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Changes To The Tax Law - What Did The Congress Just Do?

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Created on Saturday, January 01, 2011

January 1, 2011

Donald Paris, CPA

So, you have been watching the TV or reading the news and trying to figure out what the new tax law (extension of the Bush tax cuts) really means to you and your tax situation. I hope that this article provides you some insight. I cannot hope to cover all the issues in detail, so I will attempt to synopsize some of them. In case you need more clarification on an issue, or there was another issue that you need addressed, just call me.

First thing you need to know if that the Bush-era tax cuts were extended for only 2 years. So, we will likely be dealing with these same issues again sometime during the remainder of President Obama’s term. That means that, though we have a reprieve, do not look at these tax changes as permanent.

INDIVIDUALS

• Tax Rates. Tax Rates were scheduled to rise across the board. Instead, they have been kept between 10% and 35%, based on your income.
• Itemized Deductions. There is no phase-out/reduction of your itemized deductions based on your Adjusted Gross Income.
• Personal Exemptions. There is no phase-out/reduction of your personal exemptions based on income.
• Qualified Dividends and Long-term Capital Gains. The maximum federal income tax on both Qualified Dividends and Long-term Capital Gains remains at 15%.
• Child Tax Credit. For the next 2-years the Child Tax Credit remains at $1,000 for each qualifying child under the age of 17.
• Alternative Minimum Tax (AMT). Long been the bane of many folks tax situation, the exemption amount for AMT has been significantly increased across the board. As a result, fewer taxpayers will find they pay AMT. Additionally, many nonrefundable tax credits may be applied to AMT, also lessening the possibility that you will pay AMT. Those credits include the dependent care credit, the credit for the elderly and disabled, the child credit, the credit for interest on certain home mortgages, the Hope Scholarship and Lifetime Learning credits, the credit for savers, the credit for certain nonbusiness energy property, the credit for residential energy efficient property, the credit for certain plug-in electric vehicles, the credit for alternative motor vehicles, the credit for new qualified plug-in electric drive motor vehicles, and the D.C. first-time homebuyer credit).
• Payroll Tax. For compensation received during 2011 (this is a 1-year tax reduction), 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.

BUSINESSES

• Depreciation and purchases of property. The 2010 Tax Relief Act extends and expands additional first-year depreciation to equal:
  • 100% of the cost of qualified property placed in service after Sept. 8, 2010 and before Jan. 1, 2012 (before Jan. 1, 2013 for certain longer-lived and transportation property); and
  • 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 of Cars and Trucks. The applicable first-year depreciation limit is increased by $8,000 for any passenger automobile that is "qualified property" under the bonus depreciation rules and which isn’t subject to a taxpayer election to decline bonus depreciation.
• Same year expense election for certain purchases of property. Under Code Sec. 179 , a taxpayer, other than an estate, a trust, or certain non-corporate lessors, can elect to deduct as an expense, rather than to depreciate, up to a specified amount of the cost of new or used tangible personal property placed in service during the tax year in the taxpayer’s trade or business. For tax years beginning in 2010 or 2011: (1) the dollar limitation on the expense deduction is $500,000; and (2) the investment-based reduction in the dollar limitation starts to take effect when property placed in service in a tax year exceeds $2,000,000. In general, property is eligible for Code Sec. 179 expensing if it is:
  • tangible property that’s depreciated Code Sec. 1245 property (generally, machinery and equipment) regardless of its depreciation recovery period;
  • for any tax year beginning in 2010 or 2011, up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property); and
  • off-the-shelf computer software, only if placed in service in a tax year beginning before 2012.
  • For tax years beginning in 2012, the 2010 Tax Relief Act decreases the maximum expensing amount under Code Sec. 179 to $125,000 and increases the investment-based phaseout amount from $200,000 to $500,000.
• Payroll Taxes. For compensation 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.

ESTATES AND GIFTS

• Exemption and Rates. The 2010 Tax Relief Act lowers estate and GST taxes for 2011 and 2012 by increasing the exemption amount from $1 million to $5 million 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. Plus, as explained below, there is a new portability feature for married couples.
• Modified Carryover Basis Rules Generally Repealed. The 2010 Tax Relief Act generally repeals the modified carryover basis rules that would apply only for purposes of determining basis in property acquired from a decedent who dies in 2010. Under the Act, a recipient of property acquired from a decedent who dies after Dec. 31, 2009 generally will receive fair market value (i.e., "stepped up") basis under the rules applicable to assets acquired from decedents who died in 2009. However, if an executor chooses no estate tax for a decedent dying in 2010, the modified carryover basis rules apply, as discussed below.
• Special Choice for 2010 Decedents. The 2010 Tax Relief Act 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.
• Gift Tax Changes. Under the 2010 Tax Relief Act, for gifts made in 2010, the exemption is $1 million and the gift tax rate is 35%. 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%.
• Portability of Unused Exemption between Spouses. Under the 2010 Tax Relief Act, any exemption that remains unused as of the death of a spouse who dies after Dec. 31, 2010 is generally available for use by the surviving spouse, as an addition to the surviving spouse’s exemption. A surviving spouse may use the predeceased spousal carryover amount in addition to his or her own $5 million exclusion for taxable transfers made during life or at death.