By Stephanie Salmon, CPA
Just when you thought that it was too late for new tax legislation to affect 2010 returns, the recently enacted Tax Relief Act contains incentives for all types of taxpayers: individuals, businesses, and estates. We have summarized several of provisions likely to impact your taxes.
Extension of Bush Tax Cuts
- The heart of the new law is a two-year extension of the Bush tax cuts with a top tax rate of 35% and 0% - 15% long-term capital gains and qualified dividends tax rates.
Payroll Tax Cut in the 2010 Tax Relief Act
- The Social Security payroll tax on individual wages will be lowered to 4.2% in 2011, from the usual 6.2% rate
- Social Security taxes apply only to the first $106,800 in earnings in 2011
The employer's share of Social Security tax is not affected; it stays at 6.2%
- The payroll tax reduction will not affect the worker's future Social Security benefit, because benefits are based on lifetime earnings, not the amount of tax paid by the worker into the Social Security system.
- For 2010 only, however, there are efforts to extend it beyond 2011
Extension of Expanded Child Tax Credit
- $1,000 maximum child tax credit is extended for two years through 2012. Up to $1,000 for each qualifying child under the age of 17
- Phase-out amounts are left unchanged at modified adjusted gross income over $55,000- $110,000 depending on filing status.
Extension of the American Opportunity Credit in the 2010 Tax Relief Act
A two-year extension of the American Opportunity tax credit for college costs. Families with a family member in college can benefit from a tax credit for tuition and fees. From a taxpayer's point of view, a credit is almost always preferable to a deduction, because a credit reduces taxes owed, while a deduction only reduces taxable income.
- The maximum amount of the American Opportunity credit is $2,500 (up from a maximum of $1,800 under the Hope credit) and is reached when a student has qualifying expenses of $4,000 or more.
- The credit is 100% of the first $2,000 of qualifying expenses and 25% of the next $2,000.
- The credit is available for up to four years of undergraduate education and provides that 40% of the credit is refundable.
- Taxpayers with somewhat higher incomes can qualify for the American Opportunity credit, as the phase-out of the credit begins at AGI in excess of $80,000 ($160,000 for joint filers).
Expensing and Additional First-Year Depreciation
In previous legislation, Congress allowed businesses to more rapidly deduct capital expenditures of most new tangible personal property, and certain new property with a first-year write-off of 50% of the cost.
- The new law extends and temporarily increases the additional first-year depreciation provision for investment in new business equipment.
- For investments placed in service after September 8, 2010 and through December 31, 2011, the new law provides for 100% additional first-year depreciation, without limit.
- Note that even though the legislation did not take shape in Congress until mid-December of 2010, the effective date of this provision was made retroactive, to include qualifying property placed in service after September 8, 2010.
Exemptions and Itemized Deductions No Longer Phased Out
Overall income limits for personal and dependency exemptions and itemized deductions do not apply.
Other Tax Breaks Extended
Several tax breaks that expired at the end of 2009 were renewed and can be claimed on 2010 returns. They include:
- State and local general sales tax deduction, primarily benefiting people living in areas without state and local income taxes.
- Educator expense deduction for kindergarten through grade 12 educators with out-of-pocket classroom expenses of up to $250.
An interesting bill continues to wait for the President?s signature -?Plain Writing Act of 2010'' will affect some IRS guidance
On September 29 the House approved the ?Plain Writing Act of 2010? a bill that requires heads of each executive agency to use plain language in any document issued to the public (other than a regulation), including documents and other text released in electronic form. Provisions of the bill require IRS to draft all public documents in plain writing. The bill was previously approved by the Senate by unanimous consent on Sept. 27. It is now cleared for the President's signature.
