During the last three months, there were an unusual number of important federal tax developments. They impact both how much you will likely pay on your 2010 tax return and what plans you should make to maximize tax savings in 2011. This letter highlights some of the more important federal tax developments for you. As always, please give our office a call or send us an email if you have any questions about these developments.

Massive tax relief legislation - On December 17, 2010 the president signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act). Called the most sweeping tax law in a decade, the 2010 Tax Relief Act provided, among other things, a two-year extension of the Bush-era tax cuts, including extension of current individual marginal tax rates and capital gains/dividend tax rates. The new law retains the current 10, 15, 25, 28, 33, and 35 percent individual tax rates and the maximum 15 percent capital gains tax for two years, through December 31, 2012.But the 2010 Tax Relief Act is much more than just an extension of existing tax rates. The new law also provides a temporary across-the-board payroll tax cut for wage earners, a retroactive alternative minimum tax (AMT) "patch" for 2010 and 2011, estate tax relief, education and energy incentives, and many valuable incentives for businesses, including 100 percent bonus depreciation and extension of many temporary tax breaks.

AMT patch - The 2010 Tax Relief Act on December 17, 2010 created an AMT "patch" for 2010 and 2011. Congress increased the exemption amounts for 2010 to $47,450 for single individuals, $72,450 for married couples and surviving spouses, and $36,225 for married individuals filing a separate return. The exemption amounts for 2011 are $48,450 for single individuals, $74,450 for married couples and surviving spouses, and $37,225 for married individuals filing a separate return. Congress estimated that an additional 25 million taxpayers would fall subject to the AMT if the "patch" had not passed.

Payroll tax cut - The 2010 Tax Relief Act reduced the employee-share of OASDI tax from 6.2 percent to 4.2 percent for wages paid in calendar year 2011 up to the taxable maximum of $106,800. The one-year payroll tax cut replaces the Making Work Pay credit, which expired after 2010. Unlike the Making Work Pay credit that put $400 into workers' pockets ($800 for joint filers), however, the new payroll tax cut has the potential of saving each employee up to $2,136 for the year. Generally, wage earners will find that they will have two percent more take-home pay in each paycheck until their year-to-date salary reaches $106,800 (the top end of the Social Security wage base for both 2010 and 2011).  The IRS has given employers until January 31, 2011 to implement their payroll systems to reflect this new benefit.

Estate tax reform - The 2010 Tax Relief Act ushered in estate tax relief and certainty, at least through 2012. The new law provides an estate tax at a 35 percent rate, with a $5 million exclusion, through 2012. The rate would have increased to 55 percent with a $1 million exclusion starting in 2011 without Congressional intervention.  For decedents dying in 2010, their estates have an option of paying estate tax at the new 35 percent rate/$5 million exclusion regime or pay no estate tax but are subject to a "modified carryover basis" regime that had existed for 2010 before the new law had passed.  In any case, the estate tax after 2012 remains just as uncertain as ever and requires estate planning that continues to maintain a high degree of flexibility.

Tax extenders - The 2010 Tax Relief Act retroactively extended a number of tax incentives that had expired at the end of 2009 retroactively for two years: 2010 and 2011. The renewed extenders include, but are not limited to, the state and local sales tax deduction; teacher's classroom expense deduction; tax-free distributions from IRAs for charity; and the higher education tuition deduction.

American Opportunity Tax Credit - The American Recovery and Reinvestment Act of 2009 (2009 Recovery Act) significantly expanded the HOPE education credit and renamed the credit the American Opportunity Tax Credit (AOTC). The 2010 Tax Relief Act extended the AOTC to apply to tax years 2011 and 2012, to the great relief of many students and families struggling to pay rising college tuition costs.

Bonus depreciation - The 2010 Tax Relief Act doubled and extended bonus depreciation for all businesses to 100 percent for qualified property acquired after September 8, 2010 and before January 1, 2012, and placed in service before January 1, 2012. A limited category of property with a longer production period qualifies for 100 percent bonus depreciation for an extended period through December 31, 2012. The 2010 Tax Relief Act also provides for 50-percent bonus depreciation for 2012 (through 2013 for longer production period assets).

Section 179 expensing. The 2010 Small Business Jobs Act enacted on September 17, 2010 had raised the Section 179 expensing at an enhanced level of $500,000 through December 31, 2011.The 2010 Tax Relief Act has extended the incentive further, through December 31, 2012, but at a reduced "enhanced" level.

Qualified small business stock - The 2010 Tax Relief Act extended the 100 percent exclusion or qualified small business stock for one more year, for stock acquired before January 1, 2012. The Small Business Jobs Act had enhanced the exclusion of gain from qualified small business stock to non-corporate taxpayers and provided the 100 percent exclusion for stock acquired after September 27, 2010 and before January 1, 2011, and held for at least five years. This tax break offers significant opportunities both to certain investors and to small businesses that want to raise capital to expand their operations.

 Roth IRA conversions - The IRS posted new frequently asked questions (FAQs) on 2010 rollovers and conversions to a Roth individual retirement arrangement (IRA) on its web site. The FAQs describe the timing, reporting of income, and more for rollovers and conversions to a Roth IRA in 2010, as well as the rules governing rollovers in 2011. The IRS also issued much-anticipated guidance on the new in-plan Roth rollover opportunity for 401(k) and 403(b) plans.  

Broker reporting of basis - The IRS issued long-awaited final regulations on broker reporting of basis on stock sales and provided transition relief for 2011. The new regulations also apply for stock in a mutual fund (regulated investment company or RIC) or a dividend reinvestment plan acquired on or after January 1, 212; and for other securities and options acquired on or after January 1, 2013. The final regulations require brokers to report the basis of stock when it is sold, and to classify gain or loss from the sales as long-term or short-term. The new rules apply for most stock acquired on or after January 1, 2011. Despite pleas to postpone the requirements beyond the 2011 effective date, the IRS retained the statutory deadlines. However, the IRS provided significant transition relief for the reporting of broker-to-broker transfers.

Standard mileage rates increase - The IRS announced that the business standard mileage reimbursement rate for 2011 will be 51 cents-per-mile, a $0.01 increase from 50 cents-per-mile for 2010. The standard mileage rate for medical and moving expenses for 2011 will be 19 cents-per-mile, a 2.5 cent increase over 2010. The statutorily-determined rate for the charitable deduction remains at 14 cents-per-mile for 2011. Higher fuel prices are the primary reason for the increase. The depreciation component of the business standard mileage rate will be 22 cents-per-mile for 2011, a slight decrease from 23-cents-per-mile for 2010.

2011 retirement COLAs announced - Most retirement plan contribution and benefit limits for 2011 remained unchanged from 2010, the IRS announced. The 2011 cost of living adjustments (COLAs) as applied by Internal Revenue Code-based counterparts affect the maximum limits for a variety of contributions and distributions for 2011, including defined benefit accounts, 401(k)s, and other defined contribution plans, as well as limits on employee stock ownership plans (ESOPs) and benefits to highly-compensated employees.

Health care reform guidance/rules/relief -  The passage of the Patient Protection and Affordable Care Act (PPACA) earlier in 2010 has commenced a steady stream of rules from the IRS and the Labor Department that is likely not to abate for many months.  Notable guidance in the fourth quarter 2010 saw the IRS reverse course in December and amend rules issued earlier in 2010 to allow certain changes in coverage without loss of grandfathered status under the PPACA. Under the eased final rules, all group health plans may switch insurance companies and preserve their grandfathered status, so long as the structure of the coverage does not violate one of the other rules for maintaining grandfathered plan status. The IRS also provided a significant one-year grace period to employers from a new requirement to report the cost of employer-sponsored health insurance to their employees on Form W-2, Wage and Tax Statement.

Uncertain tax return positions - The IRS finalized rules authorizing the reporting of uncertain tax positions (UTPs). The final rules authorize the IRS to require corporations to report UTPs and generally follow proposed rules issued earlier in 2010. The final rules moved the start date for applying the UTP reporting rules to returns filed for tax years beginning on or after January 1, 2010. Generally, the timetable now calls for corporations that file Form 1120 series returns to file Schedule UTP, Uncertain Tax Position Statement, for the 2010 tax year if they have assets that equal or exceed $100 million. The asset threshold for reporting is reduced to $50 million starting with the 2012 tax year and to $10 million starting with the 2014 tax year. Proposals also have been made to eventually include non-corporate businesses in this mandatory disclosure regime.

These are just some of the many federal tax developments that occurred over the last three months. Please contact our office if you have any questions about the impact of these, or any other tax recent changes, on your particular situation.