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2010 Tax Relief Act Client Letters
GENERAL INFORMATION -
BENEFITS FOR BUSINESS -
BENEFITS FOR INDIVIDUALS
GENERAL INFORMATION
Dear Client:
After weeks of intense negotiations
between the White House and Congressional leaders, Congress passed and
President Obama signed into law a two-year extension of soon-to-have-expired
Bush-era tax cuts, including extension of current individual tax rates and
capital gains/dividend tax rates. Called the most sweeping tax law in a
decade, the Tax Relief, Unemployment Insurance Reauthorization and Job
Creation Act of 2010 (H.R. 4853), was approved by the Senate on December 15,
2010 and by the House on December 16, 2010. The new law is, however, 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
AMT “patch,” 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. This letter highlights many of
the key incentives in the new law. As always, please call or email our
office for more details.
Individuals
Tax
rates. Among the most valuable tax breaks for individuals in the new law are
a two-year extension of individual income tax rate reductions and a payroll
tax cut. Both will deliver immediate tax savings starting in January 2011.
The new law keeps in place the current 10, 15, 25, 28, 33, and 35 percent
individual tax rates for two years, through December 31, 2012. If Congress
had not passed this extension, the individual tax rates would have jumped
significantly for all income levels. The new law also extends full repeal of
the limitation on itemized deductions and the personal exemption phaseout
for two years. Married couples filing jointly will also benefit from
extended provisions designed to ameliorate the so-called marriage penalty.
Payroll tax cut. The payroll tax cut is designed to get more money
into workers’ paychecks and to encourage consumer spending. Effective for
calendar year 2011, the employee share of the OASDI portion of Social
Security taxes is reduced from 6.2 percent to 4.2 percent up to the taxable
wage base of $106,800. Self-employed individuals also benefit. Self-employed
individuals will pay 10.4 percent on self-employment income up to the wage
base (reduced from the normal 12.4 percent rate). The payroll cut replaces
the Making Work Pay credit, which reduced income tax withholding for wage
earners in 2009 and 2010. The payroll tax cut, unlike the credit, does not
exclude some individuals based on their earnings and has the potential of
significantly higher benefits (with a maximum payroll tax reduction of
$2,136 on wages at or above the $106,800 level as compared to a maximum
available $800 Making Work Pay credit for married couples filing jointly
($400 for single individuals)).
Capital gains/dividends. The new law
also extends reduced capital gains and dividend tax rates. Like the
individual rate cuts, the extended capital gains and dividend tax rates are
temporary and will expire after 2012 unless Congress intervenes. In the
meantime, however, for two years (2011 and 2012), individuals in the 10 and
15 percent rate brackets can take advantage of a zero percent capital gains
and dividend tax rate. Individuals in higher rate brackets will enjoy a
maximum tax rate of 15 percent on capital gains, as opposed to a 20 percent
rate that had been scheduled to replace it and with dividends taxed at
income tax rates. Only net capital gains and qualified dividends are
eligible for this special tax treatment. If you have any questions about
your capital gain/dividend income, please contact our office.
AMT
patch. More and more individuals are finding themselves falling under the
alternative minimum tax (AMT) because of the way the AMT is structured. To
prevent the AMT from encroaching on middle income taxpayers, Congress has
routinely enacted so-called “AMT patches.” The new law continues this trend
by providing higher exemption amounts and other targeted relief.
More
incentives. Along with all these incentives, the new law extends many
popular but temporary tax breaks. Extended for 2011 and 2012 are:
•
$1,000 child tax credit
• Enhanced earned income tax credit
•
Adoption credit with modifications
• Dependent care credit
•
Deduction for certain mortgage insurance premiums
The new law also
extends retroactively some other valuable tax incentives for individuals
that expired at the end of 2009. These incentives are extended for 2010 and
2011 and include:
• State and local sales tax deduction
•
Teacher’s classroom expense deduction
• Charitable contributions of IRA
proceeds
• Charitable contributions of appreciated property for
conservation purposes
Businesses
Bonus
depreciation. Bonus depreciation is intended to help businesses depreciate
purchases faster against their taxable income, thereby encouraging
businesses to invest in more equipment. Bonus depreciation allows businesses
to recover the costs of certain capital expenditures more quickly than under
ordinary tax depreciation schedules. Businesses can use bonus depreciation
to immediately write off a percentage of the cost of depreciable property.
The new law makes 100 percent bonus depreciation available for qualified
investments made after September 8, 2010 and before January 1, 2012. It also
continues bonus depreciation, albeit at 50 percent, on property placed in
service after December 31, 2011 and before January 1, 2013. There are
special rules for certain longer-lived and transportation property.
Additionally, certain taxpayers may claim refundable credits in lieu of
bonus depreciation. 100 percent bonus depreciation is a valuable tax break
and businesses have only a short window to take advantage of it. Please
contact our office so we can help you plan for 100 bonus depreciation.
Code Sec. 179 expensing. Along with bonus depreciation, the new law also
provides for enhanced Code Sec. 179 expensing for 2012. Under current law,
the Code Sec. 179 dollar and investment limits are $500,000 and $2 million,
respectively, for tax years beginning in 2010 and 2011. The new law 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
(but not after).
Research credit. Many businesses urged Congress to
make the research credit permanent after the credit expired at the end of
2009. While this proposal enjoyed significant support in Congress, its cost
was deemed prohibitive. Instead, Congress extended the research tax credit
for two years, for 2010 and 2011.
More incentives. Other valuable
business incentives in the new law include extensions of:
• 100
percent exclusion of gain from qualified small business stock
• Transit
benefits parity
• Work Opportunity Tax Credit (with modifications)
•
New Markets Tax Credit (with modifications)
• Differential wage credit
• Brownfields remediation
• Active financing exception/look-through
treatment for CFCs
• Tax incentives for empowerment zones
• Special
rules for charitable deductions by corporations and other businesses
•
And more
Energy
In 2010, Congress had been
expected to pass comprehensive energy legislation including new and enhanced
tax incentives. For a number of reasons, an energy bill did not pass.
However, the new law extends some energy tax breaks for businesses. The new
law also extends, but modifies, a popular energy tax break for individuals.
Businesses. For businesses, one of the most valuable energy incentives
is the Code Sec. 1603 cash grant in lieu of a tax credit program. This
incentive encourages the development of alternative energy sources, such as
wind energy. Other business energy incentives extended by the new law
include excise tax and other credits for alternative fuels, percentage
depletion for oil and gas from marginal wells, and other targeted
incentives.
Individuals. Individuals who made energy efficiency
improvements to their homes in 2009 or 2010 are likely familiar with the
Code Sec. 25C energy tax credit. This credit rewards individuals who install
energy efficient furnaces or add insulation, or make other improvements to
reduce energy usage. The new law extends the credit through 2011 but reduces
some of its benefits. Although 2010 is soon over, there may still be time to
take advantage of the more generous credit. Please contact our office.
Education
The Tax Code includes a number of
incentives to encourage individuals to save for education expenses. In 2009,
Congress enhanced the Hope education credit and renamed it the American
Opportunity Tax Credit (AOTC). Like many other incentives, the AOTC was
temporary. The new law extends it for two years, through 2012. Along with
the AOTC, the new law also extends:
• Higher education tuition
deduction
• Student loan interest deduction
• Exclusion for
employer-provided educational assistance
• Enhanced Coverdell education
savings accounts
• Special rules for certain scholarships
Estate and gift taxes
The federal estate tax, along
with federal gift and generation skipping transfer (GST) taxes, was
significantly overhauled in 2001. At that time, Congress set in motion a
gradual reduction of the estate tax until abolishing it for 2010. Under
budget rules, however, those changes could extend for only 10 years;
starting in 2011, the estate tax had been scheduled to revert to its
pre-2001 levels of 55 percent and a $1 million exclusion.
Estate tax.
The new law revives the estate tax, but with a maximum estate tax rate of 35
percent with a $5 million exclusion. The revived estate tax is in place for
decedents dying in 2011 and 2012. The new law gives estates the option to
elect to apply the estate tax at the 35 percent/$5 million levels for 2010
or to apply carryover basis for 2010. The new law also allows “portability”
between spouses of the maximum exclusion and extends some other
taxpayer-friendly provisions originally enacted in 2001.
This
far-reaching multi-billion dollar tax package affects almost every taxpayer.
Keep in mind that many of its provisions are temporary. It is important to
plan early to maximize your tax savings. Please contact our office if you
have any questions. Back to the Top
BENEFITS FOR BUSINESSES
Back to the Top
Dear Client:
Business planning for 2011 and beyond
just got more certain with passage of the
Tax Relief, Unemployment
Insurance Reauthorization and Job Creation Act of 2010 (H.R. 4853). The
multi-billion dollar new law extends, renews or enhances a large number of
business tax incentives. This letter highlights the key business tax
incentives in the new law. As always, please contact our office for more
details.
Business spending. During past economic slowdowns, Congress
has used bonus depreciation and enhanced Code Sec. 179 small business
expensing to help jumpstart business spending. The new law provides for 100
bonus depreciation. The 100 percent bonus depreciation rate applies to
qualified property acquired after September 8, 2010 and before January 1,
2012 and placed in service before January 1, 2012 (or before January 1, 2013
for certain longer-lived and transportation property). Additionally, 50
percent bonus depreciation is available for qualified property placed in
service in 2012. Moreover, certain corporations may be able to elect to
accelerate any alternative minimum tax (AMT) credit in lieu of bonus
depreciation.
Along with bonus depreciation, the new law extends
enhanced Code Sec. 179 expensing for 2012 but not at the 2010 and 2011
dollar and investment limits. For 2010 and 2011, the Code Sec. 179 dollar
limit is $500,000 and the investment limit is $2 million. The new law makes
no changes to these limits for 2010 and 2011. However, the dollar limit will
fall to $125,000 (indexed for inflation) and the investment limit will fall
to $500,000 (indexed for inflation) for tax years beginning in 2012 (and
sunsetting after December 31, 2012). The 2012 amounts, while reduced from
2010 and 2011, are still above the amounts that would have been in place for
2012 absent the new law ($25,000/$200,000 respectively).
For 2010 and
2011, special rules apply to qualified real property. Taxpayers can elect up
to $250,000 of the $500,000 dollar limit for qualified leasehold improvement
property, qualified restaurant property and qualified retail improvement
property. The new law does not extend these special rules beyond 2011. The
new law does renew a 15-year recovery period for qualified leasehold
improvement property, qualified restaurant property and qualified retail
improvement property for 2010 and 2011.
Payroll tax cut. The new law
reduces an employee’s share of Social Security taxes (the OASDI portion)
from 6.2 percent to 4.2 percent up to the taxable maximum amount of $106,800
for calendar year 2011. The new law does not reduce the employer’s share,
which remains at 6.2 percent for 2011. Self-employed individuals, including
independent contractors with which a business may contract, are also
entitled to a 2 percentage point reduction in payroll taxes, from 12.4
percent to 10.4 percent.
The IRS has instructed employers to start
using new withholding tables and reducing the amount of Social Security tax
withheld as soon as possible in 2011 but no later than January 31, 2011. The
IRS also instructed employers to make any offsetting adjustments in an
employee’s pay for Social Security over-withheld during January as soon as
possible but no later than March 31, 2011.
The new law does not
extend payroll tax forgiveness for qualified new hires. This incentive was
part of the Hiring Incentives to Restore Employment (HIRE) Act of 2010 and
will expire, as scheduled, after 2010. Under the HIRE Act, qualified
employers do not have to pay their share of OASDI for a covered employee’s
employment from the day after March 18, 2010 through December 31, 2010. The
HIRE Act also provides for a worker retention credit, which qualified
employers may be able to claim if the covered employee works a certain
number of weeks and meets other requirements. If you have any questions
about the interaction between the HIRE Act and the new law, please contact
our office.
Tax brackets. Businesses owners, such as sole
proprietors, who are taxed at the individual tax rates will benefit from an
extension of reduced individual tax rates. The new law extends for two years
(2011 and 2012) the current individual tax rates of 10, 15, 25, 28, 33, and
35 percent). Absent the new law, all of the rates would have risen with the
top two rates increasing from 33 and 35 percent to 36 and 39.6 percent
respectively.
Estate tax. Under the new law, the federal estate tax
will again apply to the estates of decedents dying after December 31, 2009
and before January 1, 2013. The new law sets a maximum estate tax rate of 35
percent with a $5 million exclusion ($10 million for married couples).
Additionally, executors of estates of individuals who died in 2010 can elect
out of the estate tax (and apply modified carryover basis rules) or can
elect to have the estate tax apply.
Research tax credit. In recent
years, Congress has come close to making the Code Sec. 41 research tax
credit permanent but the cost of a permanent credit has been prohibitive.
The new law renews the credit, which expired at the end of 2009, for 2010
and 2011.
Work Opportunity Tax Credit. The Work Opportunity Tax
Credit (WOTC) rewards employers that hire economically-disadvantaged
individuals and individuals from groups with historically high rates of
unemployment. The WOTC was scheduled to expire after
August 31, 2011.
The new law extends the WOTC through the end of 2011. However, the new law
does not extend two groups that were added to the credit in 2009 (unemployed
veterans and disconnected youth).
Energy. Recent laws have used the
Tax Code to encourage the development and production of alternative fuels,
such as energy from wind and biomass. Many of these incentives are
temporary. The new law extends, renews or enhances some of the incentives,
including:
• Grants for certain alternative energy property in lieu
of tax credits
• Tax credits for biodiesel and renewable diesel fuel
• Tax credit for refined coal facilities
• Percentage depletion for oil
and gas from marginal wells
• Special tax incentives for builders of
energy-efficient homes
• And more
Business tax extenders. A
package of business tax incentives, known as extenders because they
regularly expire and are regularly extended, is renewed by the new law. They
include:
• Differential wage credit
• New Markets Tax Credit
(with modifications)
• Brownfields remediation
• Tax treatment of
certain dividends of RICs and certain investments of RICs
• Active
financing exception/look-through treatment for CFCs
• Tax incentives for
empowerment zones and the District of Columbia
• Indian employment
credit
• Railroad track maintenance credit
• Mine rescue training
credit
• Code Sec. 199 deduction for Puerto Rico
• Five-year
write-off of farm machinery
• Accelerated depreciation for business
property on an Indian reservation
• And more
What’s not included.
Despite significant support in Congress, the new law does not repeal a
controversial expansion of information reporting. The Patient Protection and
Affordable Care Act of 2010 requires businesses to report payments for
property and payments to corporations aggregating $600 or more in a calendar
year made after December 31, 2011. Congress may revisit this requirement
before the effective date. The new law also does not lower the corporate tax
rate, another proposal that could be addressed in the future.
The new
law extends, renews or enhances a large number of tax incentives targeted to
businesses. Please contact our office if you have any questions about the
provisions we have discussed or any of the measures in the new law. Our
office can help you plan a strategy that maximizes your tax savings.
Back to the Top
BENEFITS FOR INDIVIDUALS
Back to the Top
Dear Client:
Many individuals entered 2010
uncertain over the fate of federal tax incentives scheduled to expire at
year-end. On December 17, President Obama signed the Tax Relief,
Unemployment Insurance Reauthorization and Job Creation Act of 2010 (H.R.
4853) after passage by the Senate on December 15 and the House on December
16. The new law extends, renews or enhances a large number of individual tax
incentives, among the most far reaching being reduced individual income tax
rates and an across-the board payroll tax cut for 2011. This letter
highlights the key individual tax incentives in the new law. As always,
please contact our office for more details.
Individual tax rates.
Reduced individual tax rates put in place in 2001 were scheduled to expire
after 2010. The new law extends the reduced rates for two years. The current
rate brackets (10, 15, 25, 28, 33 and 35 percent) remain unchanged for 2011
and 2012. The new law also extends full repeal of the itemized deduction
limitation and full repeal of the personal exemption phase-out, both
scheduled to expire after 2010, for two years.
The extension of the
reduced individual tax rates is significant. If the old rates had returned,
the top two rates would have jumped from 33 and 35 percent to 36 and 39.6
percent, respectively. The current 10 percent rate would have disappeared.
Additionally, marriage penalty relief in the form of an expanded 15 percent
rate bracket would also have expired.
AMT relief. Along with
extending these rate cuts, the new law targets relief to taxpayers facing
the alternative minimum tax (AMT). Because the AMT is not indexed for
inflation, and for other reasons, the tax steadily encroaches on middle
income taxpayers. The new law stops this encroachment by giving individuals
higher exemption amounts and providing other targeted relief. The reach of
the AMT often surprises individuals. While the provisions in the new law are
helpful, it is also important to plan strategically for the AMT. Unlike the
income tax rates, the higher AMT exemption had already expired at the end of
2009 before the new law stepped in to save it. Its two-year extension,
therefore, expires earlier, at the end of 2011.
Payroll tax cut.
Social Security is financed through a dedicated payroll tax. Employers and
employees each pay 6.2 percent of wages up to the taxable maximum of
$106,800 (in 2010 and 2011), while self-employed individuals pay 12.4
percent. Effective for calendar year 2010, the new law reduces the
employee-share from 6.2 percent to 4.2 percent up to the taxable maximum.
The employer-share remains unchanged. Self-employed individuals will pay
10.4 percent on self-employment income up to the taxable maximum. The
reduction has no effect on an individual’s future Social Security benefits.
Let’s look at an example.
Tyler, who is single, earns $106,800
(the maximum taxable wage). For 2011, the new law reduces Tyler’s share of
Social Security taxes on his earnings to 4.2 percent. Tyler will see $2,136
in savings for 2011.
The payroll tax cut replaces the Making Work
Pay credit, which temporarily reduced income tax withholding in 2009 and
2010. The Making Work Pay credit phased-out for higher-income individuals.
The payroll tax cut is across-the-board (up to the taxable maximum of
$106,800).
Shortly after the new law was passed, the IRS instructed
employers to start reducing the amount of Social Security tax withheld as
soon as possible in 2011 but no later than January 31, 2011. For any Social
Security tax over-withheld in January, employers should make an offsetting
adjustment in an individual’s pay no later than March 31, 2011.
The
payroll tax cut opens up some tax planning opportunities for individuals.
The savings could be contributed to an IRA or another retirement savings
vehicle, thereby compounding available tax benefits. The savings also could
be used to help fund a Coverdell education savings account. Please contact
our office for details.
Capital gains/dividends. In 2003, Congress
set new maximum tax rates for qualified capital gains and dividends but,
like the individual rate cuts, these taxpayer-friendly rates were temporary.
For 2010, the maximum tax rate is 15 percent (zero percent for individuals
in the 10 and 15 percent tax brackets). The new law extends these rates for
two years, through December 31, 2012. In a related development, the new law
extends the temporary 100 percent exclusion of gain on certain small
business stock.
Child tax credit. Many individuals enjoy the benefit
of the $1,000 per child tax credit. Without the new law, the child tax
credit would have dropped to $500 for 2011. The new law extends the $1,000
credit and keeps the refundability threshold at $3,000 for 2011 and 2012. In
related developments, the new law also extends some enhancements to the
earned income tax credit and the adoption credit for two years.
Estate tax. Under the new law, the federal estate tax will again apply to
the estates of decedents dying after December 31, 2009 and before January 1,
2013. The new law sets a maximum estate tax rate of 35 percent with a $5
million exclusion ($10 million for married couples). Additionally, executors
of estates of individuals who died in 2010 can elect out of the estate tax
(and apply modified carryover basis rules) or can elect to have the estate
tax apply. This election, and many of the other estate tax provisions in the
new law, is very technical. Besides the estate tax, there are provisions in
the new law extending and modifying the federal gift tax and the federal
generation skipping transfer (GST) tax. Please contact our office so we can
discuss how these changes will affect your estate planning.
Education. A variety of tax incentives are available to help save for and
finance education costs. Like so many incentives, they are temporary. The
new law extends some of the most popular education tax incentives. They
include:
• American Opportunity Tax Credit
• Higher education
tuition deduction
• Student loan interest deduction
• Exclusion for
employer-provided educational assistance
• Enhancements to Coverdell
education savings accounts
• Special rules for certain scholarships
The education incentives in the Tax Code are among the most complex.
Often, taxpayers will mistakenly believe they cannot claim more than one or
they may inadvertently claim ones they should not. Our office can help you
sort through the complexity of the federal education tax incentives.
Energy. Individuals who made some energy-efficient improvements in 2009 or
2010 may have benefitted from a special tax break. This tax incentive
rewarded individuals who installed energy-efficient windows, doors,
furnaces, and other items in their homes. The credit, while very valuable,
was also very complex. The new law extends the credit but also adds to the
complexity by reinstating rules for the credit in place before 2009. The
complexity is certain to confuse taxpayers. Please contact our office if you
are planning to install new windows, doors, heating or cooling systems, or
other energy-efficient items so you do not miss out on this tax break.
More incentives. The new law extends many valuable but temporary tax
incentives for individuals. They include the state and local sales tax
deduction, the teacher’s classroom expense deduction, and special rules for
individuals who contribute IRA proceeds to charity. Keep in mind that not
all of the expired temporary individual tax incentives were extended. Among
the incentives not extended are the additional standard deduction for real
property taxes, the $2,400 exclusion for unemployment benefits, the
first-time homebuyer tax credit, COBRA premium assistance, and some others.
If you have any questions about which incentives were extended, please
contact our office.
The new law provides many options for tax
planning for 2011, 2012 and beyond. Please contact our office and we can
discuss how you can maximize your tax savings.
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The above information is from CCH, a Wolters
Kluwer business.
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