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Highlights of the 2010 Tax Relief Act
The 2010 Tax Relief Act provides (1) two-year sunset relief that protects key tax breaks for individuals, (2) retroactive reinstatement and extension of tax breaks for individuals, (3) economic stimulus incentives, (4) retroactive reinstatement and extension of business tax breaks, and (5) significant estate and gift tax relief.
INDIVIDUAL TAX RELIEF IRS Quick Facts
2010 Tax Relief Act extends reduced individual tax rates for two years. Under Sec. 101 of the 2010 Tax Relief Act, the tax rate schedules for individuals will remain at 10%, 15%, 25%, 28%, 33% and 35% for two additional years, through 2012. In addition, the size of the 15% tax bracket for joint filers and qualified surviving spouses will remain at 200% of the 15% tax bracket for individual filers through 2012.
2010 Tax Relief Act extends increased standard deduction amounts for two years. Under Sec. 101 of the 2010 Tax Relief Act, the standard deduction for married taxpayers filing jointly (and qualified surviving spouses) remains at 200% of the standard deduction for single taxpayers for two additional years, through 2012.
Personal exemptions and itemized deductions are no longer phased out. For 2010 (and for 2011 and 2012), no overall income limits for personal and dependency exemptions and itemized deductions apply. Limitations continue to apply to particular itemized deductions, such as medical and dental expenses, certain miscellaneous itemized deductions, and casualty and theft losses.
2010 Tax Relief Act extends the reduced capital gains and qualified dividends rate for two years.
Capital gain. For tax years beginning in 2010, for both regular tax and AMT purposes, the maximum rate of tax on the adjusted net capital gain of an individual is 15%. If the adjusted net capital gain would otherwise be taxed at a rate below 25% if it were ordinary income, it is taxed at a 0% rate. That part of net capital gain attributable to unrecaptured section 1250 gain (i.e., gain attributable to real estate depreciation) is taxed at a maximum rate of 25%. Net capital gain attributable to collectibles gain and section 1202 gain is taxed at a maximum rate of 28%.
Qualified dividend income. For tax years beginning in 2010, for both the regular tax and AMT purposes, an individual's qualified dividend income is taxed at the same rates that apply to net capital gain. Thus, an individual's qualified dividend income is taxed at a 15% and (for qualified dividend income which otherwise would be taxed at a 10% or 15% rate if the special rates did not apply) at a zero rate. The amount of a taxpayer's unrecaptured section 1250 gain taxed at a maximum 25% rate is limited to the taxpayer's net capital gain determined without regard to the taxpayer's qualified dividend income. (In addition, a taxpayer must hold stock for at least 61 days during the 121-day period beginning 60 days before the ex-dividend date in order for dividends on the stock to qualify as qualified dividend income.)
Under Sec. 102 of the 2010 Tax Relief Act, adjusted net capital gain will be taxed at a maximum rate of 0/15% for two additional years, through 2012. A qualified dividend paid to individuals will be taxed at the same rates as adjusted net capital gain through 2012. In addition, the 2010 Tax Relief Act also extends for two years, through 2012, the rules excluding qualified dividend income from net capital gain in computing unrecaptured section 1250 gain taxed at a 25% rate; and the holding period rule for determining when dividends on stock qualify as qualified dividend income.
AMT exemption is increased. For tax year 2010, the alternative minimum tax (AMT) exemption increases to: $72,450 for a married couple filing a joint return and qualifying widows and widowers; $36,225 for a married person filing separately; and $47,450 for singles and heads of household. The 2010 Tax Relief Act patches the AMT exemption amounts for 2010 and 2011.
Tax Relief Act extends the expanded child tax credit for two years. Under Secs. 101 and 103 of the 2010 Tax Relief Act, the $1,000 child tax credit is extended and allowed to be used against regular income tax and the AMT for two years, through 2012. The formula for determining the refundable child credit, with the earned income threshold of $3,000 (but not adjusted for inflation) is extended for two years, through 2012.
2010 Tax Relief Act extends the expanded dependent care tax credit for two years. A dependent care tax credit may be claimed in 2010 by an individual who has one or more qualifying individuals and incurs employment-related expenses enabling him to be gainfully employed. For 2010, the maximum dependent care tax credit is $1,050 (35% of up to $3,000 of eligible expenses) if there is one qualifying individual, and $2,100 (35% of up to $6,000 of eligible expenses) if there are two or more qualifying individuals. The 35% credit rate is reduced, but not below 20%, by one percentage point for each $2,000 (or fraction of) AGI above $15,000. Thus, the credit percentage is reduced to 20% for taxpayers with AGI over $43,000. Under Sec. 101 of the 2010 Tax Relief Act, the expanded dependent care tax credit applies for two additional years, through 2012.
2010 Tax Relief Act extends many education incentives for two years. IRS Guidelines
American opportunity tax credit. For tax years beginning in 2010, individuals may claim an American opportunity tax credit (AOTC) equal to 100% of up to $2,000 of qualified higher-education tuition and related expenses (including course materials), plus 25% of the next $2,000 of expenses paid for education furnished to an eligible student in an academic period,i.e., a maximum credit of $2,500 a year for each eligible student. For 2010, the availability of the credit phases out ratably for taxpayers with modified AGI of $80,000 to $90,000 ($160,000 to $180,000 for joint filers). The AOTC (which expanded the credit available under the Hope Scholarship Credit) is allowed for each of the first four years of the student's post-secondary education in a degree or certificate program. The credit can be claimed against AMT liability; and 40% of the otherwise allowable AOTC is refundable (unless the taxpayer claiming the credit is a child under age 18 or a child under age 24 who is a student providing less than one-half of his support, who has at least one living parent, and doesn't file a joint return).
Above-the-line student loan interest deduction. Individuals can deduct a maximum of $2,500 annually for interest paid on qualified higher education loans. For 2010, the deduction phases out ratably for taxpayers with modified AGI between $60,000 and $75,000 ($120,000 and $150,000 for joint returns).
Coverdell education savings accounts. Taxpayers can contribute up to $2,000 per year to Coverdell Education Savings Accounts (CESAs) for beneficiaries under age 18 (and, special needs beneficiaries of any age). The account is exempt from income tax, and distributions of earnings from CESAs are tax-free if used for qualified education expenses. The contribution limit is phased out for contributors with modified AGI between $95,000 and $110,000 ($190,000 and $220,000 for joint returns).
Making work pay credit. The making working pay credit is available to eligible individuals for a tax year beginning in 2010. The credit, which is refundable, is the lesser of (1) 6.2% of an individual's earned income or (2) $400 ($800 for a joint return). It is phased out for higher income taxpayers. Schedule M is used to compute the amount of the credit, which generally was paid in advance through reduced withholding.
2010 Tax Relief Act provides for a temporary employee/self-employed payroll tax cut for 2011. The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees, and self-employed workers, one for Old Age, Survivors and Disability Insurance (OASDI; commonly known as the Social Security tax), and the other for Hospital Insurance (HI; commonly known as the Medicare tax). For remuneration received during 2011, the Act reduces the employee OASDI tax rate under the FICA tax by two percentage points to 4.2%. Similarly, for self-employment income for tax years beginning in 2011, the Act reduces the OASDI tax rate under the SECA tax by two percentage points to 10.4% percent. As a result, for 2011, employees will pay only 4.2% Social Security tax on wages up to $106,800 and self-employed individuals will pay only 10.4% Social Security self-employment taxes on self-employment income up to $106,800.
Tax breaks extended. Several tax breaks that expired at the end of 2009 were renewed and can be claimed on 2010 returns, including:
... State and local general sales tax deduction in lieu of state and local income taxes, claimed on Schedule A , Line 5.
... Higher education tuition and fees deduction, claimed on Form 8917.
... Educators' $250 expense deduction, claimed on Form 1040, Line 23 or Form 1040A, Line 16.
Standard mileage rates for 2010. The standard mileage rate for business use of a car, van, pick-up or panel truck is 50 cents for each mile driven. The rate for the cost of operating a vehicle for medical reasons or as part of a deductible move is 16.5 cents per mile. The rate for using a car to provide services to charitable organizations is set by law and remains both in 2010 and 2011 at 14 cents a mile. For 2011, the standard mileage rate for business use of a car, van, pick-up or panel truck is 51 cents for each mile driven. The rate for the cost of operating a vehicle for medical reasons or as part of a deductible move is 19 cents per mile. IRS Guidelines
Self-employed health insurance deduction. In 2010, eligible self-employed individuals can use the self-employed health insurance deduction to reduce their Social Security self-employment tax liability in addition to their income tax liability. This deduction is claimed on Form 1040, Line 29. In 2010, this amount is also entered on Schedule SE, Line 3, thus reducing net earnings from self-employment subject to the 15.3 percent social security self-employment tax. Premiums paid for health insurance covering the taxpayer, spouse and dependents generally qualify for this deduction. Premiums paid for coverage of an adult child, under age 27 at the end of the year, for the time period beginning on or after Mar. 30, 2010, also qualify for this deduction, even if the child is not the taxpayer's dependent.
Special charitable contributions for certain IRA owners. Taxpayers who are age 70 1/2 or older can make qualified charitable (QCDs)tax-free distributions to a charity from an Individual Retirement Account (IRA) of up to $100,000. QCDs are counted in determining whether the owner has met the IRA's required minimum distribution (RMD). Where individuals have made nondeductible contributions to their traditional IRAs, QCD amounts are treated as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds. These distributions aren't subject to the charitable contribution percentage limits since they are neither included in gross income nor claimed as a deduction on the taxpayer's return. These rules are available for charitable IRA transfers made in tax years beginning before Jan. 1, 2012. In addition, a taxpayer can elect for such a distribution made in January of 2011 to be treated as if it were made on Dec. 31, 2010. This option is available for distributions from IRAs, regardless of whether the owners itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, aren't eligible to be treated as a QCD. QDCs are reported on Form 1040, Line 15.
More taxpayers qualify for Roth IRA conversions. The 2010 tax year is the first in which taxpayers may convert funds in regular IRAs (as well as qualified plan funds) to Roth IRAs regardless of their income level. In addition, taxpayers have the choice of paying the tax on the conversion when they file their 2010 returns or deferring the tax hit on the conversion to the 2011 and 2012 tax years. For 2010 rollovers and conversions only, half of the resulting income must be included in income in tax year 2011 and the other half in 2012, unless the taxpayer chooses to include all of it in income in 2010. Taxpayers must report any 2010 conversion on Form 8606 for tax year 2010.
Adoption credit is expanded. The maximum adoption credit for 2010 is increased to $13,170 per child, and the credit is refundable. In addition to filling out Form 8839, Qualified Adoption Expenses, taxpayers must include with their return an adoption order or decree or certain other documents. As a result, taxpayers claiming the adoption credit must file paper tax returns.
Deduction for corrosive drywall. IRS allows individuals with corrosive drywall to apply a safe harbor formula to treat the costs of repairing the defective drywall as a casualty loss. The safe harbor applies for original and amended federal income tax returns filed after Sept. 29, 2010. IRS won't challenge this treatment of damage resulting from corrosive drywall as a casualty loss (which might otherwise be difficult to achieve under the regular rules) if the loss is determined and reported under the safe harbor rule. A taxpayer who has a pending claim (or intends to pursue reimbursement) may claim a loss for 75% of the unreimbursed amount paid during the tax year to repair damage to the taxpayer's personal residence and household appliances that resulted from corrosive drywall.
BREAKS FOR BUSINESSES IRS Guidelines
Small business health care tax credit. Subject to a phaseout, an eligible small employer (ESE) may claim a credit (on Form 8941) equal to a percentage (35% in tax years beginning in 2010 to 2013; 50% in tax years beginning after 2013) of nonelective contributions for health insurance for its employees. An ESE is generally an employer with no more than 25 full-time equivalent employees (FTEs) employed during its tax year, and whose employees have average annual wages of no more than $50,000.
General business credit for employers. General business credits can offset both regular income tax and AMT of eligible small businesses. This provision is effective for any general business credits determined in the first tax year beginning after Dec. 31, 2009, and to any carryback of such credits.
Expensing election. For tax years beginning in 2010 and 2011, small businesses can expense up to $500,000 of the first $2 million of certain business property placed in service during the year.
50% or 100% bonus depreciation. Businesses that acquire and place qualified property into service after Sept. 8, 2010 and before Jan. 1, 2012 (Jan. 14, 2013 in the case of certain longer-lived and transportation property) can claim a first-year depreciation allowance of 100% of the cost of the property. Businesses that acquire qualified property during 2010 on or before Sept. 8, 2010 can claim a first-year bonus depreciation allowance of 50% of the cost of the qualified property. 50% of the cost of qualified property placed in service after Dec. 31, 2011 and before Jan. 1, 2013 (after Dec. 31, 2012 and before Jan. 1, 2014 for certain longer-lived and transportation property).
Depreciation limits on business vehicles. The total depreciation deduction (including the section 179 expense deduction and the 50% or 100% bonus depreciation) a taxpayer can take for a passenger automobile used in a business and first placed in service in 2010 is increased to $11,060 ($11,160 for a truck or van). If bonus depreciation can't be taken for a passenger automobile, truck, or van used in a business and first placed in service in 2010, the maximum deduction that can be taken is $3,060 for a passenger automobile ($3,160 for a truck or van).
Small businesses must use EFTPS for deposits. The paper coupon system for Federal Tax Deposits is no longer being maintained by the Treasury Department after Dec. 31, 2010. Most businesses must now make deposits and pay federal taxes through the Electronic Federal Tax Payment System(EFTPS).
ESTATE AND GIFT TAX RELIEF
Under the Economic Growth and Tax Relief Reconciliation Act of 2001 there was no estate tax for decedents dying in 2010, but estate and other transfer taxes were scheduled to rise substantially for post-2010 transfers. The 2010 Tax Relief Act provides temporary relief. Among other changes, it reduces estate, gift and generation-skipping transfer taxes for 2011 and 2012 and continues other estate and gift tax relief provisions that were set to expire after 2010. It preserves estate tax repeal for 2010, but in a roundabout way: estates wanting zero estate tax for 2010 must elect that option, along with the modified carryover basis rules that were set to apply for 2010. Otherwise, by default, the estate tax is revived for 2010, with a $5 million exemption, a top tax rate of 35%, and a step-up in basis. The 2010 Tax Relief Act lowers estate and GST taxes for 2011 and 2012 by increasing the exemption amount (technically, the applicable exclusion amount) from $1 million to $5 million (as indexed after 2011) and reducing the top rate from 55% to 35%. The $5 million exemption is per person. Thus, there is a $10 million exemption for a married couple. In addition, there is a new portability feature for married couples. The 2010 Tax Relief Act also modifies the transfer tax rules for 2010, 2011, and 2012. For gifts made after Dec. 31, 2010, the gift tax is reunified with the estate tax, with an applicable exclusion amount of $5 million and a top estate and gift tax rate of 35%. The annual gift exclusion remains at $13,000 per donee for 2011.