After much dissention and debate, Congress finally agreed to approve a temporary Bush Tax cut extension (through 2012 unless otherwise stated) for ‘everyone’ and extend unemployment benefits. On December 17, 2010 President Obama signed into law the final compromise officially known as the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. Below is a summary of what impact this bill will have on you and/or your business.
Individuals
Taxes
1. Temporary 2% reduction in employee-paid social security taxes on all wages and self-employment income for 2011.
2. Extension of the 10% income tax bracket that was set to expire at the end of 2010. Without the extension the lowest tax rate would have been 15%.
3. Extension of the 15%, 25%, 28%, 33% and 35% tax bracket. These rates were set to expire at the end of 2010, returning to the prior tax rates of 15%, 28%, 31%, 36% and 39.6%.
4. Extension of the repeal of the personal exemption phase-out. A personal exemption is allowed per person but subject to AGI limitations. The EGTRRA repealed the phase-out rules for 2010 and this bill extends it for an additional 2 years.
5. The current capital gains and dividend rates of zero percent for taxpayers below the 25% tax bracket and 15% for others has been extended.
6. Extension of the marriage penalty relief for the standard deduction, the 15 percent tax bracket, and the Earned Income Tax Credit.
7. Extension of the AMT “patch” for 2010 and 2011.
8. Exclusion of up to $5,250 per year in employer-provided education assistance extended.
Tax Deductions
9. Extension of the $250 above-the-line tax deduction for expenses teachers incur for books, supplies, and other equipment used in classroom. The extension applies to 2010 and 2011.
10. Extension through 2011 of the election to use the sales tax deduction in lieu of state and local income tax deduction for itemizers.
11. Extension through 2011 of the above-the-line deduction for qualified education expenses.
12. Extension of tax-free distributions to charities from an IRA of up to $100,000 through 2011. The new law also allows charitable transfers during January 2011 to be treated as being made in 2010.
13. Extension of the repeal of the itemized deduction limitation. In general, a taxpayer’s itemized deductions could be limited in their AGI is over a certain limit. EGTRRA repealed these limitations and the bill extends the repeal for an additional 2 years.
14. Deduction of qualified mortgage insurance premiums extended for one year.
Tax Credits
15. Extension of the current ‘child tax credit’ of $1,000 for each child under 17 years old.
16. Extension of the ‘dependent care credit’ increase of $3,000 for one child and $6,000 for two or more children. This extension also applies to the increased dependent care credit percentage of 35%.
17. Extension of the increased adoption tax credit and adoption assistance programs exclusion.
18. Extension of the expanded Earned Income Tax Credit.
19. Extension of education incentives and credits.
a. Allowed annual contribution of $2000 to Coverdell Education Savings Accounts. This extension also applies to the expanded definition of education expenses which includes elementary and secondary school expenses.
b. Expanded exclusion for employer-provided educational assistance.
c. Expanded student loan interest deduction.
d. Extension of American Opportunity Tax Credit. This credit is available for up to $2,500 of qualified education expenses in which 45% of the credit is refundable.
20. Extension of energy-efficient improvements to existing homes through 2011. However, the 2010 Tax Relief Act returns the credit to its pre-2009 Recovery Act limits.
Unemployment
21. Extension of federal unemployment benefits for 13 months.
Estate Tax and Gift Tax
22. The maximum estate (including the gift and generation-skipping transfer tax) tax rate is 35% with an exclusion amount of $5 million per person and $10 million per couple. This estate tax is for decedents dying after December 31, 2009. This tax eliminates the need for the modified carryover basis for estates arising in 2010 and is replaced with the stepped-up basis rules. However, for 2010 only, an election can be made to not come under the new estate tax and use the modified carryover basis rules.
23. The executor of a deceased spouse’s estate can elect to transfer any unused emption amount to the surviving spouse. The election is available for decedents dying after December 31, 2010.
24. For gifts made after 2010, the gift tax is reunified with the estate tax.
25. For 2010, the 2010 Tax Act provides a $5 million exemption with a generation-skipping transfer tax of zero percent.
For additional extensions for individuals click here
Businesses
Depreciation
1. Increase of the 50% bonus depreciation to 100% for new business equipment placed in service after September 8, 2010 through December 31, 2011. Extension of the 50% bonus depreciation for investments placed in service after December 31, 2011 through December 31, 2012.
2. Extension of the provision for taxpayers to elect to accelerate some AMT credits in lieu of bonus depreciation.
3. For taxable years beginning in 2012, the Code Sec. 179 expensing (election to deduct the costs of certain property in the year placed in service rather than depreciate over time) is increased to $125,000 with an investment limit of $500,000. Without this bill the thresholds were scheduled to revert back to the $25,000/$200,000 for tax years beginning in 2012. This bill does not include an extension on Sec 179 expensing for qualified real property.
4. Extension of the 15-year costs recovery period for certain leasehold improvements, restaurant buildings and improvements, and retail improvements through 2011.
Credits and Deductions
5. Extension of Research and Development credit through December 31, 2011.
6. Extension through December 31, 2011 of the Work opportunity tax credit allowing a 40% credit on the first $6,000 of wages paid to new hires from targeted groups. The program was set to expire August 31, 2011. The 2010 Tax Relief Act does not extend the credit for unemployed veterans and disconnected youth.
7. Extension of the provision allowing certain businesses the enhanced deduction for the donation of certain property (food inventory and book inventory or computer equipment for schools) through 2011.
8. Extension through 2011 of the provision allowing S Corporation shareholders to take into account their share of the charitable deductions even if the deduction exceeds the shareholder’s basis.
9. Extension of Energy Credits and Incentives
a. Energy efficient appliance credit extended through 2011.
b. Credit for builders and manufactures of energy efficient residential home extended through 2011.
c. Investment credit of 30% for alternative vehicle refueling property extended through 2011.
d. For additional energy credits extension click here.
Employers and Tax
10. The 2010 Tax Relief Act provides a temporary 2% reduction in employee-paid social security taxes on all wages for 2011. The employer’s share remains the same (6.2%). The IRS has released new withholding tables and employers are expected to start using the new tables and reducing the social security tax no later than January 31, 2011. See Notice 1036 for the new tables.
11. Extension of the provision of employers to receive a credit for constructing property used for a child care facility.
12. Extension through 2011 of the monthly exclusion (currently $230) for employer-provided transit benefits. These benefits may be realized as a tax free fringe benefit.
13. Extension of the 100% exclusion of the gain from the sale of small business stock held more than five years acquired before January 1, 2012.
For additional extensions for businesses click here
Recent Comments