For a quick look, read only blue sections.
On December 17, 2010, the President signed the new tax act, with a name too long and insipid to repeat, which preserves the 2001 and 2003 tax cuts through 2012, renews the alternative minimum tax patch for 2010 and 2011, cuts the estate tax to 35 percent allowing a $10 million joint exemption, and cuts Social Security payroll taxes by 2 percentage points.
For the typical private practice dentist earning $250,000 per year, I provide the following highlights:
Tax Rates Remain the Same Through 2012
The marginal federal income tax rates for individuals will remain at the 10%, 15%, 25%, 28%, 33% and 35% graduated rates through 2012. There will not be a 39.6% rate for families earning above $250,000 as proposed by Democrats.
The effect on a dental family earning $200,000 would have been zero with the change. For a dental family earning $500,000, the change would have increased taxes by $8,700. In other words, this wouldn't have made a big change for most of us.
Tax Rates on Capital Gains and Qualified Dividends Extended Through 2012
Long-term capital gains taxes for individuals generally will continue to be taxed at a maximum rate of 15% through 2012. Similarly, qualified dividends received by individuals will be taxed at the same rates as long-term capital gains through 2012.
This is significant for any dentist that actively trades investments with a cash account. The old rate of 25% would erode profits significantly. For those whose investments are mainly tax-deferred and for buy-and-hold investors, the effect wouldn't be significant.
Alternative Minimum Tax "Patch" for 2010 and 2011
The alternative minimum tax ("AMT") is a tax levied in addition to the regular federal income tax when an individual taxpayer's tentative "minimum tax" exceeds his or her regular income tax. It's a labyrinthine system guaranteed to keep CPAs in business for the foreseeable future. No one can posit a viable reason for its continued existence.
Under the new law, the AMT exemption amounts for 2010 generally will be $72,450 for married individuals filing jointly and $47,450 for unmarried individuals. Without the "patch" provided by the new law, the exemption amounts for 2010 would have been $45,000 for married individuals and $33,750 for unmarried individuals.
This is major for dentists. Without the patch, almost all of us would be paying the difference between $72,450 and $45,000 multiplied by the AMT tax rate of 28%. This amounts to $7,686 more in taxes per year!
Estate Tax Relief
The estate tax was scheduled to return in 2011 with a maximum tax rate of 55% and a $1 million exclusion. The new law, however, imposes a maximum estate tax rate of 35% and an applicable exclusion amount of $5 million ($10 million for married couples) for decedents dying on or after January 1, 2011 and reinstates the stepped-up basis regime for assets included in the estate. The new rate and exclusion represent a reduction from the 45% rate and increase from the $3.5 million exclusion applicable in 2009.
This is a huge improvement for all boomers. Few of us will be subject to any estate taxes and our descendents, when selling inherited property, will only pay taxes on the value at time of death of the benefactor, not the original value.
Social Security Payroll Taxes for 2011
The Act reduces the employee's share of Social Security tax from 6.2% to 4.2% for wages earned in 2011 up to $106,800. The employer's share of Social Security tax remains at 6.2%. The Act makes no changes to the Medicare portion of payroll taxes, which remains at 1.45% for each of the employee and employer on all wage income.
Dentists will pay SS tax of 10.4% (down from the normal 12.4%) on self-employment income up to $106,800. This is a tax savings of $2,136 for almost all of us.
Business Depreciation and Expensing Incentives
The law provides for "bonus" 100% depreciation deductions for investments in property placed in service on or after September 9, 2010, and on or before December 31, 2011, and "bonus" 50% depreciation for qualified property placed in service after December 31, 2011, and on or before December 31, 2012. Certain long-lived property is eligible for a 100% depreciation deduction if placed in service before January 1, 2013.
The Act also increases the deduction amount for business expense deductions under Section 179. In 2010 and 2011, a dentist may expense a maximum of $500,000 of the cost of qualifying property in the year such property is placed in service. This amount was scheduled to revert to $25,000 for qualified property placed in service in tax years beginning after December 31, 2011. For qualified property placed in service in tax years beginning after December 31, 2011, the deduction amount will be $125,000.
The bonus depreciation and generous Section179 deduction should increase deductions $5,000 to $10,000 per year, with a tax savings of $1,500 to $3,000 per year for the average dentist. Of course, to "Section 179" that new Cerec will decrease taxes quite a bit more!
Overall, for 2011 vs. 2010, the dentist with a $200,000 income will see taxes decrease by anywhere from $3,500 to $5,000 with greater amounts for those that have large amounts of newly depreciated equipment. The decrease comes primarily from the decrease in employment taxes (Social Security) and more generous depreciation rules.
Carlsen thought: I see a major trend. The big increase in the estate tax deduction is a signal that boomers have the voting power of Congress to protect their interests. I see this as a strong indication that Social Security benefits for all boomers and Gen-Xers remain sacrosanct.
There are other sections that don't pertain to 95% of us, yet you can peruse the full text of the Act at: http://www.gpo.gov/fdsys/pkg/BILLS-111hr4853eas2/pdf/BILLS-111hr4853eas2.pdf.
