Springfield Business Journal Articles


Good News, Bad News with New Act

First the good news. On December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Act”). The Act extends many tax provisions in effect in 2010 and also adds some new tax provisions. The bad news is that the Act only applies for 2011 and 2012, meaning that the tax uncertainty we have been facing will be back in two years. Here are some of the provisions in the Act.

Individual income tax provisions:

‚óè Income tax rates will remain at 10%, 15%, 25%, 28%, 33% and 35% rather than increasing to 15%, 28%, 31%, 36%, and 39.6%.

‚óè Dividend tax rates will remain at 0% and 15% (based on income) rather than returning to ordinary income tax rates.

‚óè Personal exemptions and itemized deductions will not be subject to phaseouts, thereby avoiding a decrease in deductions based on income levels.

‚óè The child tax credit amount will remain at $1,000 per child, may be used to offset regular tax and alternative minimum tax (”AMT”) and will be a refundable credit, meaning that if your tax is already zero, you will receive a check for the credit amount.

‚óè The amount of eligible expenses for the dependent care credit will remain $3,000 for one qualifying child/disabled dependent and $6,000 for two or more children/disabled dependents.

‚óè The standard deduction for married couples filing joint returns will remain twice the basic standard deduction for an unmarried person.

‚óè The exclusion for employer-provided educational assistance will remain at $5,250 and continue to apply to both undergraduate and graduate education.

‚óè The Act includes relief from the AMT. For a joint return, the Act increases the AMT exemption amount to $72,450 for 2010 and $74,450 for 2011. For unmarried taxpayers, the AMT exemption amount will be $47,450 for 2010 and $48,450 for 2011.

‚óè The $250 above-the-line deduction for professional expenses incurred by elementary and secondary schoolteachers will continue to be available for 2010 and 2011.

‚óè Taxpayers can still elect to deduct state and local sales taxes in lieu of state and local income taxes in 2010 and 2011.

‚óè The exclusion of gain on the sale of qualifying business stock will continue to be 100%, and the AMT tax preference attributable to such a sale is eliminated.

‚óè The new energy efficient home credit is extended for one year. To qualify the new energy efficient home must be acquired from an eligible contractor on or before December 31, 2011.

For 2011 only the Act reduces the Social Security tax rate on employees to 4.2% (from 6.2%) and reduces the self-employment tax rate to 10.4% (from 12.4%). The employer Social Security rate remains at 6.2%, and the contribution base remains at $106,800 for 2011.

Business tax provisions:

‚óè In 2010 and 2011 small businesses may elect to expense up to $500,000 of capital investment, with a phase out beginning at $2,000,000. The Section 179 election to expense property rather than depreciate it over time will be $125,000 in 2012.

‚óè The Act extends and temporarily increases the current §168(k) 50% bonus depreciation provision for qualified property placed in service before January 1, 2013. In addition, the Act provides for temporary 100% bonus depreciation for property acquired and placed in service after September 8, 2010, and before January 1, 2012.

‚óè The work opportunity credit of 40% of the first $6,000 of wages paid to new hires of nine targeted groups (including members of families receiving benefits under the Temporary Assistance to Needy Families program, qualified veterans and designated community residents) is extended through December 31, 2011.

‚óè The enhanced charitable deductions for donations of food to food pantries, book inventories to public schools and computer inventories for educational purposes are extended.

Estate and gift tax provisions:

‚óè For 2010 and 2011 the estate tax and gift tax exemptions are reunified at $5,000,000, and assets again receive a “step-up” in income tax basis at death. For decedents dying in 2010, the executor can elect to use the current 2010 law or the new law, whichever is more advantageous.

‚óè The estate and gift tax rate will be 35%, which was the gift tax rate in 2010.

‚óè The Act also includes provisions for a surviving spouse to use the unused estate tax exemption of his deceased spouse.

Check with your tax advisor to determine how you can best use these new provisions to your advantage.

by Sarah Delano Pavlik
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