New tax legislation creates, renews many breaks

The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 is packed with new provisions. Following is a rundown of what you can expect from this legislation.

Individuals
 
Tax rates will remain at the 2010 rates of 10, 15, 25, 28, 33, and 35 percent for 2011 and 2012. Had Congress not acted to extend these rates, they would have reverted to the previous levels of 15, 28, 31, 36, and 39.6 percent.
 
Social Security tax is cut by 2 percent on wages up to the taxable wage base of $106,800. This reduction is on the employee share of Social Security tax, dropping the rate to 4.2 percent from 6.2 percent. As a result, individuals earning $50,000 a year will see an increase in their paychecks over the course of the year amounting to $1,000, or approximately $83 a month. Self-employed individuals receive a one-year reduction in payroll self-employment tax from 12.4 percent to 10.4 percent.
 
The Medicare portion of payroll tax remains unchanged at 1.45 percent on all wages.
 
Favorable tax rates on long-term capital gains and qualified dividends of no more than 15 percent are extended through 2012. For taxpayers in the two lowest tax brackets, the zero percent rate also is extended. Without this extension, the rates would have increased to 20 percent, and the rate on dividends would have increased to as high as 39.6 percent.
 
The alternative minimum tax (AMT) gets a new patch, which applies to 2010 and 2011. It includes the following exemption amounts:
  • For married joint filers and surviving spouses – $72,450 for 2010, and $74,450 for 2011
  • For single filers – $47,450 for 2010, and $48,450 for 2011
  • For married couples filing separately – $36,225 for 2010, and $37,225 for 2011
The purpose of the patch is to prevent middle income taxpayers from getting hit with the AMT, which was an unintended consequence of the law. If the patch had not been passed, it is estimated that an additional 21 million households would have been subject to the AMT.
 
The child tax credit of $1,000 is extended for two-years through 2012. It is subject to phase-out beginning at $110,000 for joint filers and $75,000 for single filers. The credit would have dropped to $500 had the law not passed.
 
A higher child and dependent care credit is extended for two years through 2012. For one dependent, the maximum credit is $3,000 for eligible care expenses. Without the new law, the maximum credit would have fallen to $2,400.
 
The American Opportunity Tax Credit for higher education expenses also is extended for two years. Originally, this credit was called the Hope credit. It begins to phase out for joint filers with adjusted gross income of $160,000 and for single filers with income of $80,000.
 
A personal exemption phase-out was scheduled to take effect for 2010, along with the reduction of otherwise allowable deductions for higher income individuals. The new law repeals both of those items for two years.
 
Unemployment benefits for eligible individuals are extended and will remain at their current level for 13 months. The tax-free employee benefit for employer-provided education assistance, maximum $5,250 per year, is extended through 2012.
 
Student loan interest of up to $2,500 remains deductible through 2012.
 
The deduction for state and local sales tax expired at the end of 2009. The new law revives it for 2010 and 2011. Individuals who pay little or no state income tax can alternatively claim an itemized deduction for state and local sales taxes.
 
IRA proceeds can be used to make a charitable contribution through the end of 2011 for IRA owners age 70 ½ or older. These individuals, through an IRA trustee, can directly transfer up to $100,000 to an eligible charity. The transferred amount is not taxable.
 
The tax break for the charitable gift of appreciated property for conservation purposes also is extended through 2011.
 
Elementary and secondary school teachers who purchase classroom supplies can continue to write off up to $250 per year for out-of-pocket expenses, such as supplies, books, and computer hardware and software. This expense is deductible regardless of whether the teacher itemizes.
 
The deduction for qualified mortgage premiums is extended for one year, but limitations apply.
 
Estate/gift/generation-skipping tax
 
One of the most contentious provisions of the new law has been the estate tax.
 
For 2011, the maximum estate tax will be 35 percent, with an estate tax exclusion of $5 million. These amounts also apply to 2012, and are adjustable for inflation in that year. The estate tax was repealed completely in 2010. According to a law passed in 2001, this tax would have returned in 2011 if Congress failed to act, with an exclusion of only $1 million and a maximum tax rate of 55 percent.
 
Estate executors for individuals who died in 2010 have the option to either apply the estate tax (35 percent with a $5 million exclusion amount and a stepped up basis) or apply no-estate tax and a modified carryover basis.
 
The gift tax remains at 35 percent for 2010, with a $1 million exclusion. For 2011, the gift tax increases to 35 percent, with a $5 million exclusion. These amounts also apply to 2012, and are adjustable for inflation in that year. Without the new law, the 2011 gift tax would have increased to 55 percent.
 
The generation-skipping tax (GST) is zero for 2010, with a $5 million exclusion. While the $5 million exclusion remains for 2011, the GST rate increases to 35 percent. These amounts also apply to 2012, and are adjustable for inflation in that year.
 
Businesses
 
The tax reliefact raises the 50 percent bonus depreciation to 100 percent for qualified assets. This is available to all businesses for assets placed in service after September 8, 2010, and before January 1, 2012. For 2012, bonus depreciation drops back to 50 percent.
 
The research tax credit, which expired at the end of 2009, is renewed for 2010 and remains in place through 2011. It is available for amounts paid or incurred after December 31, 2009, for companies that develop or improve their processes, introduce new products, or improve existing products.
 
Certain energy tax credits for businesses are temporarily extended for one or two years.
 
The Work Opportunity Tax Credit will remain in place through 2011, as an incentive for employers to hire members of certain disadvantaged groups. The credit is worth a maximum of 40 percent of the first $6,000 in wages for the eligible employee during the first year of employment.
 
Eligible employers who provide childcare facilities can continue to claim a tax credit through 2012.
 
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