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January, 2011 Tax Tips and News

Finally, We Have Clarity About the Tax Law for Two More Years (We Think!)

Just when it seemed possible that the pre-Bush lax law would be restored by default, On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (Law).  The law’s cost is $858 billion, of which around $700 billion is targeted toward individual tax breaks.  The following is a summary of the more important features of the law:

Extension of Tax Rates– Individual tax rates had been scheduled to increase from their rates of 10, 15, 25, 28, 33, and 35% to 15, 28, 31, 36, and 39.6% in 2011.  The current rates have been extended through 2012.

Alternative Minimum Tax– The law contains a two year extension of the current AMT exclusion.  For the past several years through 2009 the exclusion had been patched by late Congressional action to prevent many taxpayers from becoming subject to the AMT.  This was scheduled to expire on December 31, 2009.  The current exclusion (which is subject to an annual inflationary adjustment) has been extended through December 31, 2011.

Payroll Tax Credit – For2011 only the law reduces the employee’s portion of FICA taxes from 6.2% to 4.2%.  An employee earning the maximum amount subject to Social Security tax ($106,800) will see their FICA tax reduced by $2,136.  Married couples with both spouses working and earning the maximum will see double the benefit.  Self-employed persons who currently pay 12.4% in FICA taxes will only pay 10.4% in 2011.  Note:  The law has no effect on either the Medicare portion of Social Security taxes, or the employer’s share of the 6.2% FICA tax.

Investment Income– Long term capital gains and dividends will continue to be taxed at the current maximum rate of 15% through 2012.

Itemized Deduction and Personal Exemption Limitation– Both itemized deductions and personal exemption will not be subject to phase-out through 2012.

Individual Tax Extenders– The law extends a number of temporary individual tax incentives, which were scheduled to expire on December 31, 2009, through 2011.  They include the state and local sales tax deduction, Higher education tuition deduction, teacher’s classroom expense deduction, and charitable contribution of IRA proceeds.

Real Estate Tax for Non-Itemizers– One provision that DID NOT get extended in the law was the $500 ($1,000 for married couples) enhanced standard deduction for non-itemizers.  That benefit expired on December 31, 2009.

Marriage Penalty– This penalty, which was scheduled to expire on December 31, 2010, has been extended through 2012 by increasing the standard deduction for married couples and increasing the of joint rate brackets.

Bonus Depreciation– Bonus depreciation for investment in qualifying business property made after September 8, 2010 through December 31, 2011 will be eligible for 100% bonus depreciation.  Property placed in service in 2012 will be eligible for 50% bonus depreciation.  Unlike Sec. 179 expensing (see below), bonus depreciation is not limited to use by smaller businesses or capped at a certain dollar level.

Sec. 179 Expensing– Congress has repeatedly increased the dollar and investment limits under Code Sec. 179 to encourage business spending. The Small Business Jobs Act, passed in September, 2010, increased the Sec. 179 dollar and investment limits to $500,000 and $2 million, respectively for tax years beginning in 2010 and 2011.  The law provides for a $125,000 dollar limit and a $500,000 investment limit (both indexed for inflation) for tax years beginning and ending in 2012.  The law also treats off-the-shelf computer software as qualifying property if placed in service before 2013.

Research Tax Credit– The research tax credit that had expired on December 31, 2009, was extended through 2011.

Estate Tax– There will be no George Steinbrenners In 2011 and 2012, as it will again cost to die.   For those years the maximum estate tax rate will be 35% with an exemption amount of $5 million.



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