Dec 12, 2018
December 2010 PDF Print E-mail

December 2010 | Garcia & Garcia, CPAs, P.A. | Phone: 305-266-9293

Garcia’s Tax Brief

2010 Tax Relief Act

After weeks of intense negotiations between the White House and Congressional leaders, Congress passed and President Obama signed into law a two-year extension of soon-to-have-expired  Bush-era tax cuts, including extension of current individual tax rates and capital gains/dividend tax rates.

 

Called the most sweeping tax law in a decade, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (H.R. 4853), was approved by the Senate on December 15, 2010 and by the House on December 16, 2010.  The 2010 Tax Relief Act gives taxpayers the ability to plan with some certainty their tax situation for the next two years.

 

The new law is, however, much more than just an extension of existing tax rates. The new law also provides a temporary across-the-board payroll tax cut for wage earners, a retroactive AMT “patch,” estate tax relief, education and energy incentives and many valuable incentives for businesses, including 100 percent bonus depreciation and extension of many temporary tax breaks. This letter highlights many of the key incentives in the new law. As always, please call or email our office for more details.

 

Individual Benefits

The current income tax rates will be retained for two years (2011 and 2012), with a top rate of 35% on ordinary income and a 15% on qualified dividends and long-term capital gains.

A two-year alternative minimum tax (AMT) “patch” for 2010 and 2011 will keep the AMT exemption near current levels and allow personal credits to offset AMT.

Employees and self-employed workers will receive a reduction of two percentage points in Social Security payroll tax in 2011, bringing the rate down from 6.2% to 4.2% for employees, and from 12.4% to 10.4% for the self-employed.

The $1,000 per child tax credit is extended & maintains its expanded refundability threshold at $3,000 for 2011 & 2012.

“The 2010 Tax Relief Act gives taxpayers the ability to plan with some certainty their tax situation for the next two years.”

Business Benefits

The new law increased the 50% bonus depreciation to 100% for qualified machinery & equipment purchases placed in service after September 8, 2010 and before January 1, 2012. This provision is one of the most expansive for businesses, since unlike Sec. 179 expensing, it is not limited to use by smaller businesses or capped at a certain dollar level. For property placed in service in 2012, the new law provides for 50% additional first-year bonus depreciation.

Along with bonus depreciation, the new law extends enhanced Code Sec. 179 expensing for 2012 but not at the 2010 and 2011 dollar and investment limits. For 2010 and 2011, the Code Sec. 179 dollar limit is $500,000 and the investment limit is $2 million. The new law makes no changes to these limits for 2010 and 2011. However, the dollar limit will fall to $125,000 (indexed for inflation) and the investment limit will fall to $500,000 (indexed for inflation) for tax years beginning in 2012

The research tax credit was extended for two more years, 2010 and 2011.

Extension through 2011 of the Work Opportunity Tax Credit (WOTC), which rewards employers that hire economically-disadvantaged individuals and individuals from a group with historically high rates of unemployment.

Energy incentive Code Sec. 1603 cash grant in lieu of a tax credit program, which encourages development of alternative energy sources, such as wind energy. 

Extension of the American Opportunity Credit

The recently enacted “Tax Relief, Unemployment Insurance Reauthori-zation, and Job Creation Act of 2010” includes a two-year extension of the American Opportunity tax credit for college costs. Added to the tax code in 2009 as a temporary replacement for the Hope tax credit, the American Opportunity credit both increased the tax relief available for students from middle-income families and extended relief for the first time to students from lower-income families.

Now that the American Opportunity credit has been extended for two years, it might be a good time to review tax benefits available under that credit, with an eye to how it compares with Hope credit, which would have been in effect over the next two years had the American Opportunity credit not been extended.

Families with a family member in college can benefit from a tax credit for tuition and fees. The maximum amount of the American Opportunity credit is $2,500 (up from a maximum of $1,800 under the Hope credit).

While the Hope credit was only available for the first two years of undergraduate education, the American Opportunity credit is available for up to four years.

Under the Hope credit, qualifying expenses included just tuition and fees.  The American Opportunity credit expands the list of qualifying expenses to include textbooks.

The Hope credit was nonrefund-able. It could reduce your regular tax bill to zero but could not result in a refund.  This new credit provides that 40% of the credit is refundable.

 

Temporary Estate and Gift Tax Relief

Under the new law, the federal estate tax will again apply to the estates of decedents dying after December 31, 2009 and before January 1, 2013.  The new law sets a maximum estate tax rate of 35% with a $5 million exclusion. Accordingly, a married couple can transfer up to $10 million of wealth without generating a federal estate tax. The estate tax exemption will be indexed for inflation beginning in 2012.

Additionally, executors of estates of individuals who died in 2010 can elect out of the estate tax (and apply modified carryover basis rules) or can elect to have the estate tax apply. This election, and many of the other estate tax provisions in the new law, is very technical.

Furthermore, the Act reunifies the estate and gift tax. The gift tax exemption will be set at $5 million per person with a top rate of 35% for 2011 and 2012. The gift tax exemption will also be indexed for inflation beginning 2012.

Note: For those who have previously used their $1 million gift tax exemption (the maximum lifetime exemption for 2010), they will now have an additional $4 million exemption to use during their lifetimes.

Those taxpayers who are considering making taxable gifts in 2010, should discuss with us whether it still makes sense to make those gifts, or wait until 2011 for the new rules to apply.

Overview of Alternative Minimum Tax (AMT)

The AMT is a parallel tax system which does not permit several of the deductions permissible under the regular tax system, such as property tax. Taxpayers who may be subject to the AMT must calculate their tax liability under the regular federal tax and under the AMT taking into account certain “preferences” and “adjustments.” If their liability is greater under the AMT, that’s what they owe the federal government. Originally enacted to make sure that wealthy did not escape paying taxes, the AMT has started to apply to more middle income taxpayers.

A Message to our Clients

Given the current state of economy, several new tax laws and provisions have been passed by Congress. As a result, several clients have been calling us nervous of the changes. We acknowledge your frustration and we want to make you as assured as possible. If you have any questions regarding the new laws or would like more details about these or any other aspect of the new laws, please, do not hesitate to call us. Here at Garcia & Garcia, CPAs, we strive to provide our clients with the best possible service.

 

Garcia & Garcia, CPAs, P.A.

8221 Coral Way Miami, FL 33155

Phone: 305-266-9293

Fax: 305-266-3747

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