Tax Relief Act of 2010: Quick Guide Part 2 The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was signed into law on December 17, 2010. Here's a quick guide to some of the changes. This summary was prepared by the AICPA. Tax Credits | | Before Act | After Act | Making Work Pay tax credit | For 2009 and 2010 only, a refundable tax credit
equal to the lesser of 6.2% of an individual's earned income or $400 ($800 for married couples filing joint returns); phased out for higher incomes | Not extended to 2011, but new one-year 2% reduction in employee Social Security payroll taxes in effect (applies to self-employment tax of self-employed individuals as well) | Earned income tax credit (EITC) | Increased 45% credit percentage for families
with three or more qualifying children, and increased phaseout amounts for
married couples filing joint returns expired at end of 2010 | 2010 EITC provisions extended through 2012 | American Opportunity tax credit (Hope tax
credit) | For 2010, a credit for up to $2,500 of a
student's qualified tuition and related expenses for each of the first four
years of post-secondary education; up to 40% of credit is refundable | 2010 limits and rules extended through 2012 | | Beginning in 2011, credit reduced to maximum $1,800 for first two years of post-secondary education; no portion refundable; lower income phaseout thresholds would apply | | | Child tax credit | For 2010: $1,000 maximum per child; refundable to the extent of 15% of earned income in excess of $3,000 | 2010 rules extended through 2012 | | Child and dependent care credit | Increased limit on eligible expenses and maximum
credit percentage would have expired at end of 2010 | 2010 rules extended through 2012 | >Adoption tax credit and employer-paid adoption
assistance | Increased adoption tax credit and exclusion
amount for employer-paid adoption assistance would have expired at the end of 2011, as would the refundable nature of credit | 2011 rules extended through 2012 |
Deductions | | Before Act | After Act | Deduction for educator classroom expenses | $250 above-the-line deduction expired at end of
2009 | Deduction retroactively reinstated for 2010 and
extended through 2011 | Deduction for qualified higher-education
expenses | Maximum $4,000 deduction, phased out for
individuals with higher income, expired at the end of 2009 | Deduction retroactively reinstated for 2010 and
extended through 2011 | Student loan interest deduction | Student loan interest deductible (maximum
$2,500), subject to phaseout for higher incomes; starting in 2011, deduction would be limited to interest paid in first 60 months in which interest payments required | 2010 limits and rules extended through 2012 | | Deduction for state and local sales tax | Ability to deduct state and local sales tax in lieu of the itemized deduction for state and local income taxes expired at the end of 2009 | Deduction retroactively reinstated for 2010 and
extended through 2011 | Additional standard deduction for real estate
property taxes | Ability of individuals who do not itemize to claim an additional standard deduction of up to $500 ($1,000 if married filing
jointly) for real estate property taxes expired at the end of 2009 | This provision was not extended | Itemized deductions and personal and dependency
exemptions | Beginning in 2011, these items would once again
be phased out for higher income individuals | 2010 rules (no phaseout of items for higher
income individuals) extended through 2012 | Mortgage insurance premiums | Ability to deduct as qualified residence interest, subject to phaseout for higher incomes, expired at the end of 2010 | 2010 rules extended through 2011 |
Other | | Before Act | After Act | Charitable IRA distributions | Ability of IRA holders over age 70½ to exclude from
income up to $100,000 in qualified distributions made to charitable organizations expired at the end of 2009 | Retroactively reinstated for 2010 and extended through 2011 | | Coverdell education savings accounts | For 2010, a $2,000 maximum annual contribution
phased out for higher incomes, but effective 2011, maximum annual contribution reduced to $500 with a lower phaseout range for married couples filing jointly | 2010 rules extended through 2012 |
For a more detailed list of changes please see the article at the top right "Tax Relief and Job Creation Act". We hope this summary helps you better understand the changes, if you have any questions please contact our office. Tax Relief Part 1 Tax Rates | | | Before Act | After Act | Federal income tax brackets | Five 2011 tax brackets: 15%, 28%, 31%, 36%, 39.6% | Six 2010 tax brackets extended to 2011 and 2012: 10%, 15%, 25%, 28%, 33%, 35% | Maximum tax rate on long-term capital gains | Starting in 2011: 20% (10% for individuals in the 15% tax bracket)1 | 2010 rates extended to 2011 and 2012: 15% (0% for individuals in the 10% or 15% tax brackets) | Tax on qualifying dividends | Taxed as ordinary income starting in 2011 | 2010 treatment extended to 2011 and 2012: 15% (0% for individuals in the 10% or 15% tax brackets) | Alternative minimum tax (AMT) | Exemption amounts 2010: $45,000 (married joint) $33,750 (single) $22,500 (married separate) | Exemption amounts 2010: $72,450 (married joint) $47,450 (single) $36,225 (married separate) | | | | Exemption amounts 2011: $74,450 (married joint) $48,450 (single) $37,225 (married separate) | | | Personal tax credits not allowed against AMT beginning in 2010 | Personal tax credits allowed against AMT in 2010 and 2011 |
Estate Tax | | | Before Act | After Act | Top estate tax rate | No estate tax for 2010 (modified carryover basis rules applied), estate tax would return in 2011 with top rate of 55% | Estate tax retroactively reinstated for 2010; top rate of 35% applies to 2010, 2011, and 20122 | Estate tax exemption equivalent amount (basic exclusion amount, formerly called applicable exclusion amount) | No estate tax for 2010 (modified carryover basis rules applied), estate tax would return in 2011 with $1 million applicable exclusion amount | $5 million basic exclusion amount applies to 2010, 2011, and 20122; ($5 million amount will be indexed for inflation in 2012) | Portability of exemption amount | N/A | For 2011 and 2012, when one spouse dies, any unused portion of that spouse's estate tax exemption equivalent amount may be transferred to the surviving spouse |
Gift and Generation-Skipping Transfer Tax | | | Before Act | After Act | Gift tax | For 2010: $1 million lifetime exemption equivalent, top rate of 35% | For 2011 and 2012, there will be a $5 million lifetime exemption equivalent, estate tax rates (top rate of 35%) applies | | | For 2011: $1 million lifetime exemption, top rate of 55% | | Generation-skipping transfer tax (GSTT) | No GSTT for 2010, $1 million exemption for 2011 with tax rate of 55% | GSTT exemption amount for 2010, 2011, and 2012 is $5 million; 0% rate applies for 2010; tax rate of 35% applies for 2011 and 2012 |
Business/Self-Employed Individuals | | Before Act | After Act | "Bonus" depreciation | 50% additional first-year depreciation allowed for 2010, no bonus depreciation beginning in 2011 | 100% bonus depreciation for property acquired and placed in service after 9/8/10 and before 1/1/12; 50% bonus depreciation allowed for property acquired and placed in service after 12/31/11 and before 1/1/13 | IRC Section 179 expensing | For 2010 and 2011, $500,000 expense limit, reduced by amount by which cost of qualifying property placed in service during the year exceeds $2 million; beginning in 2012, limit would be reduced to $25,000 with $200,000 phaseout threshold | 2010 and 2011 unchanged; for 2012, the limit will be set at $125,000, reduced by amount by which cost of qualifying property placed in service during the year exceeds $500,000 ($125,000 and $500,000 amounts indexed for inflation) | Tax credit for research and experimentation expenses | Expired at the end of 2009 | Retroactively reinstated for 2010 and extended through 2011 | New markets tax credit | Expired at the end of 2009 | Retroactively reinstated for 2010 and extended through 2011 | Indian employment tax credit | Expired at the end of 2009 | Retroactively reinstated for 2010 and extended through 2011 |
1Slightly lower rates would apply to qualifying property held for five or more years. 2For individuals who died in 2010, an election can be made to choose the estate tax provisions in effect prior to the Act. 2011 Mileage Rates The Internal Revenue Service today issued the 2011 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
Beginning on Jan. 1, 2011, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be: - 51 cents per mile for business miles driven
- 19 cents per mile driven for medical or moving purposes
- 14 cents per mile driven in service of charitable organizations
The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study. A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles used simultaneously. Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates. Previous Articles Start Your Budget from Zero Solid expense control can help drive a number of decisions resulting in the improved performance, productivity and profitability of your company. One proven method of controlling your spending and expenses is through zero-based budgeting. Zero-based budgeting is a planning tool that  comprehensively reviews all the expenditures involved in a company. It requires that all the income minus all the expenditures end up at zero. In a typical budget, you’ll often review only those expenses that have increased in comparison to last year or as compared to the budget itself. Zero-based budgeting has nothing to do with the previous year’s expenditures; you’re essentially looking at each year as brand new. You’re looking at every aspect of the budget and determining what the associated costs will be in real time. A basic zero-based budget starts with a spreadsheet documenting the following: All sources of revenue. All expenses—In this case, you need to identify expenses in three ways: fixed (e.g., rent or mortgage payments), variable (such as advertising) and semi-variable (like labor). Arrange your spreadsheet by putting the fixed expenses on top, then the semi-variable expenses and then variable expenses. Next, write down the amounts you expect to spend in a full year for only the fixed expenses, such as total rent expense for the year. Then, estimate the average annual amount for semi-variable expenses, such as total wages for the year would be. Variable expenses remain blank. Now total all your fixed and semi-variable expenses and deduct that total from your total projected revenues; the remainder is what is left for variable expenses. Call it your “allowed variable expense allowance.” Deduct your variable costs from the allowed variable expense allowance. This is the point of the “moment of truth”—why you start from zero in the first place. Is your result—your net bottom line amount—negative? If so, you need to adjust your income and expense amounts until the bottom line is zero. Adjusting those expenses means making the hard choices between ‘must have’ and ‘want to have.’ This is where you determine the expenses that are absolutely necessary. The fact that you reset the budget every year makes you focus on ways to improve operations or control costs. Think of it as an annual line-by-line review of your financial statements—most people just look at their bottom line and don’t really ‘read’ their financials. The process requires a declaration of a mission and ultimately results in everyone being on the same page regarding the company’s goals and budgets. Building the Wall between Business and Personal Finances Separating your personal and business assets offers you a better sense of how your business is doing, and makes it easier to handle your taxes and get additional financing when you need it. And, should you ever come under IRS scrutiny in the form of an audit, the process will be made much easier. The key areas to build separation between business and personal finances are accounts and record-keeping and in credit. In terms of your accounts, establishing completely separate checking and savings accounts for your business is critical. You might find that business accounts can be a bit more expensive to set up than personal accounts, but don’t let that dissuade you; those accounts help create that wall. Good-record-keeping, which tracks business spending and receipts, helps with projections and keeps you organized on the tax front. Key areas worth covering include, but aren’t limited to: Check register—It’s a good idea to reconcile your bank statement monthly, as you get a realistic picture of cash on hand. Summary of receipts of gross income—Whether you do it daily, weekly or monthly, keep track of where the money is coming from with notes explaining the origin of all money received. Monthly summary of expenses Disbursements record—This can be part of your check register, but, in addition to noting expenses paid by check, you should document all expense payments, whether by check, cash or credit card, and maintain all receipts. Asset purchase listing—Record purchases of all equipment acquired in connection with the business. You should also build that wall with your credit cards. Establish separate credit cards. That will be helpful when you decide to seek financing, as every lending institution will do a credit check and having those accounts separated and up-to-date will help make that decision easier. As your business grows, your revenues and expenses increase, and your finances will ultimately become that much more complex. Separating business and personal finances helps at tax time, but having those numbers clearly laid out can also help you pinpoint where you may be overspending or where growth opportunities might be. And once you have those records in place, updating them regularly is easy. Fort Collins - Greeley - Cheyenne |
