HOW TO BENEFIT FROM THE NEW TAX LAW FOR 2011
On Dec. 17, 2010, President Barack Obama signed in to law HR 4853 the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. This legislation, negotiated by the White House and select members of the House and Senate, provides for a short-term extension of tax cuts made in 2001. It also addresses the Alternative Minimum Tax (AMT) and Estate, Gift and Generation-skipping Transfer taxes.
HIGHLIGHTS
Two-year extension of all current tax rates through 2012;
* 2-year tax rates extension at 10, 25, 28, 33 and 35 percent;
* 2-year extension of reduced 0 or 15 percent rate for capital gains and dividends;
* 1-year reduction of Social Security Payroll Tax for both employees and the self-employed by 2 percent;
* 2-year estate tax exemption of $5 million for an individual with a top federal rate of 35 percent.
FULL SUMMARY
Reductions in Individual Income Tax Rates through 2012
* Income brackets remain 10, 25, 28, 33 and 35 percent
* Capital gains and dividend rates remain at 0 or 15 percent
* Repeal of the Personal Exemption Phase-out (PEP)
* Repeal of the itemized deduction limitation (Pease limitation)
* Marriage penalty relief
* Expanded dependent care credit
* Child Tax Credit
* Earned income tax credit
Education Incentives Extended Through 2012
* Expanded Coverdell accounts and definition of education expenses
* Expanded exclusion for employer-provided educational assistance of up to $5,250
* Expanded student loan interest deduction
* Exclusion from income of amounts received under certain scholarship programs
* American Opportunity Tax Credit of up to $2,500 for tuition expenses
* 30-percent credit for energy-efficiency improvements to the home (IRC section 25C)
* Deduction of state and local general sales taxes
* Parity for employer-provided mass transit benefits
* Contributions of capital gain real property for conservation purposes
* Deductibility of mortgage insurance premiums for qualified residence
* Above-the-line deduction for certain expenses of elementary and secondary school teachers.
Alternative Minimum Tax (AMT) Relief
* The legislation increases the exemption amounts for 2010 to $47,450 (individuals) and $72,450 (married filing jointly) and for 2011 to $48,450 (individuals) and $74,450 (married filing jointly).
* It also allows the nonrefundable personal credits against the AMT.
Temporary Estate Tax Relief and Modification of Gift and Generation-skipping Transfer Taxes
* Higher exemption, lower rate. The legislation sets the exemption at $5 million per person and $10 million per couple and a top tax rate of 35 percent for the estate, gift and generation-skipping transfer taxes for two years, through 2012. The exemption amount is indexed beginning in 2012. The proposal is effective Jan. 1, 2010, but allows an election to choose no estate tax and modified carryover basis for estates arising on or after Jan. 1, 2010 and before Jan.1, 2011. The proposal sets a $5 million generation-skipping transfer tax exemption and 0 percent rate for the 2010 year.
* Portability of unused exemption. Under current law, couples have to do complicated estate planning to claim their entire exemption. The proposal allows the executor of a deceased spouse's estate to transfer any unused exemption to the surviving spouse without such planning. The proposal is effective for estates of decedents dying after Dec. 31, 2010.
* Reunification of estate and gift taxes. Prior to the 2001 tax cuts, the estate and gift taxes were unified, creating a single graduated rate schedule for both. That single lifetime exemption could be used for gifts and/or bequests. The proposal reunifies the estate and gift taxes. The proposal is effective for gifts made after Dec. 31, 2010.
Extension of bonus depreciation for taxable years 2011 and 2012
* Small Business Expensing: increase in the maximum amount and phase-out threshold under section 179. Sets the maximum amount and phase-out threshold for taxable years 2012 at $125,000 and $500,000 respectively, indexed for inflation.
Temporary Employee Payroll Tax Cut
* The legislation creates a payroll/self-employment tax holiday during 2011 of 2 percentage points. The employer's share of the payroll tax remains unchanged. This means employees will pay only 4.2 percent on wages and self-employed individuals will pay only 10.4 percent on self-employment income up to $106,800. The Social Security trust fund is made whole by transfers from the general fund.
Satya Shaw, CPA, MBA, of Shaw Tax Advisory Group is an investment advisor representative. He can be reached at (o) 813-960-7429, (c) 901-550-2920 or email [email protected]
Accounting
NEW ESTATE TAX RELIEF CREATES COMPLEXITY
After years of uncertainty, the new 2010 Tax Relief Act revamps the estate tax rules, but the fix is only temporary. Absent further legislation, the new law changes are scheduled to "sunset" after 2012.
Old rules: Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the estate tax exemption gradually increased from $1 million to $3.5 million in 2009, while the top estate tax rate decreased from 55 percent to 45 percent. Among other provisions, EGTRRA separated the estate and gift tax systems, so the maximum lifetime gift tax exemption remained at $1 million.
Next, the estate tax was repealed for 2010, but was scheduled to return in 2011 at pre-EGTRRA levels. Also, EGTRRA replaced the rules allowing heirs to receive a step-up in basis on inherited assets with modified "carryover basis" rules for decedents dying in 2010. A surviving spouse could benefit from exemptions of up to $3 million ($1.3 million for non-spouse beneficiaries).
New rules: For 2011 and 2012, the estate tax exemption increases to $5 million, while the top estate tax rate is set at 35 percent. During this time, exemptions are portable, so a surviving spouse's estate may use an unused portion from a deceased spouse's estate. The estate and gift tax systems are reunified with a $5 million lifetime gift tax exemption. Also, the rules allowing heirs a step-up in basis are reinstated.
Finally, an executor may choose to apply the old EGTRRA rules or the new Tax Relief Act rules to the estate of a decedent dying in 2010.
Estate planning may be even more complicated than before. Nevertheless, you might increase gift-giving to family members to benefit from the higher lifetime gift tax exemption. It’s also advisable to have estate planning documents reviewed and updated to reflect the latest changes.
Check the rules for deducting home-office expenses
If you work at home, you’d probably like to take a tax deduction for your home office. Here’s an overview of what qualifies.
The first requirement is that you have a part of your home that you use regularly and exclusively for business purposes. It doesn’t have to be a separate room, but it must be a clearly defined area. The exclusive use is important. The area must be reserved only for business use; if you also use it for personal activities, it won’t qualify. The only exceptions are if you store business samples or inventory at home, or if you run a home daycare business. The other requirement is that your home office be any one of the following:
- Your principal place of business. That’s the place where you conduct most of the management and administrative activities of running your business. You may travel to meet customers or perform operations in a hospital, but your principal place of business is where you do most of the work of actually managing your business.
- A place where you regularly meet customers, clients, or patients. Even if you run the business from elsewhere, a home office can qualify if you regularly use it for meeting with customers, clients, or patients.
- A separate building, not connected to your home. A freestanding garage or studio will qualify if it is used in your business.
If you have an area of your home that qualifies, you can generally deduct a percentage of your total costs, including mortgage interest, insurance, taxes and utilities. The percentage is calculated as the area used for business divided by your home’s total area. - For the self-employed, home office deductions are limited to the net income of the business. An employee’s home office must be for the convenience of the employer, and this should be documented in writing. Deductions for employees, other than mortgage interest and taxes, are available only to the extent they exceed 2 percent of adjusted gross income.
CONSIDER TAX-EFFICIENT INVESTMENTS
In investing, it’s not what you make that counts, it’s what you keep. We’ve all heard that a million times. But with today’s lower investment return rates, it becomes more important than ever. You don’t want to drag down your investment returns with taxes that you could avoid. Tax-efficient investments are those that attempt to minimize tax liability while at the same time maximizing returns. They include the following:
- Tax-deferred accounts. IRAs, 401(k)s, and other types of retirement plans. These funds aren’t required to pay annual taxes on earnings.
- Individual stocks. These would include both growth stocks held long-term and dividend-paying stocks. Because of the preferred tax treatment given to long-term gains and dividends, the maximum tax rate on these investments is 15 percent (0 percent on taxpayers in the 10 percent and 15 percent tax brackets).
- Municipal bonds. If you purchase bonds, either individually or in a mutual fund, that are obligations of your resident state, you’ll pay no taxes on the interest generated by those bonds, possibly making your after-tax return greater than with a similar taxable bond.
- Tax-efficient mutual funds. These are funds actively managed by professionals who pay attention to the tax ramifications of their trading. Generally, turnover is low, and long-term capital gains are favored over short-term gains.
- Index funds. These funds mimic a market benchmark. Since they don’t do much trading, most gains are long-term, and fund expenses are lower than normal.
- Exchange-traded funds. ETFs are bundles of securities that track various indexes such as the S&P 500. ETFs trade like stocks, but act like mutual funds. Since they are passively managed, they tend to have low fund expenses.
- You’ll also want to remember to rebalance your portfolio at least annually to clear out your losers (and offset them against gains), making your portfolio as tax-efficient as possible.
Kamlesh H. Patel, CPA, can be reached at (813) 949-8889 or e-mail [email protected] or [email protected].
Finance
WHY CONTRIBUTE TO A 401(K) PLAN?
More and more employers are offering defined contribution 401(k) retirement plans to their employees. This popularity may be attributed to the fact that 401(k) plans are generally less costly for employers to maintain than traditional defined benefit pension plans.
A 401(k) plan allows participating employees to elect to defer a percentage of their pay each month into the plan, up to a 2011 maximum of $16,500 on a pre-tax basis. Participants age 50 and older may make “catch up” contributions of up to $5,500 in 2011. The amount may increase by $500 periodically based on the cost of living increases.
In addition, many employers match employee salary deferrals in some way. Employer contributions, along with those of the employee, are placed in a special retirement account for the employee where they have the potential to grow on a tax-deferred basis until retirement. Plan participants choose how they want to allocate their assets among the investment choices offered by their plans. Employees’ contributions are always their own, and employer matching funds become vested (owned by the employee) after remaining in the plan for a specific number of years.
Some of the advantages of contributing to your company’s 401(k) plan include:
- Easy and convenient payroll deductions. Contributing to any savings plan before you actually receive the money is one of the most painless ways to invest. When you join a 401(k), you decide (up to a specified maximum) how much will be withheld from your paycheck and contributed to your plan account each pay period.
- Pre-tax savings. Your 401(k) contributions are made on a before-tax basis. By contributing to the plan, you are reducing your federal taxable income.
- Tax-deferred savings. Your pre-tax contributions, any employer contributions and any earnings on these contributions can grow on a tax-deferred basis. This means you don’t pay taxes on the money in your account until it is withdrawn, usually beginning at retirement, and then at ordinary income tax rates. The compounding effect of tax-deferred growth can be a powerful way to build a retirement fund for your future. Note, however, that withdrawals before age 59½ may incur a 10 percent federal penalty.
Seema Ramroop, financial advisor, Morgan Stanley Smith Barney, can be reached at see[email protected] or call (727) 773-4629.
Finance
DON’T LET APRIL 15 PASS YOU BY
April 15 has long been considered a date to avoid. Wouldn’t it be nice if you could do something to lower your federal income tax burden instead of mailing a big check on April 15? With a traditional Individual Retirement Account (IRA), you may be able to do just that.
A contribution of the 2010 maximum of $5,000 by April 18, 2011 could reduce your taxable income, making your federal tax burden less for the year. If you were 50 or older by the end of 2010, you can add a $1,000 catch-up contribution to potentially reduce the tax burden even more. If you already have a traditional IRA, plan to make a contribution by the April 15 deadline. If not, talk to a financial professional as soon as possible to start one.
There are restrictions governing who may deduct contributions to a traditional IRA. If you don’t qualify for a traditional IRA deduction, consider a Roth IRA. You won’t get the federal tax deduction now, but qualified withdrawals can be made free of federal income tax during your retirement years.
Either way, having a plan for retirement is important. You owe it to yourself to make the best plan as soon as possible.
Adi Khorsandian, a State Farm agent providing insurance and financial services, can be reached at (813) 991-4111 or visit www.adikinsurance.com