New Tax Laws for 2011
Tax Breaks Extended, Expanded for 2010, 2011 and 2012
A long period of uncertainty about the state of future income tax rates has ended. On December 17, the President signed the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.” This wide-ranging legislation includes a number of measures that affect taxpayers in 2010, 2011 and beyond, including:
· Extending existing income tax rates and a number of tax credits and incentives through 2012
· Applying a Social Security “tax holiday” for individuals for 2011
· Changing the estate tax for 2011 and 2012 and potentially even for 2010
· Extending access to unemployment benefits for 2011
It is important to note that most of the provisions are temporary in nature, and future action will be required again to set tax rates and deal with many of the other issues on a more permanent basis.
Here is a rundown of the key provisions included in the package and action steps you may want to consider:
Individual Income/Payroll Taxes
Extension of 2010 tax rates
Federal income tax rates that were established in 2001 and that were set to expire at the end of 2010 have been extended through 2012. This includes maintaining current tax brackets at 10%, 15%, 25%, 28%, 33% and 35%. Under provisions of the law, these brackets will apply to taxpayers as they’ve applied in 2010.
Extension of more favorable capital gain and dividend tax rates
Lower tax rates on capital gains and dividends were also extended through 2012. This includes a tax rate on long-term capital gains and qualifying dividends of 0% for those in the 10% and 15% income tax brackets. The applicable tax rate of qualifying dividends and long-term capital gains for those in higher tax brackets is 15%.
Temporary Employee Payroll Tax Holiday (2011 only)
The 6.2% Social Security tax, a portion of the FICA tax, paid by employees (up to the first $106,800 in income from an employer) will be reduced to 4.2% for 2011. This creates a potential savings of up to $2,136 in a year by reducing the amount of payroll tax deducted from individual paychecks. The two-percentage point payroll tax holiday does not apply to the employer contribution to Social Security, and the payroll tax related to Medicare for both employers and employees remains unchanged. Self-employed individuals will pay Social Security payroll taxes at a rate of 10.4% in 2011 (rather than the standard 12.4% rate).
Temporary Alternative Minimum Tax (AMT) Relief
Exemption amounts applicable for purposes of calculating AMT have been increased for 2010 and 2011. This will prevent many taxpayers from being subject to AMT.
Extension of Other Provisions
A number of other provisions that were part of previous tax law set to expire at the end of 2010 have been extended for two years, including:
· The Personal Exemption Phase-Out, which has reduced the exemption amount for individuals who reach certain income levels, continues to be
repealed through 2012.
· The itemized deduction limitation that affected higher income taxpayers also continues to be repealed through 2012
Possible Action Steps
· Review your paycheck stub to determine if it makes sense to reduce the amount of income tax withheld.
· Consider utilizing the savings from your paycheck in 2011 to expand contributions to a workplace retirement plan or IRA.
· Review your investment portfolio to determine whether it can be more effectively positioned to take advantage of the extension of lower qualifying dividend
and capital gain tax rates, including the potential for lower bracket taxpayers to manage income to potentially reduce the tax rate on these types of income to 0%.
Estate Tax
Estate tax rates and exemption amounts have changed several times since 2001. In 2009, a per-person exemption of $3.5 million was applicable, and estates larger than that were subject to a 45% tax rate. In 2010, the estate tax was repealed for one year only. As the law stood prior to this legislation, the exemption in 2011 would have been set at $1 million per person with an applicable tax rate of up to 55%. As part of the package now in place, the estate tax rate for 2011 and 2012 will be 35%, with a $5 million per person and $10 million per couple exemption. This means most estates in 2011 and 2012 will not be subject to the tax. These new rules can also apply for people dying in 2010, though estates can make an election to retain the old estate tax repeal rules.
Possible Action Steps
· Consider how your estate plan is affected by the new exemption amounts and tax rates in effect for 2011 and 2012.
· Talk to your tax advisor and estate attorney about potential gifting strategies in light of the new tax law.
Education Incentives
Extension of American Opportunity Tax Credit
The $2,500 tax credit for the cost of tuition and related expenses paid during a taxable year, which applied in 2009 and 2010, is extended to 2011 and 2012. Taxpayers receive a credit based on 100% of the first $2,000 of tuition and related expenses, and a 25% credit for the next $2,000 of tuition and related expenses. The credit is subject to a phase-out for taxpayers with adjusted gross incomes in excess of $80,000 ($160,000 for married couples filing a joint return).
Coverdell Accounts
Coverdell Education Savings Accounts, a tax-exempt savings plan used to pay elementary, secondary and higher education expenses of a designated beneficiary, will continue to allow annual contributions of up to $2,000 in 2011 and 2012.
Student loan interest deduction
Some individuals may deduct up to $2,500 in interest on qualified education loans from their taxes. Income limits apply, and in 2010 the deduction was fully phased out for those with income of $75,000 or above ($150,000 or above for a married couple filing a joint return). The deduction is maintained for 2011 and 2012 and may be indexed for inflation.
Employer-provided education assistance
An employee can exclude from gross income up to $5,250 per year of employer-provided education assistance including post-graduate education. This provision is extended through 2012.
Possible Action Steps
· Try to manage income flow to stay within the threshold amounts that allow you to take advantage of the American Opportunity Tax Credit.
· Consider utilizing Coverdell Accounts, particularly for the benefit of children or grandchildren who are elementary or secondary students.
Charitable IRA Rollovers
A provision of the legislation extends for tax years 2010 and 2011 the ability of individuals to direct distributions of up to $100,000 (per person limit) to qualified charities from an IRA and incur no tax liability. Since this provision was approved late in 2010, taxpayers have through January 31, 2011 to make charitable IRA rollovers that can be treated as if they occurred in 2010.
Possible Action Steps
· Contact your favorite charities to discuss logistics of making a gift using an IRA rollover.
· Be sure to execute a charitable IRA rollover by Jan. 31, 2011 if you want it to apply for the 2010 tax year.
How 2011 Tax Laws will Affect You
Unemployment Benefits
Federal unemployment insurance benefits have been reauthorized for 2011. This continues Emergency Unemployment Compensation benefits for one more year. Those who qualify for extended unemployment benefits will still be able to receive them in 2011.
Possible Action Steps
· Contact your state employment service to help determine eligibility requirements to qualify for extended unemployment benefits.
Business Tax Incentives
Extension of bonus depreciation
Historically, businesses have had to depreciate many capital expenditures over a number of years. Special incentives were put in place beginning in 2008 and now they will be continued and expanded for 2011 and 2012. Businesses will continue to have the ability to take an additional depreciation deduction allowance on certain property. For investments placed into service after September 8, 2010 and through December 31, 2011, a bonus depreciation of 100% is allowed. For investments placed into service after December 31, 2011 and through December 31, 2012, 50% bonus depreciation is allowed.
Extension of 179 deduction
A taxpayer with a sufficiently small amount of annual investment in qualifying property may elect to deduct the cost of certain property placed into service rather than depreciate those costs over time. Under current law, in 2010 and 2011 the maximum amount that a taxpayer will be able to expense is $500,000. The amount will be reduced (but not below zero) by the amount be which the cost of the property exceeds $2,000,000. Under the new law, for tax years beginning in 2012, the maximum amount a taxpayer will be able to expense will be $125,000 of the cost of qualifying property placed in service for the tax year. The $125,000 amount will be reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the tax year exceeds $500,000.
Exclusion of small business capital gains
Non-corporate taxpayers typically can exclude 50% of the capital gain from the sale of certain small business stock acquired at original issue and held for at least five years. For stock acquired after February 17, 2009 and on or before September 27, 2010, the exclusion is increased to 75%. For stock acquired after September 27, 2010 and before January 1, 2012, the exclusion is 100%.
Possible Action Steps
· Determine if the timing of capital expenditures is appropriate in order to take advantage of accelerated depreciation and expensing provisions of the tax law.
· Incorporate changes and extensions of the tax law as a factor to consider in your business planning process.
Now that tax laws have been more clearly defined for the near term, it is a good time to meet with your financial advisor. You can discuss how the tax laws may affect your financial circumstances and explore steps to take advantage of new opportunities.
A long period of uncertainty about the state of future income tax rates has ended. On December 17, the President signed the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.” This wide-ranging legislation includes a number of measures that affect taxpayers in 2010, 2011 and beyond, including:
· Extending existing income tax rates and a number of tax credits and incentives through 2012
· Applying a Social Security “tax holiday” for individuals for 2011
· Changing the estate tax for 2011 and 2012 and potentially even for 2010
· Extending access to unemployment benefits for 2011
It is important to note that most of the provisions are temporary in nature, and future action will be required again to set tax rates and deal with many of the other issues on a more permanent basis.
Here is a rundown of the key provisions included in the package and action steps you may want to consider:
Individual Income/Payroll Taxes
Extension of 2010 tax rates
Federal income tax rates that were established in 2001 and that were set to expire at the end of 2010 have been extended through 2012. This includes maintaining current tax brackets at 10%, 15%, 25%, 28%, 33% and 35%. Under provisions of the law, these brackets will apply to taxpayers as they’ve applied in 2010.
Extension of more favorable capital gain and dividend tax rates
Lower tax rates on capital gains and dividends were also extended through 2012. This includes a tax rate on long-term capital gains and qualifying dividends of 0% for those in the 10% and 15% income tax brackets. The applicable tax rate of qualifying dividends and long-term capital gains for those in higher tax brackets is 15%.
Temporary Employee Payroll Tax Holiday (2011 only)
The 6.2% Social Security tax, a portion of the FICA tax, paid by employees (up to the first $106,800 in income from an employer) will be reduced to 4.2% for 2011. This creates a potential savings of up to $2,136 in a year by reducing the amount of payroll tax deducted from individual paychecks. The two-percentage point payroll tax holiday does not apply to the employer contribution to Social Security, and the payroll tax related to Medicare for both employers and employees remains unchanged. Self-employed individuals will pay Social Security payroll taxes at a rate of 10.4% in 2011 (rather than the standard 12.4% rate).
Temporary Alternative Minimum Tax (AMT) Relief
Exemption amounts applicable for purposes of calculating AMT have been increased for 2010 and 2011. This will prevent many taxpayers from being subject to AMT.
Extension of Other Provisions
A number of other provisions that were part of previous tax law set to expire at the end of 2010 have been extended for two years, including:
· The Personal Exemption Phase-Out, which has reduced the exemption amount for individuals who reach certain income levels, continues to be
repealed through 2012.
· The itemized deduction limitation that affected higher income taxpayers also continues to be repealed through 2012
Possible Action Steps
· Review your paycheck stub to determine if it makes sense to reduce the amount of income tax withheld.
· Consider utilizing the savings from your paycheck in 2011 to expand contributions to a workplace retirement plan or IRA.
· Review your investment portfolio to determine whether it can be more effectively positioned to take advantage of the extension of lower qualifying dividend
and capital gain tax rates, including the potential for lower bracket taxpayers to manage income to potentially reduce the tax rate on these types of income to 0%.
Estate Tax
Estate tax rates and exemption amounts have changed several times since 2001. In 2009, a per-person exemption of $3.5 million was applicable, and estates larger than that were subject to a 45% tax rate. In 2010, the estate tax was repealed for one year only. As the law stood prior to this legislation, the exemption in 2011 would have been set at $1 million per person with an applicable tax rate of up to 55%. As part of the package now in place, the estate tax rate for 2011 and 2012 will be 35%, with a $5 million per person and $10 million per couple exemption. This means most estates in 2011 and 2012 will not be subject to the tax. These new rules can also apply for people dying in 2010, though estates can make an election to retain the old estate tax repeal rules.
Possible Action Steps
· Consider how your estate plan is affected by the new exemption amounts and tax rates in effect for 2011 and 2012.
· Talk to your tax advisor and estate attorney about potential gifting strategies in light of the new tax law.
Education Incentives
Extension of American Opportunity Tax Credit
The $2,500 tax credit for the cost of tuition and related expenses paid during a taxable year, which applied in 2009 and 2010, is extended to 2011 and 2012. Taxpayers receive a credit based on 100% of the first $2,000 of tuition and related expenses, and a 25% credit for the next $2,000 of tuition and related expenses. The credit is subject to a phase-out for taxpayers with adjusted gross incomes in excess of $80,000 ($160,000 for married couples filing a joint return).
Coverdell Accounts
Coverdell Education Savings Accounts, a tax-exempt savings plan used to pay elementary, secondary and higher education expenses of a designated beneficiary, will continue to allow annual contributions of up to $2,000 in 2011 and 2012.
Student loan interest deduction
Some individuals may deduct up to $2,500 in interest on qualified education loans from their taxes. Income limits apply, and in 2010 the deduction was fully phased out for those with income of $75,000 or above ($150,000 or above for a married couple filing a joint return). The deduction is maintained for 2011 and 2012 and may be indexed for inflation.
Employer-provided education assistance
An employee can exclude from gross income up to $5,250 per year of employer-provided education assistance including post-graduate education. This provision is extended through 2012.
Possible Action Steps
· Try to manage income flow to stay within the threshold amounts that allow you to take advantage of the American Opportunity Tax Credit.
· Consider utilizing Coverdell Accounts, particularly for the benefit of children or grandchildren who are elementary or secondary students.
Charitable IRA Rollovers
A provision of the legislation extends for tax years 2010 and 2011 the ability of individuals to direct distributions of up to $100,000 (per person limit) to qualified charities from an IRA and incur no tax liability. Since this provision was approved late in 2010, taxpayers have through January 31, 2011 to make charitable IRA rollovers that can be treated as if they occurred in 2010.
Possible Action Steps
· Contact your favorite charities to discuss logistics of making a gift using an IRA rollover.
· Be sure to execute a charitable IRA rollover by Jan. 31, 2011 if you want it to apply for the 2010 tax year.
How 2011 Tax Laws will Affect You
Unemployment Benefits
Federal unemployment insurance benefits have been reauthorized for 2011. This continues Emergency Unemployment Compensation benefits for one more year. Those who qualify for extended unemployment benefits will still be able to receive them in 2011.
Possible Action Steps
· Contact your state employment service to help determine eligibility requirements to qualify for extended unemployment benefits.
Business Tax Incentives
Extension of bonus depreciation
Historically, businesses have had to depreciate many capital expenditures over a number of years. Special incentives were put in place beginning in 2008 and now they will be continued and expanded for 2011 and 2012. Businesses will continue to have the ability to take an additional depreciation deduction allowance on certain property. For investments placed into service after September 8, 2010 and through December 31, 2011, a bonus depreciation of 100% is allowed. For investments placed into service after December 31, 2011 and through December 31, 2012, 50% bonus depreciation is allowed.
Extension of 179 deduction
A taxpayer with a sufficiently small amount of annual investment in qualifying property may elect to deduct the cost of certain property placed into service rather than depreciate those costs over time. Under current law, in 2010 and 2011 the maximum amount that a taxpayer will be able to expense is $500,000. The amount will be reduced (but not below zero) by the amount be which the cost of the property exceeds $2,000,000. Under the new law, for tax years beginning in 2012, the maximum amount a taxpayer will be able to expense will be $125,000 of the cost of qualifying property placed in service for the tax year. The $125,000 amount will be reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the tax year exceeds $500,000.
Exclusion of small business capital gains
Non-corporate taxpayers typically can exclude 50% of the capital gain from the sale of certain small business stock acquired at original issue and held for at least five years. For stock acquired after February 17, 2009 and on or before September 27, 2010, the exclusion is increased to 75%. For stock acquired after September 27, 2010 and before January 1, 2012, the exclusion is 100%.
Possible Action Steps
· Determine if the timing of capital expenditures is appropriate in order to take advantage of accelerated depreciation and expensing provisions of the tax law.
· Incorporate changes and extensions of the tax law as a factor to consider in your business planning process.
Now that tax laws have been more clearly defined for the near term, it is a good time to meet with your financial advisor. You can discuss how the tax laws may affect your financial circumstances and explore steps to take advantage of new opportunities.
