A number of key tax cuts became effective in the current year (2010) as a result of the provisions of the Economic Growth and Tax Relief Reconciliation Act passed in 2001 (the “2001 Act”). In addition, the 2001 Act previously had reduced income tax rates for individual income taxpayers. However, these tax cuts all were set to expire as of December 31, 2010. Fortunately, Congress and the President gave taxpayers a holiday gift and extended these tax breaks and filled their stockings with a few others!
Following is a summary of some of the key income tax provisions of the 2010 Tax Act that affect most taxpayers:
- Temporary extension, through 2012, of reduced income tax rates, including:
- Retaining the 10% tax bracket for taxable income less than $8,500 (for single taxpayers) and $17,000 (for married filing jointly).
- Increasing the income threshold for the 15% tax bracket for married taxpayers filing jointly, as the income threshold for this bracket for married taxpayers previously had been less than twice the amount for single taxpayers (the so-called “marriage penalty”);
- Sustaining the highest tax bracket at 35% for taxable income in excess of $379,150;
- Maintaining the long term capital gains and dividend tax rate at 15% (0% for taxpayers below the 25% tax bracket – $34,500 for single taxpayers, $69,000 for married filing jointly).
- Temporary repeal of the personal exemption phase-out and limitation on itemized deductions. The 2001 Act had repealed – only for 2010 – both the personal exemption phase out and limitation on itemized deductions for taxpayers with adjusted gross income over a certain level. The 2010 Tax Act extends these repeals through 2012. Thus, taxpayers with higher adjusted gross income levels that otherwise would be subject to the phase out for personal exemptions and the limitation on certain itemized deductions, will be able to benefit from both the personal exemptions and all itemized deductions otherwise allowable.
- Temporary relief for Alternative Minimum Tax (AMT). Beginning in 2010, the AMT exemption amount is increased to $47,450 (for single taxpayers) and $72,450 (for married filing jointly). In 2011 the AMT exemption amount is $48,450 (for single taxpayers) and $74,450 (for married filing jointly). This increase in exemption should benefit a significant number of taxpayers (estimated at 21 million) who otherwise have been subject to the AMT. Thus, taxpayers may consider paying certain itemized deductions that are preference items for AMT purposes prior to December 31, 2010. You should consult your accountant regarding how this change in the law impacts your individual income tax situation.
- Temporary extension of incentives for businesses. A number of provisions in the 2010 Tax Act affecting businesses are extended (or expanded), including:
- 100% bonus depreciation allowance for equipment placed in service between September 8, 2010 and December 31, 2011;
- 50% bonus depreciation allowance for equipment placed in service after December 31, 2011, but before December 31, 2012;
- Section 179 deduction for property placed in service in 2010 and 2011 up to $500,000;
- Section 179 deduction for property placed in service after December 31, 2011 up to $125,000 (such amounts to be indexed for inflation in succeeding tax years);
- 15-year cost recovery period for certain leasehold improvements, restaurant buildings and improvements and retail improvements placed in service through 2011;
- 7-year cost recovery period for property used in motorsports entertainment complexes placed in service through 2011;
- Enhanced charitable contribution deduction for contributions of (i) food inventory, (ii) computer equipment and software to schools, and (iii) book inventory to public schools made by C corporations;
- Availability of Work Opportunity Tax Credit (WOTC) equal to 40% of the first $6,000 of wages paid to newly hired employees that are either (i) members of a family receiving benefits under the Temporary Assistance to Needy Families program, (ii) a qualified veteran, (iii) members of a designated community resident group and (iv) certain other individuals. The WOTC is extended through December 31, 2011.
- Additional temporary tax relief for individual taxpayers. The 2010 Tax Act provides individual income taxpayers additional tax relief by
- Reducing the employee paid portion of payroll taxes by 2%, effective as of January 1, 2011. This reduction also means that self-employed taxpayers will be subject to employment taxes at an aggregate 10.4% up to the applicable wage base ($106,800);
- Increasing through 2012 the personal exemption amount for married taxpayers filing a joint return to twice the amount for single taxpayers to further mitigate the “marriage penalty”;
- Permitting taxpayers to elect through 2011 to deduct State and local sales taxes in lieu of State and local income taxes;
- Allowing taxpayers to distribute in each of 2010 and 2011 up to $100,000 from their IRA directly to a qualified public charity, with such amount counting toward the taxpayer’s required minimum distribution. This distribution is not included in the taxpayer’s adjusted gross income. Taxpayers may take advantage of this provision in the current year;
- Accelerating the charitable income tax deduction for transfers made in January 2011, by permitting a deduction in 2010;
- Permitting taxpayers to deduct through 2011 the cost of mortgage insurance paid on a qualified personal residence.
You probably astutely noted that all of these tax provisions are temporary. The provisions of the 2010 Tax Act do not extend beyond 2012, so the ability to take advantage of these tax breaks may be limited. We hope that this information is helpful to you and we encourage you to contact us if you have any questions on how these changes may impact you or your business.