Extension of Bush Tax Cuts

The 2010 Tax Relief Act extends for two years the Bush-era tax cuts, provides significant estate tax relief, and includes a two-year AMT “patch.” It also contains important new tax breaks for businesses and individuals, including 100% first-year write-offs of qualifying property placed in service after Sept. 8, 2010 and before Jan. 1, 2012, and a payroll/self-employment tax cut of two percentage points for 2011 for employees and self-employed individuals, plus a host of extenders for businesses and individuals.

Tax rates

The income tax rates for individuals will stay at 10%, 15%, 25%, 28%, 33% and 35% (instead of moving to 15%, 28%, 31%, 36% and 39.6%). Additionally, the size of the 15% tax bracket for joint filers and qualified surviving spouses will remain at 200% (instead of dropping to 167%) of the 15% tax bracket for individual filers.

Standard Deduction

Under the Senate passed 2010 Tax Reform Act, the standard deduction for married taxpayers filing jointly (and qualified surviving spouses) remains at 200% (rather than 167%) of the standard deduction for single taxpayers for 2011. For marrieds filing a joint return (or surviving spouses), the standard deduction will be $11,600 (up from $11,400 for 2010); for marrieds filing separately, it will be $5,800.  This might affect your estimated income tax.

Phase Out of Itemized Deductions and Personal Exemptions

Itemized deductions of higher-income taxpayers will not be reduced when adjusted gross income exceeds certain thresholds. Also, a higher-income taxpayer’s personal exemptions will not be phased out under similar rules. For 2011 the personal exemption amount will be $3,700 (up from $3,650 for 2010).

Long Term Capital Gains Rates and Qualified Dividends

Through Dec. 31, 2012, long-term capital gain with a few limited exceptions, will continue to be taxed at a maximum rate of 15%. Qualified dividends will also be taxed at a long term capital gain rate rather than at ordinary income rates through this period.

Alternative Minimum Tax (AMT) “Patched” for Two Years

The Act includes a two year fix on the Alternative Minimum Tax which slightly increases the threshold beyond current levels at which the AMT would apply to taxpayers. This change protects millions of Americans who would have been subject to this tax for the first time.  This could lead to less complicated tax filing.

Estate Tax Relief

Under the Bush Tax cuts, the estate and generation-skipping transfer taxes phased out so that they were fully repealed in 2010, lowered the gift tax rate to 35% and increased the gift tax exemption to $1 million for 2010. Under old rules, the estate tax was set to return in 2011, with the top estate and gift tax rate reverting to 55%. The Senate passed 2010

Tax Relief Act makes the following changes:
• Lowers estate and GST taxes for 2011 and 2012 by increasing the exemption amount from $1 million to $5 million and reduces the top rate from 55% to 35%.
• Allows estates of decedents dying in 2010 to choose between (1) estate tax (based on a $5 million exemption and 35% top rate) and a step-up in basis or (2) no estate tax and modified carryover basis. In technical terms, the Act achieves this choice by making the estate tax and basis changes effective retroactively for estates of decedents dying after 2009 but allowing the opt-out choice for estates of decedents dying in 2010.
• For gifts made after Dec. 31, 2010, reunifies the gift tax with the estate tax, with an applicable exclusion amount of $5 million and a top estate and gift tax rate of 35%.
• Effective for estates of decedents dying after Dec. 31, 2010, allows the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse.

Incentives for Businesses to Invest in Machinery and Equipment

The Senate passed 2010 Tax Relief Act OKs the following major new incentives for businesses to invest in machinery and equipment:

1. A 100% write-off in the placed-in-service year of the cost of property eligible for bonus depreciation.. This will apply for property acquired and placed in service after Sept. 8, 2010, and before Jan. 1, 2012;

2. A 50% bonus first-year depreciation for property placed in service after Dec. 31, 2011, and before Jan. 1, 2013;

3. For tax years beginning after Dec. 31, 2011, setting the maximum expensing amount under Code Sec. 179 at $125,000 and the investment-based phaseout amount at $500,000 Also, off-the-shelf computer software will qualify for the Code Sec. 179 election if placed in service in a tax year beginning before 2013.

Temporary Employee/Self-Employed Payroll Tax Cut for 2011

Under current law, employees pay a 6.2% Social Security tax on all wages earned up to $106,800 (in 2011) and self-employed individuals pay 12.4% Social Security selfemployment taxes on all their self-employment income up to the same threshold. For 2011, the Senate passed 2010 Tax Reform Act gives a two-percentage-point payroll/selfemployment tax holiday for employees and self-employeds. As a result, employees will pay only 4.2% Social Security tax on wages and self-employment individuals will pay only 10.4% Social Security self-employment taxes on self-employment income up to the threshold.

List of Tax Breaks for Individuals Retroactively Reinstated and Extended Through 2011

All of the following tax breaks for individuals that expired at the end of 2009 will be retroactively reinstated and extended through 2011:

• the $250 above-the-line deduction for certain expenses of elementary and secondary school teachers;
• the election to take an itemized deduction for State and local general sales taxes in lieu of the itemized deduction permitted for State and local income taxes;
• increased contribution limits and carryforward period for contributions of appreciated real property (including partial interests in real property) for conservation purposes;
• the above-the-line deduction for qualified tuition and related expenses;
• the provision that permits taxpayers age 70 1/2 or older to make tax-free distributions to charity from an Individual Retirement Account (IRA) of up to $100,000 per taxpayer, per tax year (additionally, individuals will be allowed to treat IRA transfers to charities during January of 2011 and as if made during 2010);
• look-thru of certain RIC stock in determining gross estate of nonresidents; and
• disregard of refunds in the administration of federal or federally assisted benefit programs.

Other Individual Tax Breaks Extended Through 2011

The following tax breaks for individuals that were set to expire at the end of 2010 will be extended through 2011:

• the increase in the monthly exclusion for employer-provided transit and vanpool benefits equal to that of the exclusion for employer-provided parking benefits (i.e., $230 per month);
• treatment of mortgage insurance premiums as deductible qualified residence
interest; and
• exclusion of 100% of gain on certain small business stock.

Other Provisions Extended Through 2011

The list of energy-related provisions that will be extended through 2011 are:

• the $1.00 per gallon production tax credit for biodiesel, as well as the small agribiodiesel producer credit of 10 cents per gallon;
• the $1.00 per gallon production tax credit for diesel fuel created from biomass;
• the placed-in-service deadline for qualifying refined coal facilities;
• the credit for manufacturers of energy-efficient residential homes;
• the $0.50 per gallon alternative fuel tax credit (but the credit will not be extended for any liquid fuel derived from a pulp or paper manufacturing process);
• deferral of gain on qualified electric utilities’ sales or dispositions of electric transmission property;
• the suspension on the taxable income limit for purposes of depleting a marginal oil or gas well;
• grants for specified energy property in lieu of tax credits;
• the income tax credit for alcohol used as fuel;
• the reduced credit for ethanol blenders;
• the excise tax credit for alcohol used as fuel;
• the payment for alcohol fuel mixture;
• additional duties on imported ethanol;
• the energy efficient appliance credits (in new amounts and with new requirements);
• the Code Sec. 25C credit for energy-efficient improvements to existing homes, but reinstating the credit as it existed before passage of the American Recovery and Reinvestment Act (standards for property eligible under Code Sec. 25C are updated to reflect improvements in energy efficiency));
• the 30% investment tax credit for alternative vehicle refueling property.

The following disaster relief provisions will also be extended through 2011:

The list of energy-related provisions that will be extended through 2011 are:

• the increased rehabilitation credit for qualified expenditures in the Gulf Opportunity Zone (GO Zone);
• the placed-in-service deadline to claim additional low-income housing credits for buildings in GO Zones;
• tax-exempt bond financing; and
• the additional depreciation deduction claimed by businesses equal to 50% of the cost of new property investments made in the GO Zone (expenditures in 2011 will be eligible if the property is placed in service by Dec. 31, 2011).

The Bottom Line

Educate yourself; get prepared; make some decisions for today and make some decisions for tomorrow BUT ABOVE ALL ELSE HAVE A PLAN.

If you like what you have read or have a question, please COMMENT below!