December 23, 2010
As you all know, the past year has been a tax rollercoaster. In preparing for 2011, we wanted to highlight for you some important tax law changes for the coming year.
Retentions of Items Slated to Expire
-Tax rates in 2011 remain the same as in 2010.
-Dividends and Long Term Capital Gains will still be taxed at 15%.
-Low income (taxable income of $34,000 single or $68,000 married) individuals will continue to pay zero percent on capital gains.
-The Alternative Minimum Tax patch, which was slated to expire after 2009, was actually increased for 2010 and 2011. Without the patch it had been estimated that the average taxpayer subject to the tax would have paid over $3,000 more in tax in 2010.
-The percentage limitation on itemized deductions of higher earners has now been eliminated for 2011 and 2012. The same applies to the personal exemption phase-out for high earners.
-The “marriage penalty” relief which was earlier granted for 2010 is now extended through 2012.
-The child tax credit is extended through 2012.
-The earned income tax credit is extended through 2012.
-The dependent care credit is extended through 2012.
-The American Opportunity Tax Credit, which used to be called the Hope Credit, was extended through 2012 and is now good for 4 years of higher education instead of the 2 year limit on the Hope Credit.
-The above the line student loan interest deduction was extended through 2012.
-The deduction for sales taxes has been reinstated for 2010 and 2011.
-The higher education tuition deduction has been reinstated for 2010 and 2011.
-The teacher’s classroom expense deduction has been reinstated for 2010 and 2011.
-The 15 year recovery period for qualified restaurant building and equipment, retail improvements and leasehold improvements has been extended for 2010 and 2011.
Payroll Tax Cut
The employee portion of Social Security tax is reduced from 6.2% to 4.2% for 2011. Self employed individuals will pay 10.4% instead of 12.4%.
50% Bonus Depreciation will become 100% Bonus Depreciation for assets acquired after September 8, 2010 and before January 1, 2012. It has no dollar cap but is only available for new property.
Each individual who dies after December 31, 2010 will have a $5,000,000 estate tax exemption for 2011 and $5,000,000 adjusted for inflation in 2012. The tax rate will be 35%. Assets will have a basis of fair market value at day of death or at the alternative valuation date in the hands of the estate or heirs will apply to all assets in an estate.
Executors of estates of individuals who died in 2010 will have the option of electing to be taxed under the 2011 rules. If they choose not to elect, the assets in the estate will have a basis determined as follows: Start from the lower of basis in the hands of the decedent or fair market value at day of death, whichever is lower. Add up to $1,300,000 to the value of whichever assets the executor selects but not so as to increase any asset to above fair market value at the valuation date. Add an additional $3,000,000 to the basis of any assets inherited by the decedent’s spouse but not to increase any asset to above fair market value at the valuation date.
The executor of an individual who failed to utilize his or her $5,000,000 exclusion can elect to pass the unused portion of the exclusion on to a surviving spouse but only on a timely filed estate tax return. If this concept remains in the law, it will greatly reduce the effort that married couples with taxable estates now put into keeping their holdings on an equal footing. At the moment it is only valid if both spouses die in 2011 or 2012.
The federal estate tax credit, which had been replaced by a deduction, has been revived for 2011 and 2012.
In general, any tax filing required under these rules for decedents who died in 2010 is due nine months from date of enactment August 17, 2011.
The lifetime Gift Tax Exclusion for gifts made in 2010 remains at $1,000,000 but the rate has been reduced from 45% to 35%. For gifts made after December 31, 2010, the lifetime exclusion is raised to $5,000,000. The tax rate will be 35%.
The Generation Skipping Tax exclusion has been raised to $5,000,000 for 2011 and 2012 to match the estate tax exclusion. The rate will be 35% for those years because the Generation Skipping Tax rate is tied to the maximum estate tax rate.
Section 179 Depreciation
The limit on the current deduction for depreciation of eligible property under Section 179 has been raised from $250,000 to $500,000. The phase-out threshold has been raised to $2,000,000.
Time to review your estate plan
With the many changes going into effect and the uncertainty about what will happen with the estate, GST and gift taxes in 2013, it's critical to revisit your estate plan. If you don't, the changes could result in your assets not being distributed according to your wishes or your family paying unnecessary taxes.
The law is complex and there are many contingencies to consider. We'd be pleased to work with you and your attorney to review your estate plan and update it as needed in light of the 2010 Tax Relief act.
Transfer Tax Exemptions and rates for 2009 – 2013
Estate Tax 1
Generation Skipping Transfer (GST)
Highest Gift, Estate and GST tax rates
0% for GST
1. Less any gift tax exemption already used during life. For 2011 and 2012, these amounts are “portable” between spouses.
2. Indexed for inflation.
3. Estates can elect to follow the pre-2010 Tax Relief act regime (estate tax repeal and limited step up in basis).
4. The benefits of the graduated gift and estate tax rates and exemptions are phased out for gift/estates over $10,000,000.
Hopefully this information was helpful and got you thinking about issues that may arise in the coming year. Feel free to let us know if you have any questions.
Gidney & Company, P.A., CPAs
We are amazed how quickly the year has passed. Congress continues to work on last minute income tax bills as this letter goes to press, but we will stay abreast of all the latest changes as they occur.
Attached is our tax information questionnaire to assist in organizing your tax information. Below are some significant items to bring to your attention. For links to these and other important sites, please visit our website at www.gidneycpa.com.
Cash for Clunkers
Good news — if you traded in that old junk vehicle under the "cash for clunkers bill" you do not have to pay tax on the credit you received. We don't even need to know about it unless you use your car for business, and even then you don't pay tax on the credit.
• First-time homebuyers. Qualifying first-time homebuyers (you or your spouse have not owned a home during the three years prior to purchase) purchase a home on or after January 1, 2009 through April 30, 2010 (June 30, 2010 if under binding contract by April 30, 2010) may be eligible for a tax credit of 10% of the purchase price, up to a maximum credit of $8,000.
• Existing homebuyers. Qualifying existing homeowners who have owned and lived in a principal residence for at least five consecutive years (during the eight years prior to purchase) may qualify for a tax credit for the purchase of a different principal residence. The tax credit is 10% of the purchase price, up to a maximum credit of $6,500, under the same income restriction, and schedule as first-time homebuyers.
• Some restrictions apply. To qualify for the credit, purchased homes must be used as the purchaser's principal residence for at least 36 months (vacation homes are not eligible). Other restrictions include: income limitations, age and dependency disqualifiers, and related party sales.
New Anti-fraud Protections
Under the new law, homebuyers must support credits claimed on 2009 and 2010 returns by attaching properly executed real estate settlement sheets to their returns. Also, the IRS can now automatically deny credits that appear to be claimed in error.
New Cars or Trucks
Several new tax deductions and credits are available this year if you bought a new car, light truck (GVW<8,500), motorcycle or motor home of any weight during the year. If you bought a new vehicle please provide a copy of the invoice with your tax documentation.
Recent IRS scrutiny of home mortgage interest deductions now require us to carefully track re-financings and the use of loan proceeds. Please provide us with any new home loan information, closing statements from any re-financings, and a summary of how any additional loan proceeds were used.
An IRS court case from 2008 reminds us of the rules on charitable contributions. ALL deductions of any amount must have a receipt. Any individual contribution over $250 must also have an acknowledgment letter from the charity, and the letter must be dated by the date we file your return. The letter must show the date and amount of any individual contribution over $250, and must also state that no goods or services were received in return for the contribution. Therefore, no documentation, no deduction, no exceptions.
Individual Retirement Accounts (IRA's)
As a reminder, the IRS has waived the minimum distribution requirement for Individual Retirement Accounts for 2009. Direct gifts from IRA's to qualified charitable organizations are still allowed for taxpayers over age 70.
There is a new special property tax deduction available in 2009 for property tax paid on your personal residence. Everyone who paid property tax in 2009 should provide the amounts.
You may have heard that the IRS is looking closely for offshore accounts. If you have an account or signature over an account with in a foreign country, or a foreign business ownership (not through a mutual fund) please let us know as some special rules will apply to you and you may have to file forms with a June due date.
Deductible mileage rates changed for 2009. Please provide us with the number of business miles, medical miles and charitable miles you drove during the year for this deduction.
A major change of college credits has provided us with the new "American Opportunity Credit", a special credit for undergraduate college students. If you have children in college, please discuss some options with us to ensure that you receive the best benefit for these costs. Also a major tax court case has changed Graduate school tuition deductions, please provide those cost too.
Roth IRA Conversions
You will be hearing from lots of "experts" this year that you need to convert your retirement accounts to Roth IRAs. While there are a number of advantages to conversions, there are an equal number of disadvantages that carry some major tax consequences. If considering Roth conversion, please contact us to discuss the tax implications.
Effective 1/1/2009 the amount you may give to one person in one year without any return filing requirements has been increased to $13,000.
The residential energy credit has been reinstated starting in January of 2009. If you added storm windows, doors, insulation or a furnace, the Federal credit is 30% of the cost of the product, plus installation fees for furnaces, up to a maximum of $1,500 for your home. There are also tremendous credits available for solar power, geothermal and wind energy that you should discuss with us if you are considering these changes. There is still a special tax credit for some new hybrid cars bought in 2009, so please bring that information (Sales receipt) to us as well.
Five-year Carry back Privilege for Business Losses Is Extended
The American Recovery and Reinvestment Act of 2009 (ARRA) that passed earlier this year allowed an eligible small business taxpayer to carry back a Net Operating Tax Loss (NOL) for either three, four, or five years. This is a beneficial exception to the two-year carry back rule that usually applies. However, the expanded NOL carry back privilege was only allowed to an Eligible Small Business (ESB) for a calendar year 2008 NOL or for an NOL generated in a fiscal tax year that began or ended in 2008. To be an ESB, the business must have had average annual gross receipts of no more than $15 million for the three-year period that ended with the loss year.
The new WHBAA now gives a similar expanded NOL carry back privilege to virtually all businesses, large and small alike. Specifically, the new expanded carry back deal is allowed for an NOL that is generated in a tax year that ends after 2007 and begins before 2010 (which means 2008 and 2009 for a calendar-year taxpayer). An NOL generated in one of these years can be carried back for three, four, or five years. Once again, this is a beneficial exception the two-year carry back rule that applies to most NOLs. However, the new election generally can only be made for one tax year that ends after 2007 and begins before 2010.
An election to take advantage of the new expanded NOL carry back privilege must be made by the due date (including any extension) of the return for the taxpayer’s tax year that begins in 2009. Once made, the election is irrevocable.
Small Businesses Can Use Expanded NOL Carry back Privilege for Two Years.
Say an eligible small business taxpayer took advantage of the prior-law expanded NOL carry back privilege (allowed by the ARRA) for its calendar-year 2008 NOL. If the business also has an NOL for calendar-year 2009, it can take advantage of the new expanded carry back privilege allowed by the new law for its 2009 NOL. In other words, the taxpayer can benefit twice from the expanded NOL carry back privilege: once with the prior-law deal for its 2008 NOL and again with the new deal for its 2009 NOL.
Higher Failure-to-file Penalties for Partnerships , S Corps and Individuals
The WHBAA hikes the penalty for failing to file a partnership return on Form 1065, or failing to provide required information on Form 1065, from the current $89 per partner per month to $195 per partner per month. The penalty can be assessed for up to 12 months. The higher penalty applies to Forms 1065 required for tax years beginning after 12/31/09.
The WHBAA also hikes the penalty for failing to file an S corporation return on Form 1120S, or failing to provide required information on Form 1120S, from the current $89 per shareholder per month to $195 per shareholder per month. The penalty can be assessed for up to 12 months. The higher penalty applies to Forms 1120S required for tax years beginning after 12/31/09.
Future Income Tax Rates & Other
With record Federal deficits predicted for the next 10 years, it is a foregone conclusion that future tax rates will be substantially higher than today. If you are considering selling property or stock there is a good chance that 2010 will be the lowest capital gains rates any of us will ever see again, and the 2010 rates continue to be the lowest rates since before World War II. You might want to discuss some tax strategies with us if you are expecting a major asset sale in 2010. Warning keep current on the tax laws, if you cannot please call us and make an appointment before and major transactions so that we can advise you.
There are literally hundreds of other changes, extensions and deletions that we will consider this year while preparing your return. Because of these changes we are requesting that everyone have their tax information to us by your suggested drop off date and no later than March 27, 2010. If you've gathered all your information prior to your suggested drop off date please feel free to drop it off earlier. Rest assured that we will utilize our best resources to provide you with timely, complete and accurate service while keeping your tax burden to the lowest legal amount.
For those who have difficulty “getting it all together” on time, please note that the Internal Revenue Service automatically permits a one hundred eighty (180) day extension for filling a return. However, this does not allow the taxpayer additional time to pay any taxes or estimated taxes that are due and if the taxes are not paid, the IRS will assess penalties to anyone who owes and filed an extension and has the option of not accepting the extension and charging additional penalties. Additional penalties may also be incurred depending on the amount of underpayment. Extensions will be considered and completed by April 7, 2010 for those requesting an extension or those with late information. We will make every attempt to complete your return, but depending on our workload at that time an extension may be required, and any taxes owed will need to be paid. Please note that we will not automatically apply for an extension without prior notification by taxpayer. Therefore, contact us as soon as possible if you need an extension, so that we may allocate our time effectively. The final day to pick up your return is April 14, 2009. At any time of pick up, we welcome the opportunity to discuss your return with you, and remind you that all invoices are payable at that time.
Thank you in advance for the opportunity to be of service to you.