THE LAST MINUTE 2010 TAX RELIEF ACT (H.R. 4853)
Congress has finally approved (and President Obama signed) a multibillion dollar tax cut package entitled, The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (“2010 Tax Relief Act”)(H.R.4853).
The 2010 Tax Relief Act includes a 2 year extension of the Bush-era tax cuts, a one year payroll tax reduction and an estate tax compromise which, caps the top federal estate tax rate at 35 percent with a $ 5 million exclusion. The bill also provides 100 percent bonus depreciation through 2011, 50 percent bonus depreciation for 2012 and an Alternative Minimum Tax “AMT” patch.
Individual Tax Rates
The individual income tax rates had been scheduled to go back to pre-Bush tax cut levels as of December 31, 2010 (15%-39.6%). Now that the Tax Relief Act has passed and been signed into law the income tax rates will remain at current levels for two years (through December 12, 2012. These rates are reflected in the tables presented below for Single Individuals (Table 1) and Married Couples Filing Jointly (Table 2):
TABLE 1 – SINGLE INDIVIDUALS
|If Taxable Income Is:||Tax Will Be:|
|Not over $8,500||10% of taxable income|
|Over $8,500 but not over $34,500||$850.00 plus 15% of the excess over $8,500|
|Over $34,500 but not over $83,600||$4,750.00 plus 25% of the excess over $34,500|
|Over $83,600 but not over $174,400||$17,025.00 plus 28% of the excess over $83,600|
|Over $174,400 but not over $379,150||$42,449.00 plus 33% of the excess over $174,400|
|Over $379,150||$110,016.50 plus 35% of the excess over $379,150|
TABLE 2 – MARRIED COUPLES FILING JOINTLY
|If Taxable Income Is:||Tax Will Be:|
|Not over $17,000||10% of taxable income|
|Over $17,000 but not over $69,000||$1,700.00 plus 15% of the excess over $17,000|
|Over $69,000 but not over $139,350||$9,500.00 plus 25% of the excess over $69,000|
|Over $139,350 but not over $212,300||$27,087.50 plus 28% of the excess over $139,350|
|Over $212,300 but not over $379,150||$47,513.50 plus 33% of the excess over $212,300|
|Over $379,150||$102,574.00 plus 35% of the excess over $379,150|
Alternative Minimum Tax
The Alternative Minimum Tax (“AMT”) was initially created to add taxes to only “upper income” taxpayers. This controversial tax was enacted as part of the Tax Reform Act of 1969 to target the rich, by disallowing most tax deductions. But because the rates were not adjusted for inflation, it now targets not only the rich but also the middle class, and there seems to be no end to the problems its causes. The Alternative Minimum Tax was designed as a parallel tax system to the federal income tax and checks it to ensure that that the people in higher tax bracket don’t evade paying any taxes through loopholes.
The 2010 Tax Relief Act attempts to “band aid” this problem by creating a so called “patch” to ensure that middle-income taxpayers will not be impacted.
As a result, the 2010 Tax Relief Act increases the exemption amounts for 2010
to $47,450 for individual taxpayers, $72,450 for married taxpayers filing jointly and surviving spouses, and $36,225 for married couples filing separately (See Table 3 below).
TABLE 3 – AMT”PATCH”
AMT Exemption Amounts for 2010 and 2011 with/and without a “patch”
|Alternative Minimum Tax Exemption Amounts||2010||2011|
|Single individuals/not surviving spouse:||$47,450/$33,750||$48,450/$33,750|
|Married couples filing jointly/surviving spouse:||$72,450/$45,000||$74,450/$45,000|
|Married couples filing separately:||$36,225/$22,500||$37,225/$22,500|
Capital Gains / Dividends.
Qualified capital gains and dividends currently are taxed at a maximum rate of 15
percent (zero percent for taxpayers in the10 and 15 percent income tax brackets) for 2010. The 2010 Tax Relief Act ensures the continuation of these rates for two more years, through December 31, 2012. Had the Bush Tax Cuts been allowed to expire, this December 31, 2010 the rates for Capital Gains and Dividends would have increased to 20% (10% for those in the 10 and 15 percent income tax brackets). Clearly this tax impacts those living on fixed incomes such as our retired senior citizens. As such, a rise in these rates would have had harsh consequences on those who have watched their investment incomes diminish with poor returns and decreasing principle.
Child Tax Credit
The 2010 Tax Relief Act extends the $1,000 child tax credit for two more years, through December 31, 2012. The 2010 Tax Relief Act also extends alternative minimum tax (AMT) benefits: the Child Tax Credit is allowed against the AMT and the refundable portion is not reduced by the AMT. Note however, that the Child Tax Credit continues to be phased out for taxpayers with Adjusted Gross Incomes (AGI) starting at $110,000 for joint filers or $75,000 for single filers.
A qualifying child must be under age 17 at the close of the year and satisfy relationship, residency, support, citizenship, and dependent tests.
Itemized Deduction Limitation (Pease)
The “Pease” limitation (named after the member of Congress who sponsored the bill enacting it) reduces the total amount of a higher-income individual’s otherwise allowable deductions. The Pease limitation was scheduled to return in full after December 31, 2010 at a projected level of income starting at $169,550 ($84,775 for married couples filing separately).
The Pease Limitation on Itemized Deductions reduces most itemized deductions by 3 percent of the amount by which AGI exceeds a specified threshold, up to a maximum reduction of 80 percent of itemized deductions. However, the 2001 tax act eliminated the limitation entirely for 2010; as a result, all taxpayers get the full value of their itemized deductions this year. .
- The 2001 tax act reduced Pease by 1/3 in 2006 and 2007 and by 2/3 in 2008 and 2009 before repealing it entirely for 2010. The reduction does not apply to deductions for medical expenses, investment interest, casualty and theft losses, and gambling losses (which can only offset gambling winnings included in income).
- Because itemized deductions tend to increase with income, disallowed deductions are almost always less than 80 percent of total deductions. Pease is effectively just an income tax surcharge, equal to 3 percent of the taxpayer’s marginal tax rate.
- Pease does not apply under the AMT.
- The threshold for Pease is the same for single filers, heads of household, and married couples filing jointly, which creates significant marriage penalties. (The threshold is half as much for married couples filing separately.)
The 2010 Tax Relief Act extends full repeal of the Pease limitation for two more years, through December 31, 2012.
Personal Exemption Phase out
Before 2010, taxpayers with incomes over certain thresholds were subject to the Personal Exemption Phase out (PEP). The PEP reduced the total amount of exemptions that may be claimed, by 2 percent for each $2,500 or portion thereof ($1,250 for married couples filing separate returns) by which, the taxpayer’s adjusted gross income (AGI) exceeded the applicable threshold (projected for 2011 to start at $169,550 for singles and $254,350 for joint filers).
Under The 2010 Tax Relief Act, the PEP is repealed for 2010 and that repeal is also extended for two years, through December 31, 2012. The personal exemption amount for 2010 is $3,650. Most likely the inflation-adjusted personal exemption amount for 2011 will rise to $3,700. The IRS is expected to release the official personal exemption amount after H.R. 4853 is signed by the president so stay tuned.
Marriage Penalty Relief
The 2010 Tax Relief Act also provides relief from the so-called “marriage penalty” by increasing the basic standard deduction for a married couple filing a joint return to twice the amount for a single individual.
Under the 2010 Tax Relief Act “sunset rules,” the 2011 standard deduction for married couples filing jointly was projected to be $9,650. However under the extended law it will be approximately $11,600 for 2011 (compared to $11,400 for 2010).
The Child and Dependent Care Credit
The child and dependent care tax credit (CDCTC) is a nonrefundable tax credit designed to help offset the expenses of providing care for children under the age of 13 or disabled dependents as long as a parent or caretaker is working or searching for work. Thus, the person taking the credit must have income.
The 2010 Tax Relief Act temporarily increases the maximum amount of eligible expenses for the dependent care credit from $2,400 to $3,000 (from $4,800 to $6,000 for more than one qualifying individual).
The 2010 Tax Relief Act also raises the maximum credit from 30 to 35 percent of qualifying expenses and provided for a reduction in the credit, but not below 20 percent, by one percentage point for each $2,000, or fraction thereof, of AGI
above a $15,000 threshold amount. The 2010 Tax Relief Act extends the enhanced dependent care credit 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 phase out based on a taxpayer’s income. The 2010 Tax Relief Act extends the deduction for one year subject to some limitations.
First-Time Homebuyer Credit for Purchases of Qualified Residences
The national first-time homebuyer credit is expired with the following exceptions:
- The 2010 Tax Relief Act extends the first-time homebuyer credit ONLY for purchases of a “qualified” residence in the District of Columbia.
- Additionally “qualified” military personnel can still receive the First-Time
Homebuyer Credit, but we advice Real Estate Agents and military personnel to contact Kingman Winslow, LLC’s Accountants and Tax Attorneys to discuss what “qualified” means under the law.
Payroll Tax Cut
The 2010 Tax Relief Act reduces the employee-share of the Old Age Survivors Disability Insurance (OASDI) portion of Social Security taxes (also known as FICA Federal Insurance Contribution Act) from 6.2 percent to 4.2 percent for wages earned in calendar year 2011. Self-employed taxpayers receive a reduction in self-employment tax from 12.4 percent to 10.4 percent.
Estate Tax Relief
Under the new legislation, the maximum estate tax rate will be lowered to 35 percent with an exclusion amount of $5 million for single individuals and $10 million per couple. In other words, the Unified Credit, or the amount you can give away at death is $5 million per person and $10 million per couple until it goes away or “sunsets” on December 31, 2012. In real life action planning terms this means you have been given a 2 year extension on transferring assets into trusts or utilizing other estate planning tools before the amount you can give during life or at death drops to 1 million per person / 2 million per married couple or goes away entirely (down to zero), which means all estates would be taxable 100%.
NOTE: This part of the 2010 Tax Relief Act was the most contentious part of the tax relief package. House Democrats called this tax relief for the wealthy and were furious with the President for making concessions to extend the Unified Credit Amount. As such this section of the tax code will be the first that will be attempted to repeal or change if the Democrats have the power to do so within the next 2 years.
Gift Tax Relief
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, meaning that after 2010 the amount you can give during life or at death is $5 million per person, or $10 million per married couple.
WARNING: Estate Tax Planning and Gift Tax Planning are very complex areas of law. These types of planning should not be handled by anyone who does not practice estate planning as a full-time occupation and who is not a licensed attorney at law. Anyone working in the estate planning / gifting area should know the intricacy’s of the U.S. Tax Code inside and out! Kingman Winslow, LLC would be happy to provide excellent estate planning attorney referrals and to assist with tax consulting advice. Remember we don’t draft legal documents under the ethical rules but we can consult and refer. As part of your annual fee we are happy to meet with you on a no fee basis to determine whether your estate is taxable and to refer you to a good estate planning attorney.
Extension of Unemployment Benefits
Extension of unemployment benefits: Those who are unemployed will get a 13-month extension of the deadline to file for additional unemployment benefits.
100 Percent Bonus Depreciation
The 2010 Tax Relief Act boosts 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. Certain long-lived property and transportation property is eligible for 100- percent expensing if placed in service before
January 1, 2013.
Capital Asset Deductions For Business – IRC Section 179
The IRC Section 179 Deduction allows businesses and self-employed individuals to deduct the costs of capital assets purchased for business use (i.e., computers, bookshelves, office furniture, off the short software, etc…). Congress has repeatedly increased the dollar and investment limits under Code Sec. 179 to encourage business spending.
The 2010 Small Business Jobs Act (passed in September 2010) increased the Code Section 179 dollar and investment limits to $500,000 for 2010 and $2 million for the year 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 scheduled to go away or “sunset” after December 31, 2012). The 2010 Tax Relief Act also extends the treatment of off-the-shelf computer software as qualifying property if placed in service before 2013.
Summary overview 2010 Tax Relief Act.
What are the impacts of the 2010 Tax Relief Act overall?
The lowering of individual tax rates combined with the payroll tax cut will increase the amount of money U.S. taxpayers get to keep in 2011 over what would have resulted without the 2010 Tax Relief Act. Moreover, the 2010 Tax Relief Act finally gives taxpayers some certainty in tax planning for the next two years, especially when trying to plan future estate tax issues.
However, all the provisions of the 2010 Tax Relief Act described above are temporary and the new law merely defers the issue of these tax extensions and Bush-era tax cuts till December 2012. It is probably not a coincidence that 2012 is a presidential election year. As with all these tax provisions timing is everything and in this particular case, we can be at least thankful that for 2010 and 2011 we as individuals and the U.S. economy as a whole has a last minute “fix” which may allow for some significant financial recovery.
***Please note that the aforementioned tax analysis does not include all provisions of the 2010 Tax Relief Act. As such, contact Kingman Winslow, LLC before filing your 2010 taxes next year.
You don’t want to miss out on any of the benefits of this new legislation. To find out more about the 2010 Tax Relief Act and how it may impact your personal and business finances, be sure to contact us at Kingman Winslow, LLC with questions and bring notes on this article for your 2010 tax return preparation meetings. As always, we are here to assist you with your tax preparation, audit and tax planning issues.