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2010 Significant Tax Law Changes

2010 Significant Tax Law Changes. March 12, 2011. Major Tax Legislation. HIRE Act Hiring Incentives to Restore Employment Act of 2010 enacted March 18, 2010 2010 Jobs Act Small Business Jobs Act of 2010 enacted September 27, 2010 2010 Tax Relief Act

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2010 Significant Tax Law Changes

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  1. 2010 Significant Tax Law Changes March 12, 2011

  2. Major Tax Legislation • HIRE Act • Hiring Incentives to Restore Employment Act of 2010 enacted March 18, 2010 • 2010 Jobs Act • Small Business Jobs Act of 2010 enacted September 27, 2010 • 2010 Tax Relief Act • Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 enacted December 17, 2010

  3. Individual Income Tax Topics • Individual Income Tax Rates • Itemized Deductions and Personal Exemptions • AMT “Patch” • Payroll Tax Cut • Additional Medicare Tax • On wages • On unearned income • Extension of Tax Breaks

  4. Individual Income Tax Rates • Current tax rates are extended through 2012 • Retains 10% bracket for lowest income • Retains 15% maximum for long-term capital gain (would have increased to 20%) • Retains 15% maximum for qualified dividends (would have increased to 39.6%) • Retains 35% maximum for ordinary income (would have increased to 39.6%) • Brackets will continue to be indexed for inflation

  5. Itemized Deductions and Personal Exemptions • Prior Law: • Itemized deductions reduced for high income taxpayers due to “phase-out” beginning in 2011 • Personal exemptions reduced for high income taxpayers due to “phase-out” beginning in 2011 • 2010 Tax Relief Act: • Phase-out repealed for two more years • Itemized deductions and personal exemptions are fully deductible for 2011 or 2012

  6. AMT “Patch” • AMT exemption for couples: • $72,450 in 2010 • $74,250 in 2011 • Was scheduled to fall to $45,000 • AMT exemption for singles: • $47,450 in 2010 • $48,450 in 2011 • Was scheduled to fall to $33,750 • Nonrefundable credits may offset AMT for 2010 and 2011

  7. Payroll Tax Cut • For employees: • For 2011 only, social security tax withholding is reduced from 6.2% to 4.2% • Applies to first $106,800 or wages • Maximum potential savings = $2,136 • For self-employed: • For 2011 only, social security portion of self-employment tax is reduced from 12.4% to 10.4% • Applies to first $106,800 or wages • Maximum potential savings = $2,136

  8. Additional Medicare Tax • On Wages: • Additional 0.9% Medicare tax • Applies to wages in excess of $200,000 for single persons ($250,000 for a married couple) • For tax years beginning after 12/31/2012 • On Unearned Income: • Additional 3.8% Medicare tax • Applies to lesser of -- • Net investment income or • Modified adjusted gross income in excess of $200,000 for single persons ($250,000 for a married couple) • For tax years beginning after 12/31/2012

  9. Extension of Tax Breaks • Many temporary tax incentives for individuals had expired by the end of 2009 • 2010 Tax Relief Act extended most of them for 2010 and 2011 • Some of those extended include: • State and local sales tax deduction • Teacher’s classroom expense deduction • Tax-free distributions from IRAs direct to charity • Higher education tuition deduction • Child tax credit remains at $1000 • Energy property credit (but less attractive after 2010) • Enhancements to earned income tax credit, adoption credit and dependent care credit remain

  10. Business Income Tax Topics • Increased Section 179 Expensing • Bonus Depreciation • New Hire Tax Breaks • Small Employer Health Insurance Credit • Health Insurance for Self-Employed • Other Targeted Tax Benefits

  11. Increased Section 179 Expensing • Tangible personal property and certain real property (see next slide) can be expensed rather than depreciated under Section 179 • Assets must be used in a trade or business • Cannot exceed taxable income from all trade or business activities (including wages) • Up to $500,000 can be expensed for 2010 and 2011 • Up to $125,000 can be expensed for 2012 • Phased out when property purchased exceeds $2MM; fully phased out at $2.5MM

  12. Increased Section 179 ExpensingQualifying Real Property • Qualifying real property includes • Qualified leasehold improvement property • Qualified restaurant property • Qualified retail improvement property • Taxpayer can elect to exclude real property from Section 179 property • Only $250,000 of real property can be expensed

  13. Bonus Depreciation • Can take 100% bonus depreciation for qualified property placed in service between 9/9/2010 and 12/31/2011 • Can take 50% bonus depreciation for all other periods during 2010 through 2012 • No dollar limit • Not limited to taxable income • Must be new (not used) property • Same property qualifies as 2009 law • MACRS recovery period of 20 years or less • Computer software not self-created • Qualified leasehold improvement property

  14. New Hire Tax Breaks • Applies to new hires of “covered employees” • Generally, a covered employee is one who was unemployed for 60 days prior to hire • Must begin employment between 2/4/2010 and 12/31/2010 • Must complete W-11, affidavit of eligibility • Payroll Tax Exemption: • Exempt from employer’s 6.2% social security tax • Applies to wages paid 3/19/2010 - 12/31/2010 • New Hire Retention Credit • Must retain employee for 52 consecutive weeks • Lesser of $1000 or 6.2% of wages paid

  15. Small Employer Health Insurance Credit • Tax credit for eligible small employers that cover at least 50% of the cost of health insurance premiums • Eligible small employer: • Fewer than 25 full-time equivalent employees • Average annual wages no greater than $50,000 • Amount of credit equals 35% of the lesser of: • Employer paid health insurance premiums for qualified health insurance coverage; or • Average premium for small group market in your State (Texas = $5,140 for individual coverage; $11,972 for family coverage) • Applies for years beginning in 2010 - 2013

  16. Health Insurance for Self-Employed • Income tax deduction “above the line” for cost of health insurance for self, spouse, dependents, and children under age 27 • Self-employment earnings reduced by health insurance for purposes of self-employment tax (for 2010 only) • Deduction will not reduce earned income for other purposes (e.g. income eligible for retirement plan contribution) • Only for first taxable year beginning in 2010

  17. Other Targeted Tax Benefits • Exclusion of gain on qualified small business stock • Five year carryback of general business credit • S Corporation – reduction in required holding period to avoid built-in gains tax • Increased deduction for start-up expenditures

  18. Estate Tax Topics • Gift Tax • Estate Tax • Default Rule • Carryover Basis Election • Extension of Time to File and Pay and Make Disclaimers • Portability • “Clawback” Issue • GST Tax

  19. Gift Tax • Exemption: • $1 million for 2010 • $5 million for 2011 and 2012 • Indexed for inflation beginning in 2012 • Planning Opportunity: • Donors that have previously made taxable gifts exceeding $1 million may make up to $4 million of additional gifts without incurring gift tax • Donors that have not previously made gifts exceeding $1 million may make additional gifts equal to the difference between $5 million and the amount of their prior taxable gifts without incurring gift tax • 2001 rules apply after 2012

  20. Estate Tax – Default Rule • Estate tax applies to decedents dying in 2010 • Exemption is $5 million for 2010 – 2012 • Indexed for inflation beginning in 2012 • Maximum tax rate is 35% for 2010 - 2012 • Rules in effect in 2001 apply after 2012

  21. Estate Tax – Carryover Basis • Election to apply the carryover basis rules rather than the estate tax rules may be made for decedents dying in 2010 • Election is to be made “at such time and in such manner” as prescribed by the Secretary of the Treasury or his delegate • Form 8939 – not yet released • Small estates won’t make the election • Large estates generally will make the election, but a variety of factors should be considered

  22. Estate Tax - Extensions • Estate tax return and payment due date for 2010 decedents is extended to September 19, 2011 • Carryover basis report (Form 8939) was not granted a nine-month extension by TRA 2010 • Currently due 4/15/2011, but rumor has it that the IRS may grant an administrative extension until 10/15/11

  23. Estate Tax – Extensions (cont.) • The time for making any disclaimer for property passing by reason of a decedent’s death in 2010 is extended to nine months after date of enactment • Disclaimer period is extended to September 19, 2011 for decedents who die on or after January 1, 2010 and before December 17, 2010 • Normal nine-month disclaimer period applies for decedents who died after December 16, 2010 • Planning opportunity – disclaimer of a 2010 bequest that then passes to a skip person would not be subject to GST tax (since GST tax rate is zero for 2010)

  24. Estate Tax - Portability • The executor of a deceased spouse’s estate may transfer any unused estate tax exemption to the surviving spouse • The executor of the first spouse’s estate must timely file an estate tax return and make an election to permit the surviving spouse to utilize the unused exemption • Thus, even small estates of married persons must consider whether to file an estate tax return for the first deceased spouse’s estate • Only the most recent deceased spouse’s unused exemption may be used by the surviving spouse • This rule applies even if the last deceased spouse has no unused exclusion or does not make a timely election

  25. Estate Tax – Portability (cont.) • Additional exemption may be used for gift tax purposes or estate tax purposes, but not for GST tax purposes • Applies for decedents dying and gifts made after 2010 • Only available for two years – expires after 2012

  26. Estate Tax – “Clawback” Issue • If the estate tax exemption is decreased in the future, it is not clear how the estate tax is to be calculated for taxpayers that have made taxable gifts in excess of the reduced exemption amount • Following the Form 706 instructions, the deduction for “total gift tax paid or payable” is calculated using the exemption “in effect for the year the gift was made” • This results in estate tax being due on the adjusted taxable gifts if the later estate tax exemption is less than the current gift tax exemption • “Clawback” amount will equal the amount of taxable gifts times the estate tax rate • Examples

  27. GST Tax • Retroactively reinstated to January 1, 2010 • Tax rate is zero in 2010 and 35% in 2011 and 2012 • $5 million exemption in 2010, 2011, and 2012 • Indexed for inflation beginning in 2012 • Observations: • Exemption can be allocated to GST transfers made in 2010 • A zero tax rate for 2010 does not mean that transfers to trusts in 2010 automatically result in a zero inclusion ratio – exemption may need to be allocated

  28. GST Tax (cont.) • Observations (cont.): • Consideration should be given to electing out of the automatic allocation of GST exemption to direct skip transfers made in 2010 • Appears that the carryover basis election does not apply for GST tax purposes • Thus, decedents who make the carryover basis election will still be subject to GST tax and may still allocate GST exemption • Query, however, how one allocates GST exemption if carryover basis election is made • Consider “curing” non-exempt trusts during 2011 and 2012 with allocation of additional $1.5 million GST exemption

  29. 2010 Significant Tax Law Changes • Presented by: • Connie L. Estopinal CPA/PFS • Managing Partner • Mohle Adams • 3900 Essex Lane, Suite 1000 • Houston, TX 77027 • (713) 629-1381 • cestopinal@mohleadams.com

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