Tax Relief, Unemployment Insurance Reauthorization and Jobs Creation Act (H.R. 4853)

Information taken from H.R. 4853, signed December 2010

After a year of speculation as to how Congress would address the looming expiration of the 2001 and 2003 tax cuts, the answer finally came this week. The Tax Relief, Unemployment Insurance Reauthorization and Jobs Creation Act of 2010 contains changes impacting both the 2010 tax year and the next two years. There were a few unanticipated items that were included in this act. We have attempted to provide you with a summary of the major changes that could affect you.The tax cut bills that were passed in 2001 and 2003 that were set to expire have been extended for twoyears, through 2012. Several of the items with expirations that were extended are listed below: Lower ordinary tax rates – The lowest tax bracket will remain at 10%, rather than increasing to 15%, and all other tax brackets will remain at their current level.
Lower capital gain, dividend tax rates – Long-term capital gains and qualified dividends will continue to be taxed at a top tax rate of 15%. Those items will remain tax-free for taxpayers in the two lowest tax brackets.
Phaseouts remain expired – The phaseouts of itemized deductions and personal exemptions had been gradually reduced over the last few years, to where there are no phaseouts at all for 2010. That elimination of the phaseouts will continue through 2012.
Larger child tax credit – The tax credit for dependent children will remain at $1,000, rather than being reduced to $500. This credit amount is still subject to a phaseout for married couples with AGI above $110,000 and singles above $75,000.
Larger dependent care credit – Single taxpayers, or couples where both spouses are employed, will continue to be eligible for the same level of dependent care credit. Eligible expenses remain $3,000 per child (maximum of 2 children) with a maximum credit rate of 35%.
Marriage penalty relief – The provisions helping couples minimize the marriage penalty – a larger standard deduction and 15% tax bracket – were extended through 2012.
Education incentives continue – The following incentives to save and pay for education have all been extended through 2012:
• The maximum contribution to Coverdell accounts will remain $2,000 (rather than falling to $500), and K-12 costs will continue to be qualified expenses.
• Employer-provided educational assistance of up to $5,250 will remain tax-free to the employee.
• The expanded above-the-line deduction for student loan interest will remain.
• The American Opportunity Tax Credit, an expanded version of the Hope Scholarship credit, will still be fully available to married couples with AGI below $160,000 and singles below $80,000 (subject to phaseout above those amounts).

Tuition and Fees Deduction – extends until December 31, 2011.

Mortgage Insurance Premiums – individuals paying mortgage insurance premiums may continue to deduct the premiums paid thru December 31, 2011.

Alternative Minimum Tax Relief

The highly anticipated patch to the Alternative Minimum Tax, which will help millions of taxpayers avoid the AMT, was included in this bill. Enacting this patch has been an annual occurrence since 2006, but this act extended the patch for both 2010 and 2011. For 2010, married couples will now have an AMT exemption amount of $72,450 and singles will have a $47,450 exemption. For 2011, those amounts will increase to $74,450 and $48,450, respectively. Because this AMT exemption is phased out for taxpayers with Alternative Minimum Taxable Income (AMTI) above certain thresholds, many taxpayers did not benefit from the exemption. While the phaseout is still in place, an increase in the exemption means it will take higher levels of income before it is fully phased out, allowing more taxpayers to benefit from the exemption.

Reduction in Payroll Taxes

For 2011, the 6.2% FICA tax that all employees pay on their wages will be reduced to 4.2% of income.
For self-employed taxpayers, their employment tax amount will drop from 12.4% to 10.4%. The maximum income subject to the tax will remain $106,800 for 2011. There is no change to the 1.45% Medicare tax that applies to all wages. Individuals whose wages or self-employment income meet or exceed this threshold will realize a total tax savings of $2,136 in 2011.

This change does not affect the employer portion of the employment tax.

IRA Charitable Distributions

For those over age 70½, distributions from an IRA directly to a charity will continue to be tax-free. In addition, taxpayers can elect to treat distributions made in January 2011 as if they were made in 2010. The effect of this aspect is that taxpayers have a one month extension for taking their 2010 Required Minimum Distribution, as long as that RMD goes directly to a charity. This provision continues to be limited to $100,000 per taxpayer.

Energy Efficient Appliance Credits

There are expanded energy efficient credits available for the purchase of appliances in 2011 (dishwashers, clothes washers, and refrigerators). The appliances must be manufactured in 2011 and the credit is based on the kilowatt usage or modified energy factor, so if you are interested in these credits, please contact our office for the details.

Non-business Energy Efficient Property Credits

The energy efficient property credits that were set to expire in 2010 have been extended through 2011. Therefore if you are considering improvements to your home, please contact our office to discuss the specifics of these extended credits.

Estate Tax Relief

Under this act, the federal estate tax exemption will increase to $5 million, the largest amount ever, before reverting to $1 million in 2013. In addition, the top tax rate for estates over this amount will be reduced from 55% to 35%. Both of these changes apply to 2011 and 2012 only. However, the act provides that the exemption amount is subject to inflation adjustments after 2012, leaving the impression that lawmakers may plan on eventually extending these changes past 2012.
In a surprise addition to the estate tax rules, this exemption amount has been made portable, meaning any exemption amount not used at the death of one spouse may be added to the exemption amount for the surviving spouse, provided the executor of the estate files a special election.
Another unexpected change is that the estate and gift tax systems will be re-unified under the new rules for gifts made after 2010. Since 2001, the lifetime exemption for gifts had been limited to $1 million, while the estate tax exemption gradually increased to as high as $3.5 million in 2009. Under the new rules, individuals will be able to use the full $5 million exemption to make lifetime gifts without incurring gift tax. Married couples will be able to make combined lifetime gifts of up to $10 million. The new 35% tax rate will apply to gifts above the exemption amount.

Finally, there is a special election available for estates of individuals dying in 2010. Administrators of the estate of someone dying in 2010 may either: (1) elect the new $5 million estate tax exemption, with an unlimited adjustment to the basis of assets included in the decedent’s estate, or (2) elect the temporary full repeal of the estate tax, with the adjustment to the basis of the decedent’s property limited to $1.3 million (more for spousal transfers). Executors or personal representatives faced with this election should consult with their tax advisor before making a decision.

Mileage Rates for 2011

Business $0.51/mile
Medical $0.19/mile
Charitable $0.14/mile

Small Business Incentives

Section 168(k) bonus depreciation rules allow businesses to deduct up to 100% of the cost of new assets placed in service during 2010 if the assets were purchased between September 8, 2010 and January 1, 2012. Prior to September 8th, businesses are allowed to deduct up to 50% of the cost of the asset.

Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment purchased of the first $500,000 for 2010 and 2011; however, the deduction is phased out when assets totaling $2,000,000 and $2,500,000 are purchased. Lower limits of $125,000 return in 2012, and the phase out begins when assets totaling $500,000 are purchased.

15-year straight line cost recovery for qualified leasehold improvements, restaurant buildings and improvements, and qualified retail improvements has been extended until January 1, 2012.