The news has been abuzz recently with new tax legislation passed by Congress and approved by the President. This newsletter will explain in more detail a substantial part of the content of the recently passed tax legislation and how the new relief provisions may affect you.
On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the Act). The law extends Bush-era tax cuts, temporarily extends unemployment insurance benefits and includes other temporary tax breaks for businesses and individuals. However, the Law does not include any income compensation.
The staff of the Joint Committee on Taxation estimate that the Act will deliver $801 billion in tax and $56 billion in direct spending benefits over 10 years.
Summary of the provisions of the Law
• Extension of the current personal income tax rates for two years until 2012.
•Extension of a greater exemption from the alternative minimum tax (AMT) and granting of non-refundable personal credits against the AMT for 2010 and 2011
•Temporary relief from estate tax with a $5 million exemption per person and rates up to 35 percent with 2010 elections.
•Extension of the 50 percent depreciation allowance through 2012 and a 100 percent expense allowance for properties placed in service after September 8, 2010 through 2011.
•A one-year reduction in the employee’s share of the social security tax from 6.2 percent to 4.2 percent.
•Extension through 2011 of provisions that expired at the end of 2010, including the research and experimentation credit and the section 1603 credit that provides grants for energy property in lieu of production or investment tax credits.
individuals
Individual tax rates
The Act extends all individual tax rates to 10, 15, 28, 33, and 35 percent for two years, through December 31, 2012. After the expiration of these tax rate extensions, the maximum individual tax rate will increase to 39 .6 percent.
The higher individual tax rate in 2013 does not include the rate increases enacted by the Patient Protection and Affordable Care Act of 2010. This increase includes an additional 0.9 percent tax on Medicare hospital insurance for individuals self-employed and employed and a Medicare tax on unearned income of 3.8 percent on certain investment income.
Capital Gains / Dividends
During 2010, qualified capital gains and dividends were taxed at a maximum rate of 15 percent (zero percent for taxpayers in the 10 and 15 percent income tax brackets). The Act continues this treatment for two years, until December 31, 2012. In addition, qualified dividend rates will remain at 15 percent for the next two years. Qualified dividends are dividends received from a domestic corporation or a qualified foreign corporation.
Itemized Deduction Limitation
The Act extends the full repeal of the Pease limitation, through December 31, 2012. The Pease limitation reduces the total amount of allowable deductions for a higher-income individual.
Marriage penalty relief
Previously, some dual-income couples experienced a “marriage penalty,” meaning their joint tax liability was greater than the sum of their separate individual tax liability (calculated as if they were single). The relief from the marriage penalty is an increase in the basic standard deduction for a married couple filing jointly to double the amount for a single person and an expansion in the 15 percent bracket for joint filers to twice that amount. for single taxpayers. The Act extends this relief from the current marriage penalty for two years, until December 31, 2012.
Child Tax Credit
The Act extends through 2012 the child tax credit amendments made by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the American Recovery and Reinvestment Act of 2009 (ARRA). Under EGGTRA, the credit was increased from $500 to $1,000, taxpayers were able to claim the credit in full against the AMT, and families with fewer than three children were able to claim the credit. Under ARRA, the threshold for claiming the refundable credit was lowered to $3,000 of earned income.
Alternative Minimum Tax Relief
The Act provides an AMT “patch” intended to prevent the AMT from encroaching on middle-income taxpayers by providing higher exemption amounts and other targeted relief for 2010 and 2011. The Act increases the exemption amounts for 2010 to $47,450 for individual filers, $72,450 for married taxpayers filing jointly and surviving spouses, and $36,225 for married couples filing separately.
Payroll Tax Reduction
The Law includes a new temporary reduction of the Social Security payroll tax for employed and self-employed workers. Consequently, the rates of 6.2 percent and 12.4 percent applicable under current legislation to employed and self-employed workers are reduced, respectively, to 4.2 and 10.4 percent for 2011. Employees will benefit from the payroll tax moratorium through reduced withholdings. Self-employed individuals can reflect the reduced rates in their estimated tax payments.
Planning Considerations
With the withholding of the tax cuts, the tax planning methods used by taxpayers over the years will remain largely the same. Tax planning will focus on the specific circumstances of the individual rather than issues related to changing income tax rates.
Those with substantial investment income can now make decisions about rebalancing investment portfolios with confidence about the tax impact of earning dividend or capital appreciation income. Because tax rates are fixed for the next two years, other tax planning issues such as accelerating income or deferring deductions lose relevance in the short term. This may all change when the tax extensions expire in 2 years.
Business Incentives
additional depreciation
The Act increases the additional depreciation from 50 percent to 100 percent for qualified investments made after September 8, 2010 and before January 1, 2012. The Act also makes the additional 50 percent depreciation available for qualified properties placed in service after December 31, 2011, and before January 1, 2013. Certain long-term properties and transportation property are eligible for a 100 percent spend if placed in service before January 1, 2013. 2013.
The Act provides for another temporary election to claim a refundable credit in lieu of additional depreciation for property placed in service during 2011 and 2012. This election allows corporations to monetize a portion of their AMT credit (if originally generated in tax years that started before 2006) instead of claiming the additional depreciation.
State tax implications
Taxpayers operating in states that do not follow federal bonus depreciation rules will face increased complexity of state tax filings and provisions and will need to maintain detailed records so state and federal differences can be reconciled.
Section 179 Limitation
The Small Business Jobs Act of 2010 increased the investment and dollar limits of section 179 to $500,000 and $2 million, respectively, for 2010 and 2011.
The Act provides an additional year of increased section 179 spending, but at levels lower than those in effect for 2010 and 2011. For fiscal years beginning in 2012, the limitation increases to $125,000 and the reduction begins at $500,000. Those amounts will revert to $25,000 and $200,000, respectively, after 2012.
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This publication is intended for general information purposes. It does not constitute legal advice. The reader should consult with expert legal counsel to determine how applicable laws apply to specific situations. The articles in this publication are based on the most current information available at the time of writing. Since the law and other circumstances may have changed since this posting, please call us to discuss any action you may be considering as a result of reading an article.