gains Tax

Taxpayers who are in the 10% and 15% tax bracket will not have to pay any income tax on their long term capital gains in either 2010 or 2011. Taxpayers in the 25% or higher tax brackets will pay a 15% tax on their long term capital gains in 2010 and 2011.

Qualified Dividends

The income tax rate will remain at 15% for taxpayers who receive qualified dividend income in 2010 and 2011.

Social Security Tax

The 2010 social security tax rate was 6.2% on the first $106,800 or $6,621.60. The 2011 social security tax rate will 4.2% on the first $106,800 or $4,485.60. This will yield a tax savings of $2,136 in 2011 for those paying the maximum tax.

IRA Contribution

The maximum IRA contribution that can be made in 2010 and 2011 is $5,000. The maximum “catch up” IRA contribution that can be made for those over age 50 in 2010 and 2011 is $1,000.

401(k) Contribution

The maximum 401(k) contribution that can be made in 2010 and 2011 is $16,500.

Federal Estate Tax

The Federal estate tax did not exist in 2010. In 2011 the Federal estate tax exemption will be $5,000,000 and the maximum Federal estate tax rate will be 35%. Beneficiaries of 2011 estates will again receive a “step up” to fair market value in the basis of the assets they receive.

Federal Gift Tax

The Federal gift tax lifetime exemption will increase from $1,000,000 in 2010 to $5,000,000 in 2011. The maximum gift tax rate will decrease from 45% in 2010 to 35% in 2011. The annual gift tax exclusion will remain at $13,000 for both 2010 and 2011.