Current Topics

The following is a summary of the most important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

 

IT'S TAX TIME AGAIN

 

Individual Tax Rate Provisions:

• Income tax rates. The Act extends the 10% individual income tax bracket as well as the 25%, 28%, 33%, and 35% individual income tax brackets for two more years, through 2012.
• Capital gains rates. The Act allows the capital gains rates to remain at 0% for taxpayers below the 25% bracket and 15% for taxpayers in the 25% rate and above, through 2012.
• Dividends taxed at capital gains rates. Here is a big one - the current dividend rates of 0% for taxpayers below the 25% bracket and 15% for taxpayers in the 25% bracket and above are extended through 2012. Without the legislation, these rates were set to effectively go up as high as 39.6% beginning next year!
• Phase-out of marriage penalty in the 15% bracket. The 15% regular income tax bracket for married couples filing joint returns set at twice the corresponding bracket for an unmarried individual filing a single return (marriage penalty relief for the 15% bracket ) is extended through 2012.
• Employee payroll tax cut. For 2011 only, the Act reduces the Social Security (OASDI) tax rate on employees to 4.2% (from 6.2%) and reduces the self-employment tax (SECA) rate to 10.4% (from 12.4%). However, the Act does not reduce the OASDI contribution base, which is $106,800 for 2011.

 

Alternative Minimum Tax Relief:

• Alternative minimum tax exemption amount and credit relief. The Act puts in place a 2-year ‘patch‘for the AMT. The Act increases the AMT exemption amount to $72,450 for tax years beginning in 2010, and $74,450 for tax years beginning in 2011. For an individual who is not married and is not a surviving spouse, the exemption amount is $47,450 for tax years beginning in 2010, and $48,450 for tax years beginning in 2011.  In addition, both the personal credits and nonrefundable credits can offset AMT through 2011. We have run projections for quite a few of you, and had seen that absent this ‘patch’, as they call it, many of you would have been hit hard by the AMT on your 2010 returns.

 

Individual Deductions and Credits:

• Elimination of marriage penalty in standard deduction. The Act extends, from 2010, the basic standard deduction for married couples filing joint returns that is twice the basic standard deduction for an unmarried individual filing a single return, through 2012.
• Repeal of the phase-out for personal exemptions. You may recall that the phase out of the personal exemption (referred to as PEP) for higher income individuals had been gradually decreasing, so that by 2010, the phase-out was entirely repealed. The Act extends the repeal of PEP for an additional two years, through 2012. Thus, personal exemption amounts will continue to be allowed regardless of the taxpayer's income.
• Phase-out of overall limitation on itemized deductions. Similar to the PEP, the phase-out of the overall limitation on deductions for higher income taxpayers had gradually decreased until its 2010 complete repeal. The Act extends this repeal for an additional two years, through 2012.
• Deduction of state and local taxes. The Act extends, from 2009, the election available to taxpayers who itemize their deductions to deduct state and local sales taxes in lieu of state and local income taxes. This is of course, a biggie for us Nevadans since we do not have a State income tax here.
• Tax-free distributions from individual retirement plans for charitable purposes. Through 2011, the Act allows taxpayers age 701/2 or older to make tax-free distributions to charities from their traditional individual retirement accounts (IRAs) and Roth IRAs up to $100,000 per taxpayer, per taxable year. Although this provision expired at the end of 2009, the Act permits individuals to make charitable transfers during January of 2011 as if they were made during 2010.
• Deduction for mortgage insurance premiums. The Act extends for one year, through 2011, the itemized deduction for the cost of mortgage insurance on a qualified personal residence. The deduction is phased-out ratably by 10% for each $1,000 by which the taxpayer's adjusted gross income (AGI) exceeds $100,000, so that the deduction is unavailable for a taxpayer with an AGI in excess of $110,000.

 

Education Benefits:

• Above-the-line deduction for qualified tuition and related expenses. The Act extends, from 2009, the above-the-line deduction for qualified tuition and related expenses through 2011. The maximum deduction is $4,000 for taxpayers with adjusted gross incomes not exceeding $65,000 ($130,000 for joint returns) and $2,000 for taxpayers with adjusted gross incomes not exceeding $80,000 ($160,000 for joint returns).
• American Opportunity Tax Credit. The Act extends this temporary expansion of the Hope Credit through 2012. Generally, the credit is for up to $2,500 of the cost of tuition and related expenses paid during the taxable year. The credit is allowable for the first four year of post-secondary education and 40% of the credit is refundable. The credit is subject to a phase-out for taxpayers with adjusted gross income in excess of $80,000 ($160,000 for married couples filing jointly).

As we noted at the beginning, these are only but a few of the provisions in this sweeping change. There are many more that may apply to you or to your companies, but the above gives you a flavor for it. And a word of caution – as we have come to learn over the past few years, there will probably be a few tax bills in 2011 as well. The only question will be – how extensive will THEY be, and will they benefit you, or push you back.

 

Happy New Year to all, and we hope to see, and visit with you all, very soon!

 

Main Amundson & Associates