2010 Tax Relief Act – Personal Income Tax
On December 17, 2010, The Tax Relief, Unemployment Insurance Re-authorization and Job Creation Act of 2010 was signed into law by the President. The personal income tax provisions in this law provide for an extension of the Bush-era tax cuts which were scheduled to expire at the end of 2010. The 2010 Tax Relief Act temporarily extends most of the tax cuts for 2011 and 2012 only.
Income Tax Rates
Individual income tax brackets will remain unchanged for 2011 and 2012, keeping the current structure ranging from 10-35%. The capital gains tax rates will also remain as is for the next two years.
Payroll taxes are reduced by 2 percentage points. Social Security tax rate for the employee-portion will be reduced temporarily to 4.2% for 2011 only. The employer-portion will remain at 6.2%. The Social Security wage base remains at $106,800 for 2011. Medicare tax rates unchanged. Self-employment tax rate is temporarily reduced 2 percentage points to 13.3% for 2011 only.
Extension of Tax Credits
The Act extended many personal tax credits through 2012. These credits were either scheduled to expire or reverted back to previous levels in 2011.
- Child Tax Credit
- Earned Income Credit
- Dependent and Child Care Credit
- Adoption Tax Credit
- American Opportunities Credit
Estate Tax
The Estate Tax Credit was enhanced under the Act. The 2011 Estate Tax exempts the first $5.0 million of the estate and then imposes a 35% tax rate on the reminder. This is a significant change from the 2009 level of $3.5 million exemption and 45% tax rate. Further, without this provision, the estate exemption level would have revert back to $1.0 million.
Other Deductions
- For higher-end taxpayers, there is a two year extension to the elimination of the itemized deduction limitation and the personal exemption phaseout. Both of the temporary repeals have been extended until the end of 2012.
- Retention of marriage relief penalty for certain tax brackets.
- Deductions for educator expenses, student loan interest, qualified tuition and state sales tax have all been extended for one or two years.
As can be seen, the 2010 Tax Relief Act provides many tax saving opportunities for individuals.
Check Your Withholdings
With less than two months remaining in the calendar year, it’s a great time to double check your federal withholding to make sure enough taxes are being taken out of your pay.
The average refund for 2009 was $2,887, up 8 percent from 2008. Even though the Making Work Pay Tax Credit lowered tax withholding rates in 2009 and 2010 for millions of American households, some workers and retirees still need to take steps to be sure enough tax is being taken out of their checks.
Certain folks should pay particular attention to their withholding. These include:
- Married couples with two incomes
- Individuals with multiple jobs
- Dependents
- Some Social Security recipients who work
- Workers who do not have valid Social Security numbers
- Retirees who receive pension payments
As was the case in 2009, taxpayers who wind up owing tax because too little was taken out of their paychecks during 2010 may qualify for special relief on a penalty that sometimes applies. Depending on their personal situation, some people could have less withheld from their paychecks than they need or want.
Failure to adjust withholding could result in potentially smaller refunds or, in limited instances, a taxpayer may owe tax rather than receive a refund next year.
An easy way to check how much you’ll owe this year is to use the 1040 Tax Calculator on our website. Or just give us a call and we’ll figure it out with you.
How the Bush Tax Cuts Affect Tax-Saving Strategies
Each November, we like to look at the steps you can take to reduce your tax bill. This year, it’s a little ambiguous, because the Bush tax cuts and credits are set to expire at the end of 2010. If they do expire, a lot of folks will experience a significant adjustment to their tax situation.
The “Bush tax cuts” refers to legislation enacted in 2001 and 2003. The cuts lowered tax rates on income, dividends, and capital gains; eliminated the estate tax; lowered burdens on married couples, parents, and the working poor; and increased tax credits for education and retirement savings.
Both Republicans and Democrats favor an extension of the tax cuts for the middle class. Where they differ is whether to extend the cuts for Americans in the top 2% of taxpayers.
With this in mind, we’re looking at year-end measures separately for these two groups: the middle class – those making less than $200,000 for singles / $250,000 for married filers – and the higher income taxpayers – those making more than $200,000 / $250,000.
But first, let’s take a quick look at what’s at stake.
If All the Bush Tax Cuts Expire…
Among other things, if the Bush tax cuts were allowed to expire, the following would take place:
- Tax brackets would change, from 10%, 15%, 25%, 28%, 33%, and 35% to 15%, 28%, 31%, 36%, and 39.6%.
- Long-term capital gain tax rates would rise from 15% to a maximum of 20%.
- The child tax credit would be lowered.
- The alternative minimum tax would cease to be indexed for inflation.
- The marriage penalty would be reinstated.
Middle-Income Taxpayers
We don’t expect Congress to allow the tax cuts to expire for this group. That means middle-income taxpayers can take the same measures this year they have in previous years to reduce their tax burden for 2010.
We recommend the following steps to save on taxes this year: defer income, accelerate your deductions, and plan out your capital gains.
Defer Income
- If you are planning to sell an investment on which you have a gain, it may be best to wait until the new year. This will defer payment of the taxes for another year (subject to estimated tax requirements).
- If you are due a bonus at year-end, you may be able to defer receipt of these funds until January. Again, this can defer the payment of taxes (other than the portion withheld) for another year. (Note that deferral of tax generally won’t work where the bonus is contractually due in 2010.)
- If your company grants stock options, it may be wise to wait until next year to exercise the option or sell stock acquired by the exercise of an option. (Exercise of the option is often a taxable event; sale of the stock is almost always a taxable event.)
- If you’re self-employed, and you can afford the delay in cash inflow, defer sending invoices to clients until the end of December.
Accelerate Deductions
- Pay a state estimated tax installment in December instead of at the January due date. Just make sure the payment is based on a reasonable estimate of your state tax.
- Pay your entire property tax bill, including installments due in 2011, by year-end. (This is not applicable to mortgage escrow accounts.)
- Try to bunch threshold expenses, such as medical expenses and miscellaneous itemized deductions. (Threshold expenses are deductible only to the extent they exceed a certain percentage of adjusted gross income.) By bunching these expenses into one year, rather than spreading them out over two years, you have a better chance of exceeding the thresholds, thereby maximizing your deduction. For example, you might pay medical bills and dues and subscriptions in whichever year they would do you the most tax good.
Caution: In most cases, credit card charges are considered paid in the year of the charge regardless of when you pay on the card. But this does not apply to store revolving credit cards. If you charge expenses on a Wal-Mart store credit card, for example, the deduction cannot be claimed until the bill is paid.
Some tax benefits are phased out if you have more than a certain level of adjusted gross income. In these cases, a strategy of deferring income and accelerating deductions may also allow you to claim larger deductions, credits, and other tax breaks for 2010.
Tip: Deferring income into 2011 is an especially good idea for taxpayers who anticipate being in a lower tax bracket next year, either because of much-reduced income or much-increased deductible expenses.
Minimize Taxes on Investments
Judiciously match your capital gains and losses to reduce your tax burden for 2010. Where appropriate, try to avoid short-term gains, which are usually taxed at a much higher tax rate (up to 35%) than long-term gains (15%). You might consider, where feasible, trying to reduce all capital gains and generate short-term capital losses of up to $3,000.
Tip: If you have a large capital gain this year, consider selling an investment on which you have an accumulated loss. Capital losses are deductible up to the amount of your capital gains plus $3,000.
High-Income Taxpayers
Depending on what Congress decides in this legislative session, individuals making more than $200,000 filing singly or $250,000 filing married in 2010 will owe more tax than they have since the 2001 Bush tax cuts were passed. What does this mean for end-of-year tax planning?
If tax cuts for the richest Americans are allowed to expire at the end of the year, then many in the current 33% tax bracket will find themselves in the 36% bracket, and those currently taxed at the 36% rate will be taxed at 39.6%.
For these taxpayers, it makes sense to bump up 2010 income, to take advantage of the current lower rates. Grab that year-end bonus; sell stock acquired by the exercise of a company stock option; bill clients for as much work as possible if you’re self-employed.
Take Capital Gains Now
Capital gains and qualified dividends for those in the higher tax brackets would be affected if the tax cuts are allowed to expire for the richest Americans. The capital gains rate would revert to a maximum of 20% for higher income filers (from 15% currently), and qualified dividends would resume being taxed at the regular tax rate of the filer, or as high as 39.6%.
This indicates that now is a good time to take any capital gains or qualified dividends. Selling assets now as opposed to 2011 could have positive tax consequences for higher income filers.
Let Us Help You
As you can see, this is a complicated year for tax planning. Please don’t hesitate to come in and meet with us about your situation. There’s still a lot we can do to minimize your tax burden for 2010.
Avoiding Refund Delays
The IRS has provided this very important information. Please note this is directly from:
Five Tips for Avoiding Refund Delays Relating to Your Economic Recovery Payment
The $250 Economic Recovery Payments that were issued in 2009 by the Social Security Administration, Department of Veterans Affairs and Railroad Retirement Board must be included when claiming the Making Work Pay Tax Credit on 2009 tax returns. Many people who worked during 2009 and also received a $250 Economic Recovery Payment in 2009 are slowing down their tax refunds by not properly including the payments when claiming the Making Work Pay Tax Credit.
Here are five tips from the IRS that will help you avoid these refund delays:
- If you worked during 2009, you may be eligible to claim the Making Work Pay Tax Credit that was established by the American Recovery and Reinvestment Act of 2009 and is worth up to $400 for individuals and $800 for married couples.
- The Economic Recovery Payments are not taxable income; however, anyone who receives social security, veteran or railroad retirement benefits, as well as certain other government retirement benefits, must reduce the Making Work Pay Tax Credit they claim by the amount of any payment they received in 2009.
- Taxpayers with earned income should claim the credit by attaching Schedule M to their 2009 income tax return.
- To help avoid delays when you claim the credit, make sure you properly report your Economic Recovery Payment on IRS Schedule M, Making Work Pay and Government Retiree Credits.
- If you are not certain whether you received the $250 payment, you should verify that information by contacting the appropriate agency before preparing and filing your tax return and claiming the Making Work Pay Tax Credit.
More information about the Economic Recovery Payment and the Making Work Pay Tax Credit can be found at IRS.gov/recovery. Schedule M and the related instructions can be obtained at IRS.gov or can be ordered by calling 800-TAX-FORM (800-829-3676).
Links:
- The American Recovery and Reinvestment Act of 2009: Information Center
- Schedule M, Making Work Pay and Government Retiree Credits
Additional Contact Information:
- Social Security Administration - Toll free Number: 800-772-1213
- Department of Veterans Affairs – Toll Free Number: 800-827-1000
- Railroad Retirement Board
Special Edition Tax Tip 2009-12
Well not the post I was hoping to get out next, but when you have days. . . . Below is a copy of an e-news release. I am busy trying to get the blog rolls up and complete today or at least for another hour or so. I hope to work on the Quotes tomorrow.
Seven Facts about the Non-business Energy Property Credit
Taxpayers who take energy saving steps this year may get bigger tax savings next year. The Nonbusiness Energy Property Credit, a tax credit for making energy efficient improvements to homes has been increased as part of the American Recovery and Reinvestment Act of 2009.
Here are seven things the IRS wants you to know about the Non-business Energy Property Credit:
- The new law increases the credit rate to 30 percent of the cost of all qualifying improvements and raises the maximum credit limit to $1,500 claimed for 2009 and 2010 combined.
- The credit applies to improvements such as adding insulation, energy-efficient exterior windows and energy-efficient heating and air conditioning systems.
- To qualify as “energy efficient” for purposes of this tax credit, products generally must meet higher standards than the standards for the credit that was available in 2007.
- Manufacturers must certify that their products meet new standards and they must provide a written statement to the taxpayer such as with the packaging of the product or in a printable format on the manufacturers’ Website.
- Qualifying improvements must be placed into service after December 31, 2008, and before January 1, 2011.
- The improvements must be made to the taxpayer’s principal residence located in the United States.
- To claim the credit, attach Form 5695, Residential Energy Credits to either the 2009 or 2010 tax return. Taxpayers must claim the credit on the tax return for the year that the improvements are made.
Homeowners who have been considering some energy efficient home improvements may find these tax credits will get them bigger tax savings next year.
For more information on this and other key tax provisions of the Recovery Act, visit the official IRS Website at IRS.gov/recovery.
Links:
- Energy Incentives for Individuals in the American Recovery and Reinvestment Act
- IR-2009-98, Expanded Recovery Act Tax Credits Help Homeowners Winterize their Homes, Save Energy; Check Tax Credit Certification Before You Buy, IRS Advises
- YouTube Video: Home Energy Credits: English | Spanish | ASL
IRS Reminds Taxpayers to Take Advantage of Recovery Act Benefits
This post is straight from the IRS Newswire, an IRS e-mail service. – subscribe. No I didn’t write any of this, you can get this information sent to you directly. I copied it here for you to see.
WASHINGTON — With 2009 now half over, the Internal Revenue Service reminds taxpayers to take advantage of the numerous tax breaks made available earlier this year in the American Recovery and Reinvestment Act (ARRA).The recovery law provides tax incentives for first-time homebuyers, people purchasing new cars, those interested in making their homes more energy efficient and parents and students paying for college. But all of these incentives have expiration dates so taxpayers should take advantage of them while they can.
First-Time Homebuyer Credit
The Recovery Act extended and expanded the first-time homebuyer tax credit for 2009. Taxpayers who didn’t own a principal residence during the past three years and purchase a home this year before Dec. 1 can receive a credit of up to $8,000 on either an original or amended 2008 tax return, or a 2009 return. But the purchase must close before Dec. 1, 2009, and an eligible taxpayer cannot claim the credit until after the closing date. This credit phases out at higher income levels, and different rules apply to home purchases made in 2008.
New Vehicle Purchase Incentive
ARRA also provides a tax break to taxpayers who make qualified new vehicle purchases after Feb. 16, 2009, and before Jan. 1, 2010. Qualifying taxpayers can deduct the state and local sales and excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles. There is no limit on the number of vehicles that may be purchased, and you may claim the deduction for taxes paid on multiple purchases. But the deduction per vehicle is limited to the tax on up to $49,500 of the purchase price of each qualifying vehicle and phases out for taxpayers at higher income levels. This deduction is available regardless of whether a taxpayer itemizes deductions on Schedule A.
Energy-Efficient Home Improvements
The Recovery Act also encourages homeowners to make their homes more energy efficient. The credit for nonbusiness energy property is increased for homeowners who make qualified energy-efficient improvements to existing homes. The law increases the rate to 30 percent of the cost of all qualifying improvements and raises the maximum credit limit to a total of $1,500 for improvements placed in service in 2009 and 2010. Qualifying improvements include the addition of insulation, energy-efficient exterior windows and energy-efficient heating and air conditioning systems.
Tax Credit for First Four Years of College
The American opportunity credit is designed to help parents and students pay part of the cost of the first four years of college. The new credit modifies the existing Hope credit for tax years 2009 and 2010, making it available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. Tuition, related fees, books and other required course materials generally qualify. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.
Certain Computer Technology Purchases Allowed for 529 Plans
ARRA adds computer technology to the list of college expenses (tuition, books, etc.) that can be paid for by a qualified tuition program (QTP), commonly referred to as a 529 plan. For 2009 and 2010, the law expands the definition of qualified higher education expenses to include expenses for computer technology and equipment or Internet access and related services to be used by the designated beneficiary of the QTP while enrolled at an eligible educational institution. Software designed for sports, games or hobbies does not qualify, unless it is predominantly educational in nature.
Making Work Pay and Withholding
The Making Work Pay Credit lowered tax withholding rates this year for 120 million American households. However, particular taxpayers who fall into any of the following groups should review their tax withholding rates to ensure enough tax is withheld, including multiple job holders, families in which both spouses work, workers who can be claimed as dependents by other taxpayers and pensioners. Failure to adjust your withholding could result in potentially smaller refunds or in limited instances may cause you to owe tax rather than receive a refund next year. So far in 2009, the average refund amount is $2,675, and 79 percent of all returns received a refund.
Related Information
For more on the Recovery provisions that may apply to individual taxpayers see the ARRA page on IRS.gov.
Audio Files for Podcast
Tax Breaks for 2009 & 2010: In English and in Spanish
Videos
First-Time Home Buyer Tax Credit
From the flyer notes
First time homebuyer Credit doesn’t mean you have to actually be a first-time buyer to qualify. And personally I think credit is the wrong word too.
During the summer President Bush signed the Housing Assistance Act of 2008. It allows first-time buyers (homes) a tax “credit” to the lesser of $7,500.00 ($3,750.00 if married filling separate) or 10% of the purchase price of a home. {Meaning if your home that you are buying only cost $45,500.00, your so called credit won’t exceed $4,500.00}
What is a first time home buyer? Well for this purpose it is described as an individual who had no present ownership interest in a principal residence for the three years prior the purchase of the home. If you are married both spouses’ must meet this requirement.
This “credit” is available for houses purchased after April 8th , 2008 and before July 1st, 2009.
Have you ever heard the phrase “If it sounds to good to be true it probably is.”? Well this in my opinion is one of those times. The “credit” has to be paid back. So is it a credit or a loan? Well, you decide. You must pay this back over a period of 15 years from your tax return. You have to start paying this back with the second tax year after the residence was purchased. No you only have to pay it back if you take the credit. You take the credit, two years later start paying it back.
So lets say you buy a $75,000.00 home and you elect to take this credit. You’ll get a credit of $7,500.00. In two years you will add back to your return (subtract from a refund, add to an amount due) $500.00 And will keep doing this for 15 years. There will be phase outs for income and a few other rules but that is the just of it.
Seems more like a loan than a credit to me.
I have a few clients who will qualify for this so called credit and I have already called and visited with them about it. I advised them of all the situations that applied to them and asked them to discuss it amongst themselves then to re-visit the issue come time to prepare their returns. As to take it or not I am not advising anyone in this, My view is that Taxes are high enough, new homeowners from my client base are young couples (one individual) starting out and having a tax liability for the next 15 years seems a bit questionable.
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