Christmas Comes Early Tax Compromise Bill Signed By President

By: William J. Killory, CPA (Dec, 2010)

The much anticipated tax bill was signed into law late in the afternoon on December 17. The law extends the Bush era tax rates through 2012 which includes lower rates for individuals, maximum rates of 15% on qualified dividends and long-term capital gains, marriage penalty relief and removal of itemized deduction and personal exemption limits on taxpayers with adjusted gross income above $169,550.

A variety of credits were extended from the $1,000 child credit for dependents under the age of seventeen, to enhanced dependent care and adoption credits to the American Opportunity Tax Credit for qualified education expenses. While many of these credits were extended they are subject to adjusted gross income limits, reductions and phase-outs as they had been in prior years.

The more liberal student loan interest deduction from gross income was extended as was the $250 teacher classroom expense deduction. Using state and local sales tax rather than income taxes remains an option for those who itemize in states without an income tax. The additional standard deduction from property taxes did not survive the compromise negotiations. The Alternative Minimum Tax exemption increased slightly from 2009 levels saving millions of taxpayers thousands of dollars come this April 15th.

Starting with your first paycheck in January the employee portion of the social security tax will be reduced by 2%. The employer portion is unaffected and those that are self-employed will received the same 2% reduction in overall self-employment tax. As a reminder the reduction in the employers' portion of the social security tax for qualified new hires expires at the end of this year.

Businesses that purchase new assets and place them in service between September 9, 2010 and before December 31, 2011 can write off 100% of these assets. This replaces the 50% bonus depreciation rules that have been featured in recent tax legislation. The enhanced Section 179 expensing election for 2010 and 2011 is $500,000 and can include new and used tangible personal property. Businesses that purchase more than $2,000,000 in property a year are subject to phase-outs. The new law imposes a $125,000 deduction limit in 2012 with a $500,000 investment limit.

The credit for increasing research and development was restored retroactively to January 1, 2010 and is safe until the end of 2012. The Work Opportunity tax credit for targeted new hires that was scheduled to expire next August was extended through the end of 2011. Fifteen year depreciation for qualified leasehold improvements, restaurant buildings and improvements, and retail improvements was extended through 2011 along with tax incentives for empowerment zones. Credits for energy efficient appliances were extended through 2011 but at the pre-2009 limit of $500 down from the $1,500 available in 2009 and 2010.

The estate tax is back, at least for the next two years. The new law provides for an exemption of $5,000,000 and a rate of 35%. The estate exemption is in combination with the lifetime gift exclusion that was $1,000,000. The new law allows a surviving spouse to add any unused exemption to their estate exemption. The new law provides for a step up in basis for estate assets. There was no estate tax in 2010 and estate assets would have a carry-over basis. The new law allows estates the option of computing their estate under the new rules or the 2010 rules. Any estate under $5,000,000 should consider filing a 2010 estate tax return.

These are the highlights of the new law. For planning purposes we are back to our old regime, which is to defer income and accelerate expenses, at least for this year and next. We have a degree of certainty for the next two years and any substantial change will likely occur during the federal election cycle in 2012. We will keep an eye on these changes and what they mean for your business. As always, please feel free to contact your Dermody, Burke & Brown tax advisor if you have any questions.


The information reflected in this article was current at the time of publication. This information will not be modified or updated for any subsequent tax law changes, if any.

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