Congress continues to discuss tax reform and whether taxes and spending should be raised or lowered. One of the topics being bantered about is whether long-term capital gain rates should be increased. Although it is difficult to say where tax rates will go in the future, we have a pretty good idea of where they will be until the end of 2012, when the current lower rates are set to expire.
The present preferential tax treatment of long-term capital gains is creating a significant planning opportunity. Clearly, for taxpayers in higher ordinary income tax brackets, shifting to investments that generate long-term capital gains rather than ordinary income should reduce taxes.
To qualify for the preferential long-term capital gain rates, the taxpayer must hold the asset for more than 12 months. The holding period generally begins the day after an asset is purchased and runs through (and includes) the date of sale. These rules must be followed exactly, because missing the required holding period by even one day prevents the taxpayer from using the preferential rates. However, the downside of holding assets (e.g., stocks) for a longer term is the risk that the price or value will fall and money will be lost on that investment.
Note that it is important to consider owning assets that generate capital gains outside of qualified (e.g., pension or profit-sharing) plans or IRAs. Distributions from those retirement accounts are almost always ordinary income, so the benefit of the lower long-term capital gain rates may be wasted.
Generally, your ordinary income assets should be held inside the qualified plan or IRA, and capital gain assets should be held directly in taxable accounts. However, a careful analysis of your investment policy is necessary to determine how to allocate investments between your qualified accounts and taxable accounts.
Please contact us to discuss how to qualify for long-term capital gain treatment.
Monday, July 11, 2011
Friday, July 8, 2011
Rollovers from Qualified Plans to IRAs
Deciding whether it is advantageous to roll over a qualified retirement plan account [e.g., 401(k) account] to an IRA depends on the taxpayer’s specific circumstances. However, there are some general advantages:
1. Postmortem Tax-deferral Opportunities. Beneficiary designations as of the date of the owner’s death control the availability of various postmortem tax-deferral opportunities. Therefore, it is important to set up these designations to maximize those opportunities. Greater flexibility generally is afforded in beneficiary designations for IRAs and in stretching out the tax-deferral period.
2. Investment Choices. Although some qualified plans offer self-directed accounts, many restrict the available investment choices. However, most IRA providers offer their entire investment portfolio for the participant to choose from.
3. Availability of Taking Withdrawals. While most qualified plans restrict the availability of withdrawals, IRA withdrawals are available at any time and in any amount.
4. Investment Advice. While in recent years the availability of investment advice offered to qualified plan participants has expanded, IRAs generally will offer greater availability. However, the cost of that advice should be compared to the services that are being provided.
5. Control over Funds. When funds are maintained in a qualified plan, the employer has the right to amend discretionary provisions in the plan, including the right to terminate it. This is not the case with an IRA.
Please contact us if you have questions about qualified plan rollovers or the tax aspects of retirement saving.
1. Postmortem Tax-deferral Opportunities. Beneficiary designations as of the date of the owner’s death control the availability of various postmortem tax-deferral opportunities. Therefore, it is important to set up these designations to maximize those opportunities. Greater flexibility generally is afforded in beneficiary designations for IRAs and in stretching out the tax-deferral period.
2. Investment Choices. Although some qualified plans offer self-directed accounts, many restrict the available investment choices. However, most IRA providers offer their entire investment portfolio for the participant to choose from.
3. Availability of Taking Withdrawals. While most qualified plans restrict the availability of withdrawals, IRA withdrawals are available at any time and in any amount.
4. Investment Advice. While in recent years the availability of investment advice offered to qualified plan participants has expanded, IRAs generally will offer greater availability. However, the cost of that advice should be compared to the services that are being provided.
5. Control over Funds. When funds are maintained in a qualified plan, the employer has the right to amend discretionary provisions in the plan, including the right to terminate it. This is not the case with an IRA.
Please contact us if you have questions about qualified plan rollovers or the tax aspects of retirement saving.
Tuesday, April 5, 2011
New Details for Selected Charitable Contributions
The 2010 Tax Relief Act extended numerous federal tax provisions. Among those are two valuable charitable contribution opportunities for individuals. The IRA qualified charitable contributions provision was extended through 2011. Under this provision, IRA owners who have reached age 70½ are allowed to make annual tax-free distributions of up to $100,000 directly out of their IRAs to charitable organizations.
These donations, called qualified charitable distributions (QCDs), generally do not directly affect the IRA owner’s federal income tax bill because funds go directly to the charity. Additionally, the taxpayer does not need to itemize to benefit from this provision, and the QCDs count as IRA required minimum distributions (RMDs). Therefore, charitably inclined seniors with more IRA money than they need can get a tax break by arranging for tax-free QCDs to take the place of taxable RMDs, and those who do not itemize can effectively get the benefit of the deduction by arranging tax-free QCDs. The QCD break originally expired at the end of 2009 but has been extended through 2011.
Liberalized qualified conservation contribution rules expired at the end of 2009, but were extended through 2011 by the recent 2010 Tax Relief Act. Qualified conservation contributions are charitable donations of real property interests, including remainder interests and easements that restrict the use of real property. For individuals, the maximum write-off for qualified conservation contributions of long-term capital gain property is increased from the normal 30% to 50% of adjusted gross income.
For an individual who is a qualified farmer or rancher, the qualified conservation contribution write-off for donated farm or ranch real property can be as much as 100% of the donor’s adjusted gross income. However, the donation must include a usage restriction stating that the property must remain available for agricultural or livestock production. In addition, qualified conservation contributions are not counted when calculating an individual’s allowable write-offs for other charitable contributions. Qualified conservation contributions in excess of what can be written off in the year of the donation can be carried forward for 15 years (only a five-year carryover period was allowed under the previous rules).
Please contact us concerning these or other charitable contribution opportunities.
These donations, called qualified charitable distributions (QCDs), generally do not directly affect the IRA owner’s federal income tax bill because funds go directly to the charity. Additionally, the taxpayer does not need to itemize to benefit from this provision, and the QCDs count as IRA required minimum distributions (RMDs). Therefore, charitably inclined seniors with more IRA money than they need can get a tax break by arranging for tax-free QCDs to take the place of taxable RMDs, and those who do not itemize can effectively get the benefit of the deduction by arranging tax-free QCDs. The QCD break originally expired at the end of 2009 but has been extended through 2011.
Liberalized qualified conservation contribution rules expired at the end of 2009, but were extended through 2011 by the recent 2010 Tax Relief Act. Qualified conservation contributions are charitable donations of real property interests, including remainder interests and easements that restrict the use of real property. For individuals, the maximum write-off for qualified conservation contributions of long-term capital gain property is increased from the normal 30% to 50% of adjusted gross income.
For an individual who is a qualified farmer or rancher, the qualified conservation contribution write-off for donated farm or ranch real property can be as much as 100% of the donor’s adjusted gross income. However, the donation must include a usage restriction stating that the property must remain available for agricultural or livestock production. In addition, qualified conservation contributions are not counted when calculating an individual’s allowable write-offs for other charitable contributions. Qualified conservation contributions in excess of what can be written off in the year of the donation can be carried forward for 15 years (only a five-year carryover period was allowed under the previous rules).
Please contact us concerning these or other charitable contribution opportunities.
Claiming Bonus Depreciation for Business Property Acquisitions
As the economy picks up, business begins to expand, and the bottom line starts to improve. But, quite often, the tax bill goes up as well. However, an excellent way to reduce that tax bill is through the use of bonus depreciation. Bonus depreciation is available for qualified property in the year the property is acquired and placed in service. Bonus depreciation is not prorated; therefore, it doesn’t matter when during the tax year the property was placed in service. So, even property placed in service on the last day of the tax year is eligible for the full applicable amount. Bonus depreciation is available for qualifying vehicles via an $8,000 increase in the first-year luxury auto depreciation limit.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act) provides for 100% first-year bonus depreciation (i.e., effectively writing off the entire cost of the asset in the year placed in service) for qualified property that is purchased and placed in service after September 8, 2010, and before January 1, 2012 (January 1, 2013, for certain aircraft and long-production-period property). Prior to this legislation, the maximum bonus depreciation allowance percentage had been 50%. Note the 100% first-year bonus depreciation rules apply for both regular tax and AMT purposes, so no adjustment is required for AMT.
To be eligible for bonus depreciation, the property must meet three broad criteria:
1. The asset must be qualified property (defined below),
2. The original use must commence with the taxpayer, and
3. The property must be acquired and placed in service before January 1, 2012 (January 1, 2013, for certain aircraft and long-production-period property).
Qualified property must also meet one of four definitions:
1. The asset is eligible property with a recovery period of 20 years or less.
2. The asset is depreciable computer software.
3. The property is water utility property.
4. The asset is qualified leasehold improvement property.
The term original use generally means the first use of the asset. Simply put, the asset generally must be new, rather than pre-owned; however, there are some exceptions. New property initially used by a taxpayer for personal use and subsequently converted to business use meets the original-use requirement. Property acquired for use in a taxpayer’s business that was previously used by another taxpayer does not qualify regardless of how the previous owner used the property (i.e., for business or personal use). Capital expenditures to recondition or rebuild acquired or owned property satisfy the original use requirement, but purchases of reconditioned or rebuilt assets do not qualify. The determination of whether an asset is reconditioned or rebuilt (i.e., used) is a question of fact. However, an asset that contains used parts will not be considered used if the cost of the used parts is 20% or less of the total cost.
The time to take advantage of the 100% first-year bonus depreciation provision is limited. So, please contact us to discuss the benefits of bonus depreciation or any other tax compliance or planning issue.
Tahim and Associates, APC
An Accountancy and Financial Planning Firm
Tel: 714-772-4744
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act) provides for 100% first-year bonus depreciation (i.e., effectively writing off the entire cost of the asset in the year placed in service) for qualified property that is purchased and placed in service after September 8, 2010, and before January 1, 2012 (January 1, 2013, for certain aircraft and long-production-period property). Prior to this legislation, the maximum bonus depreciation allowance percentage had been 50%. Note the 100% first-year bonus depreciation rules apply for both regular tax and AMT purposes, so no adjustment is required for AMT.
To be eligible for bonus depreciation, the property must meet three broad criteria:
1. The asset must be qualified property (defined below),
2. The original use must commence with the taxpayer, and
3. The property must be acquired and placed in service before January 1, 2012 (January 1, 2013, for certain aircraft and long-production-period property).
Qualified property must also meet one of four definitions:
1. The asset is eligible property with a recovery period of 20 years or less.
2. The asset is depreciable computer software.
3. The property is water utility property.
4. The asset is qualified leasehold improvement property.
The term original use generally means the first use of the asset. Simply put, the asset generally must be new, rather than pre-owned; however, there are some exceptions. New property initially used by a taxpayer for personal use and subsequently converted to business use meets the original-use requirement. Property acquired for use in a taxpayer’s business that was previously used by another taxpayer does not qualify regardless of how the previous owner used the property (i.e., for business or personal use). Capital expenditures to recondition or rebuild acquired or owned property satisfy the original use requirement, but purchases of reconditioned or rebuilt assets do not qualify. The determination of whether an asset is reconditioned or rebuilt (i.e., used) is a question of fact. However, an asset that contains used parts will not be considered used if the cost of the used parts is 20% or less of the total cost.
The time to take advantage of the 100% first-year bonus depreciation provision is limited. So, please contact us to discuss the benefits of bonus depreciation or any other tax compliance or planning issue.
Tahim and Associates, APC
An Accountancy and Financial Planning Firm
Tel: 714-772-4744
Age-related Planning Milestones
In an era filled with uncertainty, you can count on one thing for sure: time marches on! Listed below are some important age-related tax and financial planning milestones that you should keep in mind. Many of these milestones present tax-saving opportunities.
Age 0–23:
The so-called Kiddie Tax rules can potentially apply to your child’s or grandchild’s investment income above a specified amount until the year he or she reaches age 24. For 2011, the investment income threshold is $1,900.
Age 50:
If you’re age 50 or older as of the end of the year, you can make an additional catch-up contribution of up to $5,500 for 2011 to your 401(k), Section 403(b), or Section 457 plan, or up to $2,500 for 2011 to your SIMPLE plan, assuming the plan permits catch-up contributions. You can also make an additional catch-up contribution of up to $1,000 for 2011 to your traditional or Roth IRA.
Age 55:
If you permanently leave your job for any reason, you can receive distributions from the former employer’s qualified retirement plan(s) without being hit with the 10% premature withdrawal penalty tax. This is an exception to the general rule that the taxable portion of qualified retirement plan distributions received before age 59½ are subject to the 10% penalty tax.
Age 59½:
You can receive distributions from all types of tax-favored retirement plans and accounts [e.g., IRAs, 401(k) accounts, pensions] and from tax-deferred annuities without incurring the 10% premature withdrawal penalty tax. Before age 59½, the 10% penalty tax will hit the taxable portion of distributions unless an exception to the penalty tax applies.
Age 62:
You can choose to start receiving social security retirement benefits; however, your benefits will be lower than if you wait until reaching full retirement age, which is age 66 for those born between 1943 and 1954. If you also work before reaching full retirement age, your 2011 social security retirement benefits will be further reduced if your income from working exceeds $14,160 for 2011.
Age 66:
You can start receiving full social security retirement benefits at age 66 if you were born between 1943 and 1954. You won’t lose any benefits if you work in years after the year you reach age 66, regardless of how much money you make in those years. However, if you will reach age 66 this year, your 2011 benefits will be reduced if this year’s earnings exceed $37,680.
Age 70:
You can choose to postpone receiving social security retirement benefits until you reach age 70. If you make this choice, your benefits will be higher than if you started earlier.
Age 70½:
You generally must begin taking annual required minimum distributions (RMDs) from tax-favored retirement accounts [e.g., traditional IRAs, SEP accounts, 401(k) accounts] and pay the resulting income taxes. (However, you need not take any RMDs from Roth IRAs set up in your name.) The initial RMD is for the year you turn 70½, but you can postpone taking that one until as late as April 1 of the following year. If you choose that option, however, you must take two RMDs in that year: one by the April 1 deadline (the RMD for the previous year), plus another by December 31 (the RMD for the current year). For each subsequent year, you must take another RMD by December 31. There’s one more exception: if you’re still working after reaching age 70½ and you don’t own over 5% of the employer, you can postpone taking any RMDs from the employer’s plan(s) until after you’ve actually retired.
Age 0–23:
The so-called Kiddie Tax rules can potentially apply to your child’s or grandchild’s investment income above a specified amount until the year he or she reaches age 24. For 2011, the investment income threshold is $1,900.
Age 50:
If you’re age 50 or older as of the end of the year, you can make an additional catch-up contribution of up to $5,500 for 2011 to your 401(k), Section 403(b), or Section 457 plan, or up to $2,500 for 2011 to your SIMPLE plan, assuming the plan permits catch-up contributions. You can also make an additional catch-up contribution of up to $1,000 for 2011 to your traditional or Roth IRA.
Age 55:
If you permanently leave your job for any reason, you can receive distributions from the former employer’s qualified retirement plan(s) without being hit with the 10% premature withdrawal penalty tax. This is an exception to the general rule that the taxable portion of qualified retirement plan distributions received before age 59½ are subject to the 10% penalty tax.
Age 59½:
You can receive distributions from all types of tax-favored retirement plans and accounts [e.g., IRAs, 401(k) accounts, pensions] and from tax-deferred annuities without incurring the 10% premature withdrawal penalty tax. Before age 59½, the 10% penalty tax will hit the taxable portion of distributions unless an exception to the penalty tax applies.
Age 62:
You can choose to start receiving social security retirement benefits; however, your benefits will be lower than if you wait until reaching full retirement age, which is age 66 for those born between 1943 and 1954. If you also work before reaching full retirement age, your 2011 social security retirement benefits will be further reduced if your income from working exceeds $14,160 for 2011.
Age 66:
You can start receiving full social security retirement benefits at age 66 if you were born between 1943 and 1954. You won’t lose any benefits if you work in years after the year you reach age 66, regardless of how much money you make in those years. However, if you will reach age 66 this year, your 2011 benefits will be reduced if this year’s earnings exceed $37,680.
Age 70:
You can choose to postpone receiving social security retirement benefits until you reach age 70. If you make this choice, your benefits will be higher than if you started earlier.
Age 70½:
You generally must begin taking annual required minimum distributions (RMDs) from tax-favored retirement accounts [e.g., traditional IRAs, SEP accounts, 401(k) accounts] and pay the resulting income taxes. (However, you need not take any RMDs from Roth IRAs set up in your name.) The initial RMD is for the year you turn 70½, but you can postpone taking that one until as late as April 1 of the following year. If you choose that option, however, you must take two RMDs in that year: one by the April 1 deadline (the RMD for the previous year), plus another by December 31 (the RMD for the current year). For each subsequent year, you must take another RMD by December 31. There’s one more exception: if you’re still working after reaching age 70½ and you don’t own over 5% of the employer, you can postpone taking any RMDs from the employer’s plan(s) until after you’ve actually retired.
Monday, March 7, 2011
Today's News on Social Security for Baby Boomers
Today, March 7, 2011 MONEY Magazine published:
The first wave of of baby boomers -- including Cher, Steven Spielberg, George W. Bush, Bill Clinton, and nearly 3 million other Americans -- will turn 65 this year. If you're among those celebrating in 2011 or the next few years, you may be feeling a bit gloomy about a birthday that officially crowns you a senior citizen. You're too young to be old, right? Adding insult to arthritis, this big birthday doesn't offer all the perks it used to: You can't collect full Social Security benefits at age 65 anymore; boomers qualify between 66 and 67, depending on their birth year. And most "senior" discounts -- from travel bargains to blue-plate specials -- kick in from 50 to 60 nowadays, as horrifying as that may be.
(See seniordiscounts.com for a comprehensive list.)
That's not to say that this trip over the hill isn't a financial milestone at all. There are still a few important actions to take and things to think about as you approach this new mark of maturity.
* A larger federal deduction. The standard deduction increases for taxpayers 65 and older -- good news for those who don't itemize. For singles it goes from $5,700 to $7,100; for couples in which one partner is 65 it rises from $11,400 to $12,500; when both spouses are 65 or older, it's $13,600. That last boost, for those in the 28% bracket, knocks $616 off your tax bill.
* Property tax breaks. Forty-five states and the District of Columbia give seniors a break on real estate taxes for a primary residence, says analyst Cathleen Calhoun of tax information service CCH; in the vast majority of them you must be 65 to qualify.
The deals vary: In Ohio the Homestead Exemption cuts about $400 off yearly property taxes. In Illinois the assessment on your home is frozen when you or your spouse turns 65. Check with your tax assessor's office to see what's offered and if there are any income limits or prerequisites.
For more information on Pre/ Post Retirement Planning contact our office. We also offer our comprehensive retirement planning guides for those in or planning to retire in the next 5-10 years.
The first wave of of baby boomers -- including Cher, Steven Spielberg, George W. Bush, Bill Clinton, and nearly 3 million other Americans -- will turn 65 this year. If you're among those celebrating in 2011 or the next few years, you may be feeling a bit gloomy about a birthday that officially crowns you a senior citizen. You're too young to be old, right? Adding insult to arthritis, this big birthday doesn't offer all the perks it used to: You can't collect full Social Security benefits at age 65 anymore; boomers qualify between 66 and 67, depending on their birth year. And most "senior" discounts -- from travel bargains to blue-plate specials -- kick in from 50 to 60 nowadays, as horrifying as that may be.
(See seniordiscounts.com for a comprehensive list.)
That's not to say that this trip over the hill isn't a financial milestone at all. There are still a few important actions to take and things to think about as you approach this new mark of maturity.
1. Get set with Medicare
"If you don't take Medicare at the appropriate time, you face a lifetime of penalties and will have gaps in coverage," says Ilene Stein, a lawyer at the Medicare Rights Center. You can enroll, at medicare.gov or by calling 800-772-1213, from three months before you turn 65, and Medicare will kick in the first day of your birth month. You have three months after your birthday to enroll without penalty -- unless you're still working and have comparable insurance through your job, in which case you have eight months after that coverage ends to join up. Deciding between original Medicare (Parts A and B) and privately run Advantage plans (Part C) can be overwhelming. But you can compare premiums and out-of-pocket costs for all your options at medicare.gov. Just be sure to narrow your Advantage choices to plans that get four or five stars from Medicare. 2. Slash your taxes
Facing higher costs under health care reform, some plans may slash benefits or raise premiums. But as of 2012, the highest-rated plans will get federal bonuses too. At 65 you're entitled to some tax breaks that can add up to serious savings. These include: * A larger federal deduction. The standard deduction increases for taxpayers 65 and older -- good news for those who don't itemize. For singles it goes from $5,700 to $7,100; for couples in which one partner is 65 it rises from $11,400 to $12,500; when both spouses are 65 or older, it's $13,600. That last boost, for those in the 28% bracket, knocks $616 off your tax bill.
* Property tax breaks. Forty-five states and the District of Columbia give seniors a break on real estate taxes for a primary residence, says analyst Cathleen Calhoun of tax information service CCH; in the vast majority of them you must be 65 to qualify.
The deals vary: In Ohio the Homestead Exemption cuts about $400 off yearly property taxes. In Illinois the assessment on your home is frozen when you or your spouse turns 65. Check with your tax assessor's office to see what's offered and if there are any income limits or prerequisites.
3. Assess retirement plans
Sixty-five may no longer be the retirement turning point it used to be, but it's still a watershed year psychologically. If you're still working -- nearly half of leading-edge boomers are, a recent AARP survey found -- you may be feeling an itch to get out. Put that desire to use by thinking about how you'd like to spend your retirement. Will you travel? Will you work at all? Will you move? Next, figure out how much your dream life will cost, and stress test your nest egg. Our OnTrak Retirement calculator can help you determine how much income your savings, Social Security, and any pension will provide. If it isn't enough, you could dial back your plans or work a few more years to postpone drawing on your savings and collecting Social Security. Delaying the latter beyond your full retirement age increases your benefit 8% a year. Determine what your payout will be with the Retirement Estimator at ssa.gov.For more information on Pre/ Post Retirement Planning contact our office. We also offer our comprehensive retirement planning guides for those in or planning to retire in the next 5-10 years.
Individual and Business Tax Relief from New Law
The recent Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Act) includes many taxpayer-friendly provisions for individuals and businesses. Listed below is information on several of them.
Lower Tax Rates. The Act extends the 10%, 15%, 25%, 28%, 33%, and 35% federal income tax rates on ordinary income through 2012. It also extends the 0% and 15% federal income tax rates on most long-term capital gains and dividends through 2012. Without the new law, most long-term capital gains would have been taxed at 10% or 20%, and dividends would have been taxed at ordinary rates of up to 39.6%.
Marriage Penalty Relief. Getting married can cause a couple’s combined federal income tax bill to be higher than if they were single. Tax reduction legislation in 2001 eased this marriage penalty by tweaking the lowest two tax brackets for married couples and giving them bigger standard deductions. The Act extends this relief through 2012.
Social Security Tax Reduction. The Act cuts the Social Security tax withholding rate on employee salaries from 6.2% to 4.2% for 2011. This temporary change affects the first $106,800 of 2011 wages. The maximum savings are $2,136 for unmarried individuals and $4,272 for couples. The Social Security tax component of the self-employment tax is cut from 12.4% to 10.4% for 2011, so self-employed folks will benefit, too.
Alternative Minimum Tax (AMT). As you may know, it has become an annual ritual for Congress to “patch” the AMT rules to prevent millions of additional households from getting socked with this add-on tax. The patch primarily consists of allowing bigger AMT exemptions and allowing personal tax credits to offset the AMT. The Act provides an AMT patch for 2010 and 2011.
American Opportunity Education Credit. The American Opportunity credit can be worth up to $2,500, be claimed for up to four years of undergraduate education, and is 40% refundable. It was scheduled to expire at the end of 2010. The Act extends this credit through 2012.
College Tuition Deduction. This write-off, which can be as much as $4,000, or $2,000 at higher income levels, expired at the end of 2009. The Act retroactively restores the deduction for 2010 and extends it through 2011.
More Generous Student Loan Interest Deduction. This write-off, which can be as much as $2,500 (whether you itemize or not), was scheduled to fall under less favorable rules in 2011 and beyond. The Act extends through 2012 the more favorable rules established by 2001 legislation.
Education Savings Accounts (ESAs). For 2011, the maximum contribution to federal-income-tax-free ESAs was scheduled to drop from $2,000 to only $500, and a stricter phase-out rule would have limited contributions by many married joint-filing couples. The Act extends through 2012 the more generous contribution rules established by 2001 legislation.
State and Local Sales Taxes. For the last few years, individuals who paid little or no state income taxes had the option of claiming an alternative itemized deduction for state and local general sales taxes. The sales tax deduction option expired at the end of 2009. The Act retroactively restores it for 2010 and extends it through 2011.
Smaller Tax Credit for 2011 Energy-efficient Home Improvements. The 2009 Stimulus Act provided that 30% of 2009 and 2010 expenditures for energy-efficient insulation, windows, doors, roofs, and heating and cooling equipment in U.S. residences could qualify for a credit, up to a maximum credit amount of $1,500, over the two years combined. The Act extends the credit through 2011, but the credit percentage is scaled back to only 10%, and the lifetime credit limit is only $500. The $500 credit cap is reduced by any credits claimed in 2006–2010.
First-year Bonus Depreciation. The Act generally allows 100% first-year bonus depreciation for qualifying new assets that are acquired and placed in service after September 8, 2010, through December 31, 2011. It also allows 50% first-year bonus depreciation for qualifying new assets that are placed in service in calendar year 2012. For a new passenger auto or light truck that is used for business and is subject to the luxury auto depreciation limitation, the bonus depreciation breaks increase the maximum first-year depreciation deduction by $8,000 for vehicles acquired and placed in service by December 31, 2012.
15-year Depreciation for Leasehold Improvements, Restaurant Property, and Retail Space Improvements. The 15-year straight-line depreciation privilege for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail space improvements is retroactively restored for property placed in service in 2010 and extended to cover property placed in service in 2011. (Without the favorable 15-year depreciation rule, these assets would have to be depreciated straight-line over 39 years.)
100% Gain Exclusion for Qualified Small Business Stock (QSBS). The Small Business Jobs Act of 2010 (enacted last September) created temporary 100% gain exclusion (within limits) for sales of QSBS issued after September 27, 2010, through December 31, 2010. The Act extends the window for taking advantage of this change by one year to cover QSBS shares issued after September 27, 2010, through December 31, 2011.
Lower Tax Rates. The Act extends the 10%, 15%, 25%, 28%, 33%, and 35% federal income tax rates on ordinary income through 2012. It also extends the 0% and 15% federal income tax rates on most long-term capital gains and dividends through 2012. Without the new law, most long-term capital gains would have been taxed at 10% or 20%, and dividends would have been taxed at ordinary rates of up to 39.6%.
Marriage Penalty Relief. Getting married can cause a couple’s combined federal income tax bill to be higher than if they were single. Tax reduction legislation in 2001 eased this marriage penalty by tweaking the lowest two tax brackets for married couples and giving them bigger standard deductions. The Act extends this relief through 2012.
Social Security Tax Reduction. The Act cuts the Social Security tax withholding rate on employee salaries from 6.2% to 4.2% for 2011. This temporary change affects the first $106,800 of 2011 wages. The maximum savings are $2,136 for unmarried individuals and $4,272 for couples. The Social Security tax component of the self-employment tax is cut from 12.4% to 10.4% for 2011, so self-employed folks will benefit, too.
Alternative Minimum Tax (AMT). As you may know, it has become an annual ritual for Congress to “patch” the AMT rules to prevent millions of additional households from getting socked with this add-on tax. The patch primarily consists of allowing bigger AMT exemptions and allowing personal tax credits to offset the AMT. The Act provides an AMT patch for 2010 and 2011.
American Opportunity Education Credit. The American Opportunity credit can be worth up to $2,500, be claimed for up to four years of undergraduate education, and is 40% refundable. It was scheduled to expire at the end of 2010. The Act extends this credit through 2012.
College Tuition Deduction. This write-off, which can be as much as $4,000, or $2,000 at higher income levels, expired at the end of 2009. The Act retroactively restores the deduction for 2010 and extends it through 2011.
More Generous Student Loan Interest Deduction. This write-off, which can be as much as $2,500 (whether you itemize or not), was scheduled to fall under less favorable rules in 2011 and beyond. The Act extends through 2012 the more favorable rules established by 2001 legislation.
Education Savings Accounts (ESAs). For 2011, the maximum contribution to federal-income-tax-free ESAs was scheduled to drop from $2,000 to only $500, and a stricter phase-out rule would have limited contributions by many married joint-filing couples. The Act extends through 2012 the more generous contribution rules established by 2001 legislation.
State and Local Sales Taxes. For the last few years, individuals who paid little or no state income taxes had the option of claiming an alternative itemized deduction for state and local general sales taxes. The sales tax deduction option expired at the end of 2009. The Act retroactively restores it for 2010 and extends it through 2011.
Smaller Tax Credit for 2011 Energy-efficient Home Improvements. The 2009 Stimulus Act provided that 30% of 2009 and 2010 expenditures for energy-efficient insulation, windows, doors, roofs, and heating and cooling equipment in U.S. residences could qualify for a credit, up to a maximum credit amount of $1,500, over the two years combined. The Act extends the credit through 2011, but the credit percentage is scaled back to only 10%, and the lifetime credit limit is only $500. The $500 credit cap is reduced by any credits claimed in 2006–2010.
First-year Bonus Depreciation. The Act generally allows 100% first-year bonus depreciation for qualifying new assets that are acquired and placed in service after September 8, 2010, through December 31, 2011. It also allows 50% first-year bonus depreciation for qualifying new assets that are placed in service in calendar year 2012. For a new passenger auto or light truck that is used for business and is subject to the luxury auto depreciation limitation, the bonus depreciation breaks increase the maximum first-year depreciation deduction by $8,000 for vehicles acquired and placed in service by December 31, 2012.
15-year Depreciation for Leasehold Improvements, Restaurant Property, and Retail Space Improvements. The 15-year straight-line depreciation privilege for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail space improvements is retroactively restored for property placed in service in 2010 and extended to cover property placed in service in 2011. (Without the favorable 15-year depreciation rule, these assets would have to be depreciated straight-line over 39 years.)
100% Gain Exclusion for Qualified Small Business Stock (QSBS). The Small Business Jobs Act of 2010 (enacted last September) created temporary 100% gain exclusion (within limits) for sales of QSBS issued after September 27, 2010, through December 31, 2010. The Act extends the window for taking advantage of this change by one year to cover QSBS shares issued after September 27, 2010, through December 31, 2011.
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