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Highlights of the New Tax Relief Act
Individuals
Business Incentives
Estate And Gift Tax
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suzanne
Suzanne LoBiondo, CPA
516-791-1303

 
Chris
Christopher Cheeseman, CPA
516-791-1303
New Tax Laws In Effect Just In Time!
Dear Clients and Friends,

As you know, there has been much media coverage about the Bush-era tax cuts as of late. After much debate, The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act) was signed on December 17, 2010 by President Obama.

The Act extends the Bush-era individual and capital gains/dividend tax cuts for all taxpayers for two years. The bill also provides for an AMT "patch," a one-year payroll tax cut, 100 percent bonus depreciation through 2011 and 50 percent bonus depreciation for 2012, a top federal estate tax rate of 35 percent with a $5 million exclusion, and more.  

While there are many intricacies to the 2010 Tax Relief Act, we've described some of the major highlights below.

If you think any of these provisions apply to you, please contact us at 516-791-1303. In the meantime, best wishes for a happy new year!

Very truly yours,


Suzanne LoBiondo, CPA
Christopher Cheeseman, CPA
INDIVIDUALS

Individual Tax Rates
Individual income tax rates had been scheduled to revert from their current levels of 10, 15, 25, 28, 33, and 35 percent to 15, 28, 31, 36, and 39.6 percent after December 31, 2010. The 2010 Tax Relief Act extends all individual rates at 10, 15, 25, 28, 33 and 35 percent for two years, through December 31, 2012.

Capital Gains/Dividends
Qualified capital gains and dividends currently are taxed at a maximum rate of 15 percent (zero percent for taxpayers in the 10 and 15 percent income tax brackets) for 2010. The 2010 Tax Relief Act continues this treatment for two years, through December 31, 2012.

Itemized Deduction Limitation
Prior to 2010, a limitation reduced the total allowable itemized deductions for higher-income individuals. The limitation was repealed for 2010. The Act extends the repeal through December 31, 2012 allowing all taxpayers to use all their itemized deductions.

Personal Exemption Phaseout
Before 2010, taxpayers with income over certain thresholds were subject to a personal exemption phase out (known as PEP.) This phase out was repealed for 2010. The Act extends the repeal of PEP through December 31, 2012.

Marriage Penalty Relief
Marriage penalty relief has been extended through December 31, 2012 by increasing the standard deduction and the size of the 15 percent income tax rate bracket for married couples filing jointly to twice the amount for a single individual.

Child Tax Credit
The 2010 Tax Relief Act extends the $1,000 child tax credit for two years, through December 31, 2012. Also extended for two years are enhancements to the credit made by prior tax acts.
The child credit continues to be phased out for taxpayers with adjusted gross income starting at $110,000 for joint filers ($75,000 for others).

Adoption Credit
Taxpayers who incur qualified adoption expenses may be eligible for the adoption credit or, in the case of employer-provided assistance, an exclusion from income. The 2010 Tax Relief Act extends the enhancements from prior legislation to the credit and exclusion amount through December 31, 2012.

Dependent Care Credit
A taxpayer who incurs expenses to care for a child under age 13 or for an incapacitated dependent or spouse to enable him or her to work or look for work can claim a dependent care credit. The 2010 Tax Relief Act extends the enhanced dependent care credit as established with prior legislation for two years, through December 31, 2012.

Mortgage Insurance Premiums
Under current law, taxpayers may deduct certain premiums paid for qualified mortgage insurance during the tax year in connection with acquisition indebtedness on a qualified residence. The deduction is subject to phaseout based on a taxpayer's income. The 2010 Tax Relief Act extends the deduction for one year subject to some limitations.

American Opportunity Tax Credit
The 2009 Recovery Act enhanced and renamed the Hope education credit as the American Opportunity Tax Credit (AOTC) for 2009 and 2010. The 2010 Tax Relief Act extends the AOTC for two years, through

December 31, 2012. Also extended are income limitations (the AOTC begins to phase out for single individuals with modified AGI of $80,000 ($160,000 for married couples filing jointly) and completely phases out for single individuals with modified AGI of $90,000 ($180,000 for married couples filing jointly).

Educational Assistance Exclusion
Current law allows employees to exclude up to $5,250 in employer-provided education assistance annually from income and employment taxes. Employers may deduct up to $5,250 annually for qualified education expenses paid on behalf of an employee. This treatment was scheduled to expire after 2010. The 2010 Tax Relief Act extends these provisions for two years, through December 31, 2012.

Student Loan Interest Deduction
Prior legislation eliminated a 60-month rule for the $2,500 above-the-line student loan interest deduction and expanded the modified AGI range for phase-out. This treatment was scheduled to expire after December 31, 2010. The 2010 Tax Relief Act extends the enhancements for two years, through December 31, 2012.

Coverdell Education Savings Accounts
The increased maximum contribution amount of $2,000 to a Coverdell Education Savings Account (ESA), and the allowing of elementary and secondary school expenses as qualified expenses have been extended for two years, through December 31, 2012.


Individual Tax Extenders
The Act includes certain individual tax incentive extenders that had expired at the end of 2009. These extenders will be available to individuals through December 31, 2010 and include:

  • State and local sales tax deduction
  • Higher education tuition deduction
  • Teacher classroom expense deduction
  • Charity contribution of IRA proceeds
  • Charity contribution of appreciated property for conservation purposes
  • Deduction for mortgage insurance premiums

The Act does not extend the additional standard deduction for real property taxes which expired in 2009.

Alternative Minimum Tax
The 2010 Tax Relief Act provides an AMT "patch" intended to prevent the AMT from affecting middle income taxpayers by providing higher exemption amounts and other targeted relief for 2010 and 2011.

Payroll Tax Cut
The 2010 Tax Relief Act reduces the employee-share of the OASDI portion of Social Security taxes from 6.2% to 4.2% for wages earned in calendar year 2011, up to the taxable wage base of 106,800.
This is an employee side cut only, as the employer's share of OASDI will remain at 6.2%.

Self-employed individuals would pay 10.4% on self-employment income up to the threshold (plus the 2.9% for Medicare).

Energy Credit
The credit for individuals who make energy efficient improvements to principal residences such as furnaces, windows, insulation, water heaters, etc., was set to expire at the end of 2010. This provision has been extended to 2011, but provides a 10% credit rather than the more generous 30% credit and will also impose lower credit maximum limits.

BUSINESS INCENTIVES

100 Percent Bonus Depreciation
The 2010 Tax Relief Act increases 50 percent bonus depreciation to 100 percent for qualified investments made after September 8, 2010 and before January 1, 2012. The 2010 Tax Relief Act also makes 50 percent bonus depreciation available for qualified property placed in service after December 31, 2011 and before January 1, 2013.

Code Sec. 179 Expensing
Congress has repeatedly increased the dollar and investment limits under Code Sec. 179 to encourage business spending. The 2010 Small Business Jobs Act increased the Code Sec. 179 dollar and investment limits to $500,000 and $2 million, respectively, for tax years beginning in 2010 and 2011. The 2010 Tax Relief Act provides for a $125,000 dollar limit (indexed for inflation) and a $500,000 investment limit (indexed for inflation) for tax years beginning in 2012 (and sunsetting after December 31, 2012).

Research Tax Credit
The Research Credit, which had expired at the end of 2009, has been retroactively extended for two years through December 31, 2011. The President has been urging Congress to make this Credit permanent, but a 2 year extension was enacted.

Small Business Stock
The 2010 Small Business Jobs Act enhanced the exclusion of gain from qualified small business stock to non-corporate taxpayers. For stock acquired after September 27, 2010 and before January 1, 2011, and held for at least five years, the 2010 Small Business Jobs Act provided an exclusion of 100 percent. The 2010 Tax Relief Act extends the 100 percent exclusion for one more year, for stock acquired before January 1, 2012.

 


ESTATE AND GIFT TAX

Estate Tax Compromise
The 2010 Tax Relief Act revives the estate tax for decedents dying after December 31, 2009, but at a significantly higher applicable exclusion amount and lower tax rate than had been scheduled under prior law. The maximum estate tax rate is 35 percent with an applicable exclusion amount of $5 million.

This new estate tax regime, however, is temporary and is scheduled to sunset on December 31, 2012.

Together with the revival of the estate tax, the 2010 Tax Relief Act eliminates the modified carryover basis rules and replaces them with the stepped up basis rules that had applied until 2010.

The 2010 Tax Relief Act gives estates of decedents dying during 2010 the option to elect to apply (1) the estate tax based on the new 35 percent top rate and $5 million applicable exclusion amount, with stepped up basis or (2) no estate tax and modified carryover basis rules under prior law. Any election would be revocable only with the consent of the IRS.

Portability
The 2010 Tax Relief Act provides for "portability" between spouses of the estate tax applicable exclusion amount.  This
allows a surviving spouse to elect to use the unused portion of the estate tax exclusion of a deceased spouse (who passed away after 2010), which provides the surviving spouse a larger exclusion.

State death tax credit/deduction
Prior tax law repealed the state death tax credit for decedents dying after 2004 and replaced the credit with a deduction. Under EGTRRA's sunset provisions, the credit, as it existed before 2002, is revived for decedents dying after 2010. The 2010 Tax Relief Act extends the deduction through 2012.

Gift Taxes
For gifts made in 2010, the 2010 Tax Relief Act provides that gift tax is computed using a rate schedule having a top tax rate of 35 percent and an applicable exclusion amount of $1 million. For gifts made after 2010, the gift tax is reunified with the estate tax with a top gift tax rate of 35 percent and an applicable exclusion amount of $5 million.


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About C&L Tax and Accounting Services LLP
 
clC&L Tax and Accounting Services LLP is a boutique CPA firm that specializes in meeting the tax and accounting needs of individuals and small businesses. Our experienced tax and accounting professionals offer clients insightful and strategic tax planning and compliance services that maximize savings year after year.

C&L Tax and Accounting Services LLP's offers a wide range of tax and accounting planning, compliance and consulting services for both individuals and small businesses. We invite you to peruse our capabilities and contact us for a consultation.