Congress has passed and the President will sign the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (i.e., 2010 Tax Relief Act)
Generally, the tax law that has been in force for the past few years will remain in force through 2012. Having read through the provisions, I am providing a summary of the more pertinent items. If you have any questions about anything that you see, or don’t see here, please contact us.
I have highlighted some new items and some that may have a different expiration date. Pay special attention to those.
Remember! These laws and tax rates are supposedly going to remain unchanged through 2012 only. So any definite transactions or “long term” plans should consider the two year window.
Individual income tax rates. - The individual income tax rates will remain at 10, 15, 25, 28, 33 and 35 percent through 2012.
Capital gains rates. – Long-term capital gains rates and dividends rates will stay at 0% for those below the 25% tax bracket, which is below $34,500 taxable income for single filers and below $69,000 for joint filers. Otherwise the tax rates on long term capital gains will remain at 15% for all others. Keep in mind that installment sales are taxed at the rate in effect in the year of payment, NOT the year of sale. Payments collected in 2013 and later years may be taxed at a higher rate.
Employee payroll tax rates. -The OASDI tax rate under the FICA tax for employees (W-2 recipients) is reduced to 4.2%. Self-employment tax for the self-employed is reduced by two percentage points to 10.4% for 2011. The employer share of OASDI remains at 6.2%. This is a tax savings for everyone with earned income. Although software and payroll service providers have known about this for months, be sure to test the calculations on your first payroll in 2011.
Teacher expenses. - The deduction for certain expenses of elementary and secondary school teachers is extended for two years. It continues to be available for tax years beginning before January 1, 2012. The limit remains at $250 per teacher or $500 if both spouses are teachers and filing a joint return.
Deduction of state and local general sales taxes. -The election to deduct state and local sales taxes in lieu of state and local income taxes is extended for two years (through December 31, 2011)
AMT Relief. - The alternative minimum tax exemption amounts in 2010 for individuals is $47,450 for single taxpayers, $72,450 for married taxpayers filing jointly and surviving spouses, and $36,225 for married taxpayers filing separately. The amounts for 2011 are $48,750, $74,450, and $37,225, respectively. The exemption amounts for corporations, estates and trusts remains unchanged.
Limitations on itemized deductions and personal exemptions. – There is no reduction for high income earners in the amounts for personal exemptions or the amounts that can be claimed as itemized deductions regardless of AGI. This remains in effect through 2012.
All child-related credits such as the child tax credit, dependent care credit, and adoption credits remain intact through 2012.
For decedents dying in 2010 there are two options: The Estate can elect to be subject to the new 35% top rate with a $5 million exemption, which allows for a stepped-up basis in inherited property OR the estate can elect to follow the modified carryover basis rules under EGTRRA. Generally, the $5 million exemption route is best for estates at or near the $5 million exemption amount that have appreciated assets. Those with built-in losses, capital losses, and net operating losses may benefit from the modified basis carryover rules. There is a requirement to file Form 8939 for those estates. The return is due with the decedent's 2010 individual tax return. Gifts made in 2010 are subject to a $1 million exclusion and a 35% top tax rate. The generation skipping tax exemption for 2010 was $5 million and the tax rate was 0%
For decedents dying after 2010 and before 2013. – The estate and gift tax returns in 2011 with a $5,000,000 exemption and a 35% top tax rate. This is a pretty significant improvement over the $3.5 million exemption and 45% top rate that House Democrats supported.
State death taxes. - Estates will once again pay a portion of their estate tax to the State of Georgia in 2011 and thereafter. The reason is due to a change in the federal law which will once again allow a state death tax credit. Prior to 2005, Georgia and many other states set their inheritance tax at an amount equal to the maximum credit for state death taxes allowed by the federal government. These were called “pickup tax states”. This meant that there would be no increase in estate tax due to state inheritance laws, only an allocation of a portion of the federal tax to the decedent’s home state. In 2006 the federal government ceased allowing a state tax credit which effectively killed the state death tax for pickup tax states. When the state credit returns in 2011, the requirement to file returns in pickup tax states will return with it.
BUSINESS PROVISIONS Bonus depreciation. – Bonus depreciation for the period between September 8, 2010 and January 1, 2012 has been increased from 50% to 100%. The bonus depreciation can be used to create losses, unlike Section 179 expensing.
Section 179 expensing. – Internal Revenue Code section 179 allows taxpayers to expense 100% of the cost of property placed in service subject to certain limits. For 2010 and 2011 the limit on the amount that can be expensed is $500,000 as long as the taxpayer has not purchased more that $2 million in qualifying property during the year. Beware that the expensing limit for 2012 is $125,000 and the purchase limit is $500,000 so do your capital investment planning now.
Research tax credits. – The credit for increasing research and development expenditures has been extended through December 31, 2011. The credit has been around since 1981 but was scheduled to expire at the end of 2009.
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Accounting professional for the healthcare industry
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