Morre & Company, LLP
Certified Public Accountants
Six Hamilton Landing, Suite 220
Novato, California 94949
415-382-5600 Fax: 415-382-5605
December 2010
Dear Clients and Friends:
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was enacted on December 17, 2010. The Act extends the Bush tax cuts for two years. It also created some additional taxpayer friendly rules.
The estate and generation skipping tax that had been repealed for the 2010 year, has been reinstated. The estate tax rate is 35% with an exemption of $5,000,000. The act also reestablishes stepped up basis on property inherited from a decedent.
Furthermore, any unused estate tax exclusion from the estate of a pre-deceased spouse can be added to that $5,000,000 provided the pre-deceased spouse died after 2009 (and the executor did not elect to not file an estate tax return).
For 2010 deaths only:
- The executor can elect not to use the full step up in basis and not pay the estate tax. In effect, the heirs will pay the tax when they sell the property inherited.
- The generation skipping tax rate is set at zero.
The gift tax exclusion for 2009 was $1,000,000. It is $5,000,000 after 2010. The tax rate on the excess is 35%.
For income taxes, the 10%, 15%, 25%, 28%, 33%, and 35% brackets have been extended through 2012 as are the favorable 0% and 15% rates on net long term capital gains and qualifying dividends. The 0% rate applies to the extent that the income would have been taxed at the 10% or 15% rate had it been regular income.
For 2011 only, the employee portion only of social security tax withheld from salaries and wages is reduced from 6.2% to 4.2%. The rate for the companion self-employment tax is reduced from 12.4% to 10.4%. These taxes apply to the first $106,800 of wages or self-employment income. If your earned income exceeds this amount, you will save $2,136 in FICA and / or self-employment tax next year.
The alternative minimum tax (AMT) exclusion for 2010 has been increased from $70,905 to $72,450 for married filing jointly and from $46,700 to $47,450 for unmarried taxpayers. Do you see a marriage penalty here? An unmarried couple could get $94,900 of exclusion versus $72,450 for a married couple.
The residential energy credits for doors, windows, etc. has been extended from Dec 31, 2010 to Dec 31, 2011. However, the total lifetime credit is limited to $500 ($200 for windows). The limit had been $1,500.
The phase out of personal exemptions, which was set to be reinstated after 2010, will not apply until after 2012. The same is true for the phase out of itemized deductions. The election to deduct sales tax instead of state income tax has been extended through 2011.
The tax free transfer to charities from IRAs of up to $100,000 for taxpayers who have celebrated their 70 ½ birthday has been retroactively reinstated to 2010 and 2011. If you want to do this for 2010, you will have to act quickly because the transfer must be made by January 31, 2011 to be treated as a 2010 transfer. The transfer will count against the required minimum distribution for the year of the transfer.
The Act does not appear to include a provision to pay back the RMD already taken in 2010. You could repay the last distribution if it was done within the last sixty days and you did not have another roll over in this same IRA during the past twelve months.
The American Opportunity Tax Credit, a credit for higher education tuition costs, has been extended through 2012. The maximum credit is $2,500 per student. The income phase out of the credit starts at $80,000 for unmarried and $160,000 for married filing jointly.
Business provisions of the Act include extension of the research and development credit and work opportunity credit. Also extended for 2012 is the 50% bonus depreciation. The act allows 100% bonus depreciation for 2011.
The Section 179 deduction, which allows for expensing of new business assets other than vehicles, was extended at $125,000 (less than it was, but $100,000 more than it would have been without the Act).
What didn’t make the Act was:
- An increase in the standard deduction for real property tax for 2010 and later
- A deduction for new vehicle sales tax for 2010 and later
- An exemption of the first $2,400 of unemployment compensation from income for 2010 and later
- A waiver of the required minimum distributions from IRAs for 2010 and later
- An alternative motor vehicle credit for 2011 and later
What do these new rules mean for your year end 2010 planning?
Tax rates were going to go up, now they will not, so if you had planned to postpone deductions into 2011 or accelerate income into 2010, that may no longer be necessary.
If you converted your IRA to a Roth IRA, you should now consider recognizing the income in 2011 and 2012 instead of electing to recognize it all in 2010. If you have not converted your IRA to a Roth IRA, but are considering it, the lower tax rates will be in effect for two more years, so you still have time to do so at the lower tax rates. However, 2010 is the only year that allows a two year spread of the income from the conversion.
The 15% long term capital gains rate is with us for two more years. Consider not harvesting capital losses until 2013 so that you can pay the 15% tax now and shelter your capital gains subject to 20% tax in 2013. This is a complex decision because of the time value of money, possible change in the rates, and the amount of the losses available.
If you qualify, consider making charitable transfers from your IRA to satisfy the required minimum distribution and reduce your income tax.
For estate tax, the significant increase in the exemption amount to $5,000,000 means that many trusts created at the death of the first spouse may no longer have any significance in reducing estate tax at the death of the surviving spouse. What you now have is an inconvenience that requires you to file a return each year. If the beneficiaries agree to terminate the trust, you may be able to do so; ask your attorney.
Also for estate tax, the gift tax limit was increased from $1,000,000 to $5,000,000. If you have an estate that will not be covered by the new estate tax limits, consider large interfamily gifts.
Please call us if you have any questions about these new provisions or other tax, financial or accounting issues.
~Your partners in financial success~
~Visit our website at www.morrecpa.com~
