“Putting more money in the pockets of families most likely to spend it, helping businesses invest and grow — that’s how we’re going to spark demand, spur hiring, and strengthen our economy in the New Year.” – President Obama before signing the new tax bill into law
On December 17, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.
The new law solidifies many parts of the tax law that expired at the end of last year or were scheduled to expire on December 31, 2010. It will put extra dollars in the pockets of millions of Americans — money that politicians are hoping will stimulate the economy.
Here is a rundown of the significant provisions affecting individuals in 2011 (see box below for business tax breaks).
1. Lower tax rates for individuals will stay in place. For 2011 and 2012, the Tax Relief Act extends individual tax rates at 10, 15, 25, 33 and 35 percent. Without the new law, rates were scheduled to increase to 15, 28, 31, 36 and 39.6 percent.
2. A new payroll tax cut will be created for 2011. Most working Americans will get a raise in their 2011 paychecks as a result of the new law. Regardless of an individual’s income, the employee share of the Social Security tax withheld from wages will drop from 6.2 percent to 4.2 percent up to the taxable wage ceiling of $106,800. The extra amount employees will receive in their paychecks is expected to provide a boost to the economy. A single taxpayer making $50,000 a year will save approximately $1,000 in Social Security taxes. (The Social Security tax on self-employment income was also reduced by 2 percent.)
3. Favorable rates on capital gains and dividends remain. For 2010, long-term capital gains and qualified dividends are taxed at a maximum rate of 15 percent (zero percent for taxpayers in the lowest two brackets). The new law extends these low rates through December 31, 2012.
If Congress had not acted, the top rate on capital gains would have increased to 20 percent in 2011. Dividends could have been taxed at a rate of up to 39.6 percent
4. The estate tax comes back but at a more favorable exclusion amount and tax rate than expected. For 2011, the estate tax exclusion amount will be $5 million and the maximum estate tax rate will be 35 percent.
Background: A law passed in 2001 gradually increased the exclusion amount and decreased the maximum tax rate up until 2010, when the federal estate tax was repealed for one year only. In 2011, it was scheduled to come back with an exclusion of only $1 million and a maximum tax rate of 55 percent. So the new $5 million exclusion means that far fewer estates will be hit with estate tax.
The new law also makes changes to the gift tax, the generation skipping tax and the rules involving the tax basis of assets. We will detail these changes in future articles. In addition, the law provides new options for estates of individuals dying in 2010. Consult with your estate planning adviser because the new law has many implications.
5. The alternative minimum tax (AMT) patch is applied again. If Congress had not taken action, millions more individuals would have been forced to pay the AMT for 2010 and 2011. The two-year patch expands exemption amounts as follows:
- $72,450 for married joint-filing couples and surviving spouses for 2010 ($74,450 for 2011).
- $47,450 for single individuals for 2010 ($48,450 for 2011).
- $36,225 for married individuals who file separately ($37,225 for 2011).
Without the patch, the exemption amounts would have dropped to $45,000 for joint filers, $33,750 for singles and $22,500 for married individuals filing separately. Bigger exemptions mean less chance of being hit with the AMT.
6. The $1,000 child tax credit is extended. For qualified taxpayers, the $1,000 credit will be available through December 31, 2012. (It begins to phase out for taxpayers with adjusted gross income of $110,000 for joint filers and $75,000 for singles.) Without the new law, the child tax credit was scheduled to drop to $500.
7. A higher child and dependent care credit will still be available for two more years. If you have expenses for care of your under-age-13 children while you work, you may be eligible to collect a credit. The tax break is also available if you pay someone to care for an incapacitated dependent at home, such as a parent or spouse. The new law extends a higher credit for qualified taxpayers through December 31, 2012. For one dependent, the maximum credit is based on up to $3,000 of eligible care expenses. For two or more dependents, the credit base remains up to $6,000 of eligible expenses. The credit percentage ranges from a maximum of 35 percent to a minimum of 20 percent, depending on income.
Without the new law, the maximum credit base for 2011 would have dropped to $2,400 of eligible expenses for one dependent and $4,800 for two or more.
8. A better tax credit for higher education stays in place. There is good news for parents and students paying college tuition because the American Opportunity tax credit is now available through December 31, 2012.
Background: An earlier law renamed the Hope Education credit the American Opportunity credit, and made it more valuable for eligible taxpayers paying qualified higher education expenses. However, the American Opportunity credit was scheduled to expire at the end of 2010. Now it is extended for two more years. There are income limits. The credit begins to phase out for joint taxpayers when adjusted gross income reaches $160,000 ($80,000 for singles.)
A separate deduction for higher education tuition was also extended through 2011. However, you cannot claim the American Opportunity credit in the same year that you claim the tuition deduction. You must pick the most beneficial tax break in your situation.
9. The higher contribution amounts for Coverdell Education Accounts last another two years. An earlier tax law increased the amount you could put into a Coverdell Education Savings Account to $2,000 from $500. It also allowed the accounts to be tapped for elementary and secondary school expenses.
These tax benefits were scheduled to expire at the end of 2010. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act now extends them through December 31, 2012.
10. The “marriage penalty” is eased for another two years. Getting married can cause a couple’s combined tax bill to be higher than when they were single. An earlier tax law eased the marriage penalty by tweaking tax brackets for married couples and giving them bigger standard deductions. But the fixes were scheduled to disappear after 2010.
The new law extends marriage penalty relief through December 31, 2012.
11.The tax credit for energy-efficient home improvements is extended another year. An earlier law established a credit for 30 percent of 2009 and 2010 expenditures on energy-efficient insulation, windows, doors, roofs, and heating and cooling equipment in U.S. residences. The maximum credit allowed for 2009 and 2010 combined is $1,500. The credit, under Internal Revenue Code Section 25C, was scheduled to expire at the end of 2010.
Under the new law, the energy-efficient home improvement credit is extended through December 31, 2011. However, the credit percentage is reduced to only 10 percent and the maximum credit is only $500 reduced by credits claimed in earlier years. Credits for certain items are subject to dollar limitations.
12. The itemized deduction and personal exemption “phase-out” rules for big earners are repealed for two more years. Before 2010, higher-income taxpayers had their itemized deductions and personal exemption write-offs phased out when they reached certain limits. This means that they didn’t get the full benefit of the most popular itemized deductions such as mortgage interest, state and local taxes, charitable contributions, and miscellaneous deductions.
For 2010, the phase-out rules are gone but the rules were scheduled to reappear in 2011. The new law extends the repeal of these phase-out rules through December 31, 2012.
13. Unemployment benefits are extended for eligible individuals. Under the new law, emergency unemployment benefits will remain at their current level for 13 months.
Business Tax Breaks
- The new law doubles 50 percent bonus depreciation to 100 percent for qualified business assets. According to the Treasury Department, complete expensing could generate more than $50 billion in additional investment in the United States in 2011. This provision is available to all businesses, regardless of size for eligible assets placed in service between September 9, 2010 and December 31, 2011. For assets placed in service in 2012, 50 percent bonus depreciation will be available.
- The research tax credit is renewed retroactively. The valuable credit, which expired at the end of 2009, is extended through December 31, 2011. It is available to companies that introduce new products, improve current products, and develop or enhance their processes. (President Obama has asked Congress to make the credit permanent, rather than renew it periodically — often after it expires. The new law did not do this. It only temporarily extends the research tax credit.)
- The Work Opportunity Tax Credit is extended through December 31, 2011. The credit provides financial incentives for employers to hire workers from certain disadvantaged groups. In general, it is worth 40 percent of up to $6,000 of the worker’s eligible wages during the first year. Note: Two targeted groups, unemployed veterans and “disconnected youth” were not included in the extension.
- A larger tax-free fringe benefit for employer-provided transit passes is extended through 2011. The amount (adjusted for inflation) was $230 for 2010 but was scheduled to drop to $120 in 2011 without the new law.
- A tax credit for employers providing child care facilities is extended through December 31, 2012.
The new law also extends many other incentives for businesses involving energy, disasters and charitable contributions. For more information regarding your situation, consult with your tax adviser.
About William H. Bunch
William (Bill) H. Bunch, CPA, PFS, president, William H. Bunch, CPA, PA, is a Green Plus Mover. He attended the University of North Carolina at Chapel Hill, where he earned a bachelor of science degree in accounting. Bill initially learned about accounting from his father, John Bunch, an accountant and banker in Asheboro, NC. His father taught him that balancing the books is just the first step: that analyzing the numbers and making recommendations are critical to guiding clients towards their goals.
The concept of setting and reaching goals, therefore, was ingrained in Bill early on by his father. As a natural progression, Bill founded his firm in 2001 on the premise of helping clients reach their personal and business goals via knowledgeable accounting, consulting and tax advice. He and his team of CPAs and other professionals service over 500 clients in the Chapel Hill area, including small business owners and individuals. At the firm, clients’ overall goals are documented and examined and considered throughout the relationship. Prior to founding his firm, Bill was a partner in another local accounting firm and practiced accounting for over twenty years.
Bill began his career in public accounting while a student at UNC Chapel Hill in 1980. Many of his Pi Kappa Phi fraternity brothers were also accounting majors and they often studied together. After he graduated from UNC-CH in 1982, he earned his CPA and entered the field of public accounting. He joined the Chapel Hill Chamber Board of Directors in December 2002.
Bill has always been interested in the real estate arena, and using real estate as a means to build and acquire wealth and reduce taxes. He helps his accounting and consulting clients build their net worth and real estate holdings and fully understand the tax planning and tax obstacles that are involved in real estate acquisition and planning. Over the years he’s assisted and consulted with clients with residential and commercial rental real estate purchases, property management, real estate development, office buildings and condominiums, like-kind exchanges, subdivision development, vacation homes, residential and commercial construction, and other areas in real estate.
Taxes are an integral part of any comprehensive financial plan whether business or personal. Preparing, reviewing, and signing thousands of tax returns over the years has enabled him to learn from his clients’ situations what works and what doesn’t. Clients in Chapel Hill and the surrounding area are diversified, exposing him to a myriad of financial activities where proper tax planning has resulted in significant tax savings for his clients.
In 1998, Bill’s passion for small business consulting led him to join the Results Accounting Network (RAN-One), a worldwide network of accountants who specialize in working with businesses to increase profits and value, add structure, and a myriad of other consulting tools. Helping small- to medium-sized businesses grow to their full potential is the goal of the RAN-One network. Bill and his team take advantage of a wide array of software tools to help business owners and CFOs identify and monitor key performance indicators (KPI) to help manage businesses more profitably.
For more information about Mr. Bunch and his firm, contact info@WilliamHBunchCPA.com.
The Institute for Sustainable Development