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 The recently enacted "Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010" is a sweeping tax package that includes, among many other items, an extension of the Bush-era tax cuts for two years, estate tax relief, a two-year "patch" of the alternative minimum tax (AMT), a two-percentage-point cut in employee-paid payroll taxes and in self-employment tax for 2011, new incentives to invest in machinery and equipment, and a host of retroactively resuscitated and extended tax breaks for individuals and businesses. Here's a look at the key elements of the package:
Key Individual Tax Breaks
· Reduced Tax Rates Extended for Two Years
The tax rate schedules for individuals will remain at 10%, 15%, 25%, 28%, 33% and 35% for two additional years, through 2012. In addition, the size of the 15% tax bracket for joint filers and qualified surviving spouses will remain at 200% of the 15% tax bracket for individual filers through 2012.
· Increased Standard Deduction Amounts Extended for Two Years
The standard deduction for married taxpayers filing jointly (and qualified surviving spouses) remains at 200% of the standard deduction for single taxpayers for two additional years, through 2012.
· No 3%/80% Limitation on Itemized Deductions for 2011 and 2012
The itemized deductions of higher-income taxpayers are not reduced for two additional years, through 2012.
· No Phase-Out of Personal Exemptions For 2011 and 2012
A higher-income taxpayer's personal exemptions are not phased out for two additional years (for 2011 and 2012) when adjusted gross income exceeds an inflation-adjusted threshold.
· Reduced Capital Gains and Qualified Dividends Rate Extended for Two Years
Adjusted net capital gain will be taxed at a maximum rate of 0/15% for two additional years, through 2012. A qualified dividend paid to individuals will be taxed at the same rates as adjusted net capital gain through 2012.
· Expanded Child Tax Credit Extended for Two Years
The $1,000 child tax credit is extended and allowed to be used against regular income tax and the AMT for two years, through 2012.
· Numerous Education Incentives Extended Two Years | |
American opportunity tax credit.
Individuals may claim an American opportunity tax credit (AOTC) under equal to 100% of up to $2,000 of qualified higher-education tuition and related expenses (including course material), plus 25% of the next $2,000 of expenses paid for education furnished to an eligible student in an academic period-i.e., a maximum credit of $2,500 a year for each eligible student.
Exclusion for scholarships.
A qualified individual can exclude from income a qualified scholarship or qualified tuition reductions.
Employer-provided educational assistance
An employee may exclude educational assistance provided under an employer's qualified educational assistance program, up to an annual maximum of $5,250.
Student loan interest deduction
Individuals can deduct a maximum of $2,500 annually for interest paid on qualified higher education loans.
Coverdell education savings accounts.
Taxpayers can contribute up to $2,000 per year to Coverdell Education Savings Accounts (CESAs) for beneficiaries under age 18.
· Boosted AMT Exemption Amounts for 2010 and 2011
The AMT exemption amounts for 2010 are as follows:
- Married individuals filing jointly and surviving spouses: $72,450, less 25% of AMTI exceeding $150,000 (zero exemption when AMTI is $439,800);
- Unmarried individuals: $47,450, less 25% of AMTI exceeding $112,500 (zero exemption when AMTI is $302,300); and
- Married individuals filing separately: $36,225, less 25% of AMTI exceeding $75,000 (zero exemption when AMTI is $219,900). But AMTI is increased by the lesser of $36,225 or 25% of the excess of AMTI (without the exemption reduction) over $219,900.
Under the 2010 Tax Reform Act, the AMT exemption amounts for 2011 will be as follows:
o Married individuals filing jointly and surviving spouses:
$74,450, less 25% of AMTI exceeding $150,000 (zero
exemption when AMTI is $447,800);
o Married individuals filing separately: $37,225, less 25% of AMTI
exceeding $75,000 (zero exemption when AMTI is $223,900). But
AMTI is increased by the lesser of $37,225 or 25% of the excess
of AMTI (without the exemption reduction) over $223,900.
o Unmarried individuals: $48,450, less 25% of AMTI
exceeding $112,500 (zero exemption when AMTI is $306,300);
· Personal Nonrefundable Credits May Offset AMT and Regular Tax for 2010 and 2011
For tax years beginning during 2010 or 2011, the 2010 Tax Relief Act allows an individual to offset his entire regular tax liability and AMT liability by the nonrefundable personal credits.
· Tax Breaks for Individuals Retroactively Reinstated and Extended Through 2011
All of the following tax breaks for individuals that expired at the end of 2009 will be retroactively reinstated and extended through 2011:
· Other Individual Tax Breaks Extended Through 2011
The following tax breaks for individuals that were set to expire at the
end of 2010 will be extended through 2011:
- the increase in the monthly exclusion for employer-provided transit and vanpool benefits equal to that of the exclusion for employer-provided parking benefits (i.e., $230 per moth);
- treatment of mortgage insurance premiums as deductible qualified residence interest; and
- exclusion of 100% of gain on certain small business stock.
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Business Tax Breaks Retroactively Reinstated and Extended
· Research Credit Reinstated and Extended The 2010 Tax Relief Act retroactively extends the research credit two years so that it applies for amounts paid or accrued before January 1, 2012. · 15-Year Write-off for Qualified Leasehold and Retail Improvements and Restaurant Property Reinstated and Extended The 2010 Tax Relief Act retroactively extends the inclusion of qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property in the 15-year MACRS class for two years through 2011. · Work Opportunity Tax Credit (WOTC) Extended The 2010 Tax Relief Act extends the WOTC four months to include individual who began work before January 1, 2012. | |
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Economic Stimulus Incentives
· Bonus Depreciation Extended; Temporary 100% Deduction in Placed-in-Service Year
The 2010 Tax Relief Act extends and expands additional first-year depreciation to equal:
- 100% of the cost of qualified property placed in service after September 8, 2010 and before January 1, 2012 (before January 1, 2013 for certain longer-lived and transportation property); and
- 50% of the cost of qualified property placed in service after December 31, 2011 and before January 1, 2013 (after December 31, 2012 and before January 1, 2014 for certain longer-lived and transportation property)
· Boosted Expensing Amounts for 2012
For tax years beginning in 2012, the 2010 Tax Relief Act increases the maximum expensing amount under Code Sec. 179 from $25,000 to $125,000 and increases the investment-based phaseout amount from $200,000 to $500,000. The $125,000/$500,000 amounts will be indexed for inflation. However, for tax years beginning after 2012, the maximum expensing amount drops to $25,000 and the investment-based phaseout amount drops to $200,000.
· Temporary Employee/Self-Employed Payroll Tax Cut for 2011
For remuneration received during 2011, the Act reduces the employee OASDI tax rate under the FICA tax by two percentage points to 4.2%. Similarly, for self-employment income for tax years beginning in 2011, the Act reduces the OASDI tax rate under the SECA tax by two percentage points to 10.4% percent. As a result, for 2011, employees will pay only 4.2% Social Security tax on wages up to $106,800 and self-employed individuals will pay only 10.4% Social Security self-employment taxes on self-employment income up to $106,800. | |
· Increased Exemption and Reduced Top Rate
The 2010 Tax Relief Act lowers estate and GST taxes for 2011 and 2012 by increasing the exemption amount (technically, the applicable exclusion amount) from $1 million to $5 million (as indexed after 2011) and reducing the top rate from 55% to 35%.
· Modified Carryover Basis Rules Generally Repealed
The 2010 Tax Relief Act generally repeals the modified carryover basis rules that, under EGTRRA, would apply only for purposes of determining basis in property acquired from a decedent who dies in 2010. Under the Act, a recipient of property acquired from a decedent who dies after December 31, 2009 generally will receive fair market value (i.e., "stepped up") basis under the rules applicable to assets acquired from decedents who died in 2009. However, if an executor chooses no estate tax for a decedent dying in 2010, the modified carryover basis rules apply.
· Special Choice for 2010 Decedents
The 2010 Tax Relief Act allows estates of decedents dying in 2010 to choose between (1) estate tax (based on a $5 million exemption and 35% top rate) and a step-up in basis, or (2) no estate tax and modified carryover basis. | |
For gifts made after December 31, 2010, the gift tax is reunified with the estate tax, with an applicable exclusion amount of $5 million and a top estate and gift tax rate of 35%.
· Generation-Skipping Transfer (GST) Tax Changes
Under the 2010 Tax Relief Act, the GST exemption for decedents dying or gifts made after December 31, 2009 and before January 1, 2011 is equal to the applicable exclusion amount for estate tax purposes (e.g., $5 million). The GST tax exemption for decedents dying or gifts made after December 31, 2010 is equal to the basic exclusion amount for estate tax purposes (e.g., $5 million, as indexed). The GST tax rate for transfers made in 2011 and 2012 is 35%.
· Portability of Unused GST Exemption between Spouses
Under the 2010 Tax Relief Act, any GST exemption that remains unused as of the death of a spouse who dies after December 31, 2010 (the "deceased spousal unused exclusion amount") is generally available for use by the surviving spouse, as an addition to the surviving spouse's exemption. A surviving spouse may use the predeceased spousal carryover amount in addition to his or her own $5 million exclusion for taxable transfers made during life or at death. | |
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These are just some of the year-end steps that can be taken
to save taxes. Again, by contacting us, we can tailor a
particular plan that will work best for you.
Please contact the tax department of LGC&D if
you should need further info or would like to
discuss any issues addressed herein. | |
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Lefkowitz, Garfinkel, Champi & DeRienzo P.C.
Certified Public Accountants / Business Consultants
10 Weybosset Street - Suite 700 - Providence, RI 02903
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John Finnerty Jr.
CPA/ABV, CVA, Tax Principal | |
| | Visit our Web site at www.lgcd.com | | |
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